10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

OR

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

FOR THE TRANSITION PERIOD FROM ___________ TO ___________ .

COMMISSION FILE NUMBER: 000-32989

BAM! ENTERTAINMENT, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) 77-0553117
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

333 WEST SANTA CLARA STREET, SUITE 716
SAN JOSE, CALIFORNIA 95113
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(408) 298-7500
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

	Name of each exchange on
Title of each class	which registered
Common Stock $0.001 par value	Nasdaq SmallCap Market

     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 whether the registrant (1) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 13, 2003:
16,775,388

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS.
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS — Not Applicable
	ITEM 3. DEFAULTS UPON SENIOR NOTES — Not Applicable
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS — None
	ITEM 5. OTHER INFORMATION — Not Applicable
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 10.1
Exhibit 10.1(a)
Exhibit 10.2
Exhibit 10.2(a)
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)

			September 30,			June 30,
			2003			2003
ASSETS
Current assets:
	Cash and cash equivalents		$	617		$	1,068
	Accounts receivable, net of allowance of $2,392 as of September 30, 2003 and $2,722 as of June 30, 2003			557			539
	Inventories			734			961
	Prepaid royalties			993			1,067
	Prepaid expenses and other			2,535			1,036
		Total current assets		5,436			4,671
Capitalized software and licensed assets, net				4,852			4,138
Property and equipment, net				502			597
Long-term receivable, net of allowance of $1,627 as of September 30, 2003 and $1,627 as of June 30, 2003				—			—
Other assets				104			54
Total assets			$	10,894		$	9,460
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable — trade		$	3,726		$	3,199
	Short-term borrowings			1,745			—
	Royalties payable			624			1,242
	Loan from director			250			—
	Obligations under capital leases — short-term portion			27			27
	Accrued compensation and related benefits			652			785
	Accrued software costs			368			128
	Accrued expenses — other			1,327			793
		Total current liabilities		8,719			6,174
Obligations under capital leases — long-term portion				19			26
Funds held in escrow for a future stockholder investment				503			—
Stockholders’ equity:
	Common stock $0.001 par value; shares authorized; 100,000,000; shares issued and outstanding: 14,814,040 and 14,678,290 as of September 30, 2003 and June 30, 2003, respectively			15			15
	Additional paid-in capital			63,049			62,986
	Deferred stock compensation			(125	)		(245	)
	Accumulated deficit			(61,476	)		(59,811	)
	Accumulated other comprehensive income			190			315
		Total stockholders’ equity		1,653			3,260
Total liabilities and stockholders’ equity			$	10,894		$	9,460

See notes to condensed consolidated financial statements

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BAM! ENTERTAINMENT,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

					Three months ended
					September 30,
					2003			2002
Net revenues					$	1,363		$	8,740
Costs and expenses:
	Cost of revenues
			Cost of goods sold			633			4,437
			Royalties, software costs, and license costs			681			4,196
			Project abandonment costs			105			1,927
			Total cost of revenues			1,419			10,560
	Research and development (exclusive of amortization of deferred stock compensation)					538			1,293
	Sales and marketing (exclusive of amortization of deferred stock compensation)					182			2,860
	General and administrative (exclusive of amortization of deferred stock compensation)					1,260			2,040
	Amortization of deferred stock compensation*					73			161
	Litigation settlement					(650	)		—
	Restructuring costs					176			—
				Total costs and expenses		2,998			16,914
Loss from operations						(1,635	)		(8,174	)
		Interest income				1			64
		Interest expense				(28	)		(268	)
		Other expense				(3	)		(43	)
Net loss					$	(1,665	)	$	(8,421	)
Net loss per share:
	Basic and diluted				$	(0.11	)	$	(0.58	)
Shares used in computation:
	Basic and diluted					14,723			14,595
*Amortization of deferred stock compensation:
	Research and development				$	1		$	13
	Sales and marketing					1			9
	General and administrative					71			139
Total amortization of deferred stock compensation					$	73		$	161

See notes to condensed consolidated financial statements

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BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

					Three months ended
					September 30,
					2003			2002
Cash flows from operating activities:
Net loss					$	(1,665	)	$	(8,421	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization					862			6,101
	Provision for bad debts, sales returns, price protection and cooperative advertising					254			2,662
	Consulting services performed in exchange for stock options					—			6
	Other					—			38
	Changes in operating assets and liabilities:
			Accounts receivable			(277	)		1,463
			Inventories			240			(689	)
			Prepaid expenses and other			(1,495	)		982
			Prepaid royalties			(7	)		(98	)
			Capitalized software costs and licensed assets			(1,404	)		(6,087	)
			Other assets — long-term royalties			—			(1	)
			Accounts payable — trade			479			1,819
			Royalties payable			(622	)		52
			Accrued compensation and related benefits			(133	)		40
			Accrued software costs			240			(794	)
			Accrued expenses — other			527			675
				Net cash used in operating activities		(3,001	)		(2,252	)
Cash flows from investing activities:
	Purchase of property and equipment					(4	)		(236	)
	Proceeds from sale of short-term investments					—			1,351
				Net cash provided by (used in) investing activities:		(4	)		1,115
Cash flows from financing activities:
	Advances under short-term borrowings					1,745			1,262
	Loan from director					250			—
	Repayments of short-term borrowings					—			(2,621	)
	Payments under capital leases					(7	)		—
	Funds held in escrow for a future stockholder investment					503			—
	Prepaid share issuance expenses					(50	)		—
	Net proceeds from exercise of stock options					110			—
	Net proceeds from issuance of stock under employee stock purchase plan					—			27
				Net cash provided by (used in) financing activities		2,551			(1,332	)
Net decrease in cash and cash equivalents						(454	)		(2,469	)
Net effect on cash and cash equivalents from change in exchange rates						3			(46	)
Cash and cash equivalents, beginning of period						1,068			4,726
Cash and cash equivalents, end of period					$	617		$	2,211
Supplementary disclosure of cash flow information:
		Cash paid for interest			$	28		$	268

See notes to condensed consolidated financial statements

4

BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of the operations of the interim period, have been included.

These condensed consolidated financial statements include the accounts of Bam! Entertainment, Inc. (“Bam” or “the Company”), located in San Jose, California, and its wholly owned subsidiaries, located in the United Kingdom. All significant intercompany transactions and balances have been eliminated in consolidation. The accompanying interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for annual financial statements.

The results of operations for the three months ended September 30, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year, which ends on June 30, 2004.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2003, together with management’s discussion and analysis of financial condition and results of operations, contained in Bam’s 2003 Annual Report and Form 10-K.

Going Concern and Liquidity Uncertainties - These condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in these condensed consolidated financial statements, during the three months ended September 30, 2003, Bam used cash in operating activities of $3.0 million and incurred a net loss of $1.7 million. As of September 30, 2003, Bam had cash and cash equivalents of $617,000 and its accumulated deficit was $61.5 million. These factors, among others, raise substantial doubt about Bam’s ability to continue as a going concern for a reasonable period of time. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should Bam be unable to continue as a going concern.

During the year ended June 30, 2003, Bam undertook measures to reduce spending and restructured its operations. In February 2003 Bam retained, through July 31, 2003, the investment banking firm of Gerard Klauer Mattison & Co., Inc. to assist it in reviewing a range of potential strategic alternatives. No transactions arose from this assistance or were consummated during this period.

In October 2003, Bam completed the sale of 1,850,000 shares of its common stock and warrants to purchase another 1,665,000 shares of its common stock, resulting in gross proceeds (assuming no exercise of the warrants) of $1.8 million, in a private offering to institutional and accredited investors. The warrants have a five-year term and are exercisable at $1.87 per share. The placement agents were issued warrants (“placement agent warrants”) to purchase 277,500 shares of Bam’s common stock in connection with placement agent fees under the same terms as the warrants issued to the investors, except that the placement agent warrants are subject to a 180 day lock-up provision. Bam also granted the investors additional investment rights to purchase an additional 1,111,625 shares of its common stock and warrants to purchase another 1,000,462 shares of its common stock. The shares of common stock underlying the additional investment rights are purchasable at $0.96 per share and the warrants underlying the additional investment rights have a five-year term and are exercisable at the greater of (i) $1.87 and (ii) the lesser of (x) the closing bid price of Bam’s common stock on the Nasdaq Stock Market on the business day immediately preceding the exercise date of the additional investment right, and (y) the average of the closing bid price of our common stock on the Nasdaq Stock Market for the five business days immediately preceding the exercise date of the additional investment right. The additional investment rights are exercisable until 45 business days after the effectiveness of a registration statement covering the shares and warrants sold.

5

Bam needs to raise additional funds. These funds may come from either one or a combination of additional financings, exercise of outstanding warrants and additional investment rights, mergers or acquisitions, or otherwise obtain capital via sale or license of certain of its assets, in order to satisfy its future liquidity requirements. Current market conditions present uncertainty as to Bam’s ability to secure additional financing or effectuate any merger or acquisition, as well as Bam’s ability to reach profitability. There can be no assurances that Bam will be able to secure additional financing or effectuate any such merger or acquisition, or obtain favorable terms on such financing if it is available, or as to Bam’s ability to achieve positive cash flow from operations. Continued negative cash flows create significant uncertainty about Bam’s ability to implement its operating plan and Bam may have to further reduce the scope of its planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy Bam’s liquidity requirements, Bam will not have sufficient resources to continue operations for the next six months.

As of September 30, 2003, Bam had $4.9 million of capitalized development costs and licensed assets, and $993,000 of prepaid royalties. Should Bam not be able to effectuate either a merger or acquisition or to secure sufficient additional financing, part or all of development projects in progress might have to be abandoned and the related costs would have to be written off.

Stock-Based Compensation — Bam accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and to nonemployees using the fair value method in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and in accordance with Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued To Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure requires disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Bam adopted SFAS No. 148 on January 1, 2003.

Since Bam continues to account for its stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, SFAS No. 123 requires the disclosure of pro forma net income (loss) as if Bam had adopted the fair value method. Under APB No. 25, stock-based compensation is based on the difference, if any, on the date of grant, between the fair value of Bam’s stock and the exercise price. Unearned compensation is amortized using the multiple option award valuation and amortization approach method and expensed over the vesting period of the respective options.

The following table illustrates the effect on net loss and net loss per share if Bam had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. For purposes of SFAS No. 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period (in thousands):

		Three months ended
		September 30,
		2003			2002
Net loss attributable to common stockholders		$	(1,665	)	$	(8,421	)
Add: Stock-based employee compensation expense included in net loss			73			161
Less: Stock-based employee compensation expense under the fair value method for stock option awards			(223	)		(480	)
Less: Stock-based employee compensation expense under the fair value method for purchases of stock under the employee stock purchase plan			—			(24	)
Pro forma net loss		$	(1,815	)	$	(8,764	)
	Basic and diluted net loss per share — as reported	$	(0.11	)	$	(0.58	)
	Basic and diluted net loss per share — pro forma	$	(0.12	)	$	(0.60	)

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2. RESTRUCTURING COSTS

Bam accounts for restructuring costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. For restructuring actions initiated prior to January 1, 2003 Bam accounts for restructuring costs in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring).

In November 2002, Bam initiated a restructuring of its operations, and accounted for in accordance with EITF 94-3. As part of the restructuring, Bam reduced its headcount across all departments, by a total of 30 employees, and certain members of the Company’s management also agreed to a reduction of salary for the period December 2002 through June 2003. As compensation for the reduction, those members of management taking the salary reduction were granted stock options in the Company. Bam also transferred, under UK law, an additional 12 product development employees to VIS Entertainment plc upon the sale of its London based studio in January 2003, and granted VIS a sublease to its London premises through June 2007. VIS had an option to terminate the tenancy of the sublease upon the later of November 30, 2003 and the determination of a porting contract between Bam and VIS. In October 2003, VIS notified Bam that they were terminating the sublease effective November 30, 2003. Bam is considering negotiating an early termination of the lease with its landlord.

Restructuring costs for the three months ended September 30, 2003 comprise the estimated costs to Bam of an early termination of its lease of its former London premises, and are as follows (in thousands):

		Three months ended
		September 30, 2003
				Restructuring costs
		Restructuring costs		expensed in the		Restructuring costs		Restructuring costs
		unpaid as of June		three months ended		paid as of		unpaid as of
		30, 2003		September 30, 2003		September 30, 2003		September 30, 2003
Nature of restructuring costs:
	Lease termination costs	$	—	$	176	$	—	$	176

Bam anticipates that the costs of an early termination of its lease of its former London premises will be paid in fiscal 2004.

3. INCOME TAXES

Bam accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Bam’s financial statements or tax returns. In estimating future tax consequences, Bam generally considers all expected future events other than enactments of changes in the tax law or rates. Franchise taxes are classified as general and administrative expense.

4. NET LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of common stock shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common stock shares and common stock share equivalents outstanding during the period. Potential common shares consist of warrants and stock options, using the treasury stock method. Potential common shares are excluded from the computation, if their effect is antidilutive, as was the case for the three months ended September 30, 2003 and 2002, respectively.

7

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):

			Three months ended
			September 30,
			2003			2002
Net loss			$	(1,665	)	$	(8,421	)
Calculation of loss per share, basic and diluted:
		Weighted average number of common stock shares outstanding — basic and diluted		14,723			14,595
	Net loss per share — basic and diluted		$	(0.11	)	$	(0.58	)

The following table summarizes common stock equivalents that are not included in the denominator used in the diluted net loss per share calculation because to do so would be antidilutive for the periods indicated:

		Three months ended
		September 30,
		2003		2002
Options to purchase common stock			385		169
Warrants to purchase common stock			12		197
	Total common stock equivalents		397		366

5. COMPREHENSIVE LOSS

SFAS No. 130, Reporting Comprehensive Income, requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual statement that is displayed with the same prominence as other annual financial statements. SFAS No. 130 also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. Comprehensive loss, as defined, includes all changes in equity during a period from nonowner sources.

The components of comprehensive loss for the three months ended September 30, 2003 and 2002 were as follows (in thousands):

	Three months ended
	September 30,
	2003			2002
Net loss	$	(1,665	)	$	(8,421	)
Change in accumulated translation adjustment		(125	)		7
Change in unrealized gain on available-for-sale marketable securities		—			38
Comprehensive loss	$	(1,790	)	$	(8,376	)

6. INVENTORIES

Inventories, which consist primarily of finished goods, are stated at the lower of cost (based upon the first-in, first-out method) or market value. Bam estimates the net realizable value of slow moving inventories on a product-by-product basis and charges any excess of cost over net realizable value to cost of revenues.

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7. RECEIVABLES

Trade accounts receivable

Accounts receivable, net of allowances, is comprised of the following (in thousands):

			September 30,			June 30,
			2003			2003
Accounts receivable, gross			$	2,949		$	3,261
	Less the following allowances:
		Doubtful accounts		(92	)		(93	)
		Sales return and price protection		(2,197	)		(2,460	)
		Cooperative advertising		(103	)		(169	)
Accounts receivable, net			$	557		$	539

Long-term receivable

On January 22, 2002 Kmart, a customer of Bam, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On January 22, 2002 Bam had an accounts receivable balance from Kmart of $1.7 million. The Company was an unsecured creditor, and as such was at risk of not recovering in full its accounts receivable balance. Accordingly, in the year ended June 30, 2002 Bam recorded an allowance of $1.1 million against the receivable. As Kmart stated that at earliest it would complete its reorganization in May 2003, Bam classified the receivable, net of allowance, as a long-term asset.

In the three months ended September 30, 2002 management reevaluated and increased the allowance to cover the full accounts receivable balance.

Subsequent to January 22, 2002 Kmart arranged debtor-in-possession financing Bam sold product to Kmart under this arrangement. Accounts receivables under the debtor-in-possession financing were classified as current assets.

Kmart completed its reorganization and emerged from Chapter 11 on May 6, 2003. Under its plan of reorganization Kmart will distribute Kmart Corporation common stock to the unsecured creditors on a pro-rata basis, at an approximate recovery rate of 9.7% on approved payables. Kmart has yet to distribute to Bam any of this common stock, and is unable to state when it will make such distribution or how much the distribution to Bam will be. Accordingly, Bam did not account for any potential recoverable sums as of September 30, 2003 or June 30, 2003.

Concentration of credit risk

As of September 30, 2003, four customers each accounted for between 5% and 28% of Bam’s gross trade accounts receivable, and as of June 30, 2003, four customers each accounted for between 8% and 19% of Bam’s gross trade accounts receivable. Bam has no written agreements or other understandings with any of its customers that relate to future purchases. Therefore, purchases by these customers or any others could be reduced or terminated at any time.

Revenues from the Bam’s three largest customers collectively accounted for 98% and 34% of its net revenues for the three months ended September 30, 2003 and 2002, respectively.

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8. SHORT-TERM BORROWINGS

In September 2003, Bam entered into a six month agreement (the “Agreement”) with a finance company, pursuant to which the finance company extends a line of credit facility to fund domestic inventory purchases to Bam. Bam may sell the inventory purchased under the Agreement and is required to remit customer receipts from those sales directly to the finance company up to the amounts funded by them. Bam retains collections in excess of the amounts funded by the finance company, is responsible for collecting the customer receivables, and bears the risk of loss on all uncollectible accounts. The finance company has a security interest in Bam’s accounts receivable and inventory.

Under the terms of the Agreement, the finance company’s aggregate outstanding funding is limited to $3.2 million. Bam is required to pay the finance company’s expenses under the contract, a facility fee equal to 5.0% of the funds advanced by the finance company, and interest at prime plus 0.5%. The Agreement terminates on March 31, 2004 and any sums outstanding become repayable on that date. Bam may repay any sums advanced prior to the due date of payment without penalty. As of September 30, 2003, Bam had advances of $1,745,000 outstanding under the Agreement. Prepayments for products not yet received are included in prepaid expenses and as of September 30, 2003 these totaled $1,745,000.

Prior to entering into the Agreement, Bam had entered into a two year factoring agreement (the “Factoring Agreement”) with a different finance company in February 2002, pursuant to which Bam assigned its North American receivables to the finance company. The finance company was responsible for collecting customer receivables, and upon collection, remitted the funds to Bam, less a service fee. Under the Factoring Agreement, Bam could obtain advances, subject to the finance company’s discretion and Bam’s compliance with certain liquidity covenants, in the form of cash or as collateral for letters of credit, up to a maximum of 75% of outstanding domestic receivables at any point in time. Under the terms of the Factoring Agreement, Bam paid a service fee on all receivables assigned, with a minimum annual fee of $150,000, interest at prime plus 1% on all cash sums advanced. All fees were included in interest expense. Bam bore the collection risk on the accounts receivable that were assigned, unless the finance company approved the receivable at the time of assignment, in which case the finance company bore the risk. The finance company had a security interest in Bam’s accounts receivable, inventory, fixed assets and intangible assets.

As of June 30, 2003 Bam did not meet the Factoring Agreement’s liquidity covenants and had no sums advanced under the Factoring Agreement. The Factoring Agreement was mutually terminated in September 2003, and all liabilities settled. Upon the termination of the Factoring Agreement, the minimum annual fee for the second year of the Factoring Agreement was waived, and Bam paid a termination payment of $25,000.

As of September 30, 2003 and June 30, 2003 Bam had no outstanding letters of credit issued on its behalf.

9. LOAN FROM DIRECTOR

In August 2003, Bam entered into an unsecured Promissory Note with a Director whereby the Director loaned Bam $250,000. The loan, which bears interest at 6% per annum, is repayable on or before October 31, 2003. As of November 13, 2003, this loan had not been repaid.

10. COMMON STOCK

As more fully described in Note 14, in September 2002 Bam issued 68,738 shares of common stock pursuant to a license agreement with a production company. Bam capitalized the cost of this issuance at the fair market value of the common stock, equal to $70,000, and is amortizing this amount to royalties, software costs, license costs and project abandonment over the life of the products after release. Bam previously issued 68,738 shares of common stock pursuant to this license agreement in April 2001. During the three months ended September 30, 2003 and 2002, $0 and $26,000, respectively, was amortized to royalties, software costs, and license costs.

As more fully described in Note 16, in October 2003 Bam completed the sale of 1,850,000 shares of its common stock and warrants to purchase additional shares of its common stock, in a private offering to institutional and accredited investors.

10

11. WARRANTS

There were outstanding warrants to purchase a total of 878,450 shares of common stock as of September 30, 2003 and June 30, 2003.

In connection with an agreement entered into with a production company during January 2002, Bam obtained the exclusive right of first refusal, for a period of five years, to develop products based on certain properties owned by the production company and to distribute them worldwide. In connection with the agreement, Bam is required to issue to the production company warrants to purchase up to 50,000 shares of common stock, in pre-determined multiples of either 5,000 or 10,000 shares, upon the occurrence of certain pre-determined events, such as exercising a right to develop a product. Warrants are issued at the average closing price of Bam’s stock for the five days immediately prior to the date of issue, have a five year term from date of issue, and are fully vested and are immediately exercisable upon issuance. Through September 30, 2003, Bam has issued warrants to the production company to purchase a total of 35,000 shares of common stock, at an aggregate cost of $97,000, of which $8,000 was amortized to project abandonment in the year ended June, 30, 2003. Bam is amortizing the remaining licensed asset of $89,000 over the life of the software products on which the warrants are exercisable, expected to be between three and six months, commencing upon release of the products, which occurred in September 2003. As of September 30, 2003, Bam had amortized $12,000 of this charge. Bam cannot estimate the aggregate dollar amount of future non-cash charges arising upon the future issuance of warrants as they are based on its share price at future points in time. Each of these future charges will affect the Bam’s gross margins and profitability.

In connection with the issuance of warrants pursuant to a first look agreement with another production company, Bam granted a warrant to purchase up to 200,000 shares of Bam’s common stock, of which 15,000 became immediately exercisable upon the signing of the agreement. The remaining 185,000 will only become exercisable, in multiples of either 4,625 or 13,875 shares, upon certain future events occurring relating to the development and release of products. Upon the warrant for 15,000 shares becoming exercisable, Bam incurred a non-cash charge of $29,000. Bam fully amortized the licensed asset of $29,000 to royalties, software costs, and license costs during the year ended June 30, 2003. Bam will incur additional non-cash charges as the remaining 185,000 shares become exercisable. Upon release of the software products on which the warrants are exercisable, Bam will amortize the licensed asset over the life of the products, which are expected to be between three and six months. Bam cannot estimate the aggregate dollar amount of these future non-cash charges as they are based on its share price at future points in time. Each of these future charges will affect Bam’s gross margins and profitability.

As more fully described in Note 16, in October 2003, Bam completed the sale of 1,850,000 shares of its common stock and warrants to purchase another 1,665,000 shares of its common stock, in a private offering to institutional and accredited investors. The placement agents were also issued warrants to purchase 277,500 shares of Bam’s common stock in connection with placement agent fees under the same terms as the warrants issued to the investors, except that the placement agent warrants are subject to a 180 day lock-up provision.

12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

As defined by the requirements of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, Bam operates in one reportable segment: the development and publishing of interactive entertainment products.

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Financial information by geographical region is summarized below (in thousands):

		Three months ended
		September 30,
		2003			2002
Net revenues from unaffiliated customers:
	North America	$	479		$	7,289
	Europe		782			1,419
	Other		102			32
Consolidated		$	1,363		$	8,740
Operating loss:
	North America	$	(1,190	)	$	(5,624	)
	Europe		(445	)		(2,550	)
Consolidated		$	(1,635	)	$	(8,174	)

	September 30,			June 30,
	2003			2003
Identifiable assets:
North America	$	30,026		$	28,937
Europe		5,013			4,186
Intercompany items and eliminations		(24,145	)		(23,663	)
Total	$	10,894		$	9,460
Long-Lived assets:
North America	$	1,915		$	1,486
Europe		3,543			3,303
Total	$	5,458		$	4,789

13. COMMITMENTS

Bam’s principal commitments at September 30, 2003 comprised operating leases, guaranteed royalty payments, and contractual marketing commitments. As of September 30, 2003, Bam had commitments to spend $1.6 million under operating leases, prepay $400,000 for royalties under an agreement with a content provider, of which $200,000 was due by September 30, 2003, and spend $943,000 in advertising on the networks and websites of these content providers of which $180,000 was due by September 30, 2003. Of these amounts, $1.9 million must be paid no later than September 30, 2004. Guaranteed royalty payments will be applied against any royalties that may become payable to the content providers. Sublease income is offset against operating lease expense.

14. CONTINGENCIES

As of September 30, 2003 a finance company had a security interest in Bam’s accounts receivable and inventory. Bam accounts for all cash advances made under the agreement as a current liability. As of June 30, 2003, a different finance company had a security interest in Bam’s domestic accounts receivable, inventory, fixed assets and intangible assets against advances made under a factoring agreement between the finance company and Bam. This agreement was mutually terminated in September 2003, upon payment by Bam of a termination fee of $25,000. Bam accounted for all cash advances made under the agreement as a current liability and for outstanding letters of credit as a contingent liability.

As of September 30, 2003 and June 30, 2003, other assets included $54,000 of guarantee deposits on facilities leased by Bam.

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Bam offers a limited warranty on products sold. Bam does not maintain a general warranty reserve as estimated future warranty costs are accounted for in price protection and return reserves accrued at the time of sale of the Bam’s products.

Under an agreement entered into between Bam and a production company, Bam has a first look right to review screenplays acquired by the production company and to develop products based on films produced from those screenplays. For each film (up to a total of 10 films) that Bam selects, 68,738 fully vested and non-forfeitable shares of common stock will be issued to the production company following the theatrical release of each film for which Bam has developed a product, up to a maximum of 687,375 shares of common stock. As of September 30, 2003 Bam has elected to produce software products for three films pursuant to this agreement. One of these films had its theatrical release during the year ended June 30, 2001 and another had its theatrical release during the year ended June 30, 2002. Accordingly, Bam has issued 137,476 shares of common stock to the production company to date, with an aggregate value of $816,000 which has been fully amortized as of September 30, 2003. Bam is not required to issue stock on the remaining film until such time as the film is released, which is anticipated to be in the summer of calendar year 2004.

In connection with an agreement entered into with a separate production company during January 2002, under which Bam may produce software products based on certain properties owned by the production company, Bam is required to issue to the production company warrants to purchase up to 50,000 shares of common stock, in pre-determined multiples of either 5,000 or 10,000 shares, upon the occurrence of certain pre-determined events. As of September 30, 2003, warrants to issue 35,000 shares of common stock have been issued under this agreement, with an aggregate value of $97,000. The issuance of warrants on the remaining 15,000 shares of common stock is contingent upon certain future events occurring, such as exercising a right to develop a product.

In connection with a first look agreement entered into with a production company in May 2002, Bam granted to the production company a warrant, with a ten year term from the date of issue, to purchase up to 200,000 shares of Bam’s common stock at an exercise price of $2.60, of which 15,000 shares became immediately exercisable upon the signing of the agreement, at an aggregate cost of $29,000 which has been fully amortized as of September 30, 2003, and the remaining 185,000 shares only become exercisable in multiples of 4,625 shares upon each election by Bam to produce a title based on any films, made for television movies, or television series produced from screenplays to be produced by the production company, up to a maximum ten titles, and multiples of 13,875 shares upon the theatrical release or television air-date of each film for which Bam has developed a title. Upon expiration of the agreement, any unexercised warrants will cease to be exercisable. Bam’s agreement expires upon the later of five years, and the earlier of either the theatrical release or television air-date of the tenth film or television series on which Bam bases a product, and eight years. The agreement was assigned by the production company to another production company in July 2002.

In January 2003, Bam completed the sale of the assets and operations of its London based development studio to VIS Entertainment plc (“VIS”), a UK based developer. As part of the sale Bam granted VIS a sublease to its London premises. VIS had an option to terminate the tenancy of the sublease upon the later of November 30, 2003 and the determination of a porting contract between Bam and VIS. In October 2003, VIS notified Bam that they were terminating the sublease effective November 30, 2003. See also Note 2 — Restructuring costs.

Legal proceedings

On April 1, 2003, Amaze Entertainment, Inc. asserted counterclaims against Bam in an action captioned BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC. et. al. that Bam commenced in the Superior Court of California, County of Santa Clara (Case No. CV814820) on February 18, 2003, and which Amaze had removed to the United States District Court for the Northern District of California (Case No. C03 01286 PVT) on or about March 24, 2003. Bam’s action asserted claims for, inter alia, relief based on rescission, breach of contract, declaratory relief, and money paid and received with regard to an agreement for a video game titled “Crushed Baseball” that Amaze Entertainment was developing for Bam. Amaze Entertainment’s counterclaims alleged breach of contract and unjust enrichment with regard to each of the “Crushed Baseball” development agreement and a separate development agreement for another video game titled “Samurai Jack.” The counterclaims sought, inter alia, compensatory damages of approximately $3.5 million and additional damages to be proven at trial. On July 11, 2003 Amaze and Bam agreed to compromise and settle all claims either asserted or that could be asserted in connection with the dispute and to mutually release any and all future claims and contentions they have against each

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other. This compromise required Amaze to make Bam two payments, one in July 2003 and one in October 2003 of $325,000 each. Bam has received both of these two payments and recorded them in the three months ended September 30, 2003. The settlement agreement stipulated that upon payment by Amaze to Bam of the payment due in October 2003, the parties would execute a stipulation for dismissal of the legal actions. The parties executed the stipulation for dismissal on October 21, 2003.

15. NEW ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which requires mandatorily redeemable financial instruments to be classified as liabilities, the result of which requires related expense to be classified as interest expense rather than minority interest on a prospective basis. SFAS No. 150 is effective in the three months ended June 30, 2003 for financial instruments entered into or modified after May 31, 2003, and is otherwise effective July 1, 2003 for previously issued instruments. SFAS No. 150 did not have a material impact on Bam’s consolidated financial position or results of operations.

16. SUBSEQUENT EVENTS

In October 2003, Bam completed the sale of 1,850,000 shares of its common stock and warrants to purchase another 1,665,000 shares of its common stock, resulting in gross proceeds (assuming no exercise of the warrants) of $1.8 million, in a private offering to institutional and accredited investors. The warrants have a five-year term and are exercisable at $1.87 per share. The placement agents were issued warrants to purchase 277,500 shares of Bam’s common stock in connection with placement agent fees under the same terms as the warrants issued to the investors, except that the placement agent warrants are subject to a 180 day lock-up provision. Bam also granted the investors additional investment rights to purchase an additional 1,111,625 shares of its common stock and warrants to purchase another 1,000,462 shares of its common stock. The shares of common stock underlying the additional investment rights are purchasable at $0.96 per share and the warrants underlying the additional investment rights have a five-year term and are exercisable at the greater of (i) $1.87 and (ii) the lesser of (x) the closing bid price of Bam’s common stock on the Nasdaq Stock Market on the business day immediately preceding the exercise date of the additional investment right, and (y) the average of the closing bid price of our common stock on the Nasdaq Stock Market for the five business days immediately preceding the exercise date of the additional investment right. The additional investment rights are exercisable until 45 business days after the effectiveness of a registration statement covering the shares and warrants sold.

In October 2003, David E. Tobin resigned from the Board of Directors to pursue other interests.

In January 2003, Bam completed the sale of the assets and operations of its London based development studio to VIS Entertainment plc (“VIS”), a UK based developer. As part of the sale Bam granted VIS a sublease to its London premises. VIS had an option to terminate the tenancy of the sublease upon the later of November 30, 2003 and the determination of a porting contract between Bam and VIS. In October 2003, VIS notified Bam that they were terminating the sublease effective November 30, 2003. See also Note 2 — Restructuring costs.

See also Note 14 — Legal Proceedings, for a description of other subsequent events.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Report on Form 10-Q.

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with regards to our revenues, earnings, spending, margins, cash flow, orders, inventory, products, actions, plans, strategies and objectives. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “will,” “plan,” “intend” and “expect” and similar expressions identify forward-looking statements. Although we believe that our plans, intensions and expectations reflected in those forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Form 10-Q. Important factors that could cause actual results to differ materially from our forward-looking statements include but are not limited to those set forth below under the heading “Risk Factors” and elsewhere in this Report. Our actual results could differ materially from those predicated in these forward-looking statements, and the events anticipated in the forward-looking statements may not actually occur. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in the above prospectus. Other than as required by federal securities law, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

OVERVIEW

We develop and publish interactive entertainment software products. We currently publish titles for the most popular interactive entertainment hardware platforms, such as Sony’s PlayStation and PlayStation 2, Nintendo’s GameCube, N64, Game Boy Color and Game Boy Advance, Microsoft’s Xbox, portable handheld devices manufactured by Palm and Handspring, and for personal computers or PCs. We were incorporated in California in October 1999 under the name Bay Area Multimedia, Inc. We reincorporated in Delaware in September 2000 and changed our name to BAM! Entertainment, Inc. in December 2000. We commenced operations in October 1999 and shipped our first products in June 2000.

We license properties from a wide variety of sources, and publish titles based on the motion picture, sports and television properties of our licensors. We have entered into strategic license arrangements with entertainment and media companies that have developed well-known characters and brands and that are producing popular properties that are expected to form the basis of some of our future products. Our agreements with licensors and developers generally require us to make advance royalty payments, and we may be required to spend money on advertising and promotion. We generally pay royalties based on net revenues.

We design and develop our titles through third parties with whom we have established relationships. We believe that the development cycle for new titles is long, typically ranging from 12 to 24 months, except for Nintendo’s Game Boy Advance for which the development cycle typically ranges from six to nine months. After development of the initial product, we believe that it may take between six to 12 additional months to develop the product for, or port the product to, a different hardware platform.

We have offices in both the United States and Europe. International operations outside of North America are conducted through our office in England, where we perform international sales and marketing activities and manage local third-party developers.

Domestically, we sell our products to mass merchandisers such as Toys “R” Us, Target, Kmart, Wal-Mart and Best Buy, specialty chains such as GameStop and Electronics Boutique, and independent distributors. Our products are manufactured exclusively by third parties.

In July 2003, we entered into a distribution agreement with Acclaim Entertainment Ltd (“Acclaim”) whereby Acclaim exclusively distribute certain current and forthcoming products of ours in PAL territories. PAL is the television standard for the United Kingdom, continental Europe and Australia. Acclaim will be responsible for the

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manufacture, sale, distribution and marketing of the products and will pay us based on net receipts from the sales made by them. The agreement obligates Acclaim to pay us minimum guarantee advances both before and after product release dates, but such payments are reduced upon late delivery of a product, and fully repayable upon cancellation of the product.

We have experienced recurring net losses from inception (October 7, 1999) through September 30, 2003. During the three months ended September 30, 2003, we used cash in operating activities of $3.0 million and incurred a net loss of $1.7 million. As of September 30, 2003, we had cash and cash equivalents of $617,000 and an accumulated deficit of $61.5 million. These factors, among others, raise substantial doubt about our ability to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should we be unable to continue as a going concern.

During the year ended June 30, 2003, we undertook measures to reduce spending and restructured our operations. In February 2003 we retained, through July 31, 2003, the investment banking firm of Gerard Klauer Mattison & Co., Inc. to assist it in reviewing a range of potential strategic alternatives. No transactions arose from this assistance or were consummated during this period.

In October 2003, we completed the sale of 1,850,000 shares of our common stock and warrants to purchase another 1,665,000 shares of our common stock, resulting in gross proceeds (assuming no exercise of the warrants) of $1.8 million, in a private offering to institutional and accredited investors. The warrants have a five-year term and are exercisable at $1.87 per share. The placement agents were issued warrants to purchase 277,500 shares of our common stock in connection with placement agent fees under the same terms as the warrants issued to the investors, except that the placement agent warrants are subject to a 180 day lock-up provision. We also granted the investors additional investment rights to purchase an additional 1,111,625 shares of our common stock and warrants to purchase another 1,000,462 shares of our common stock. The shares of common stock underlying the additional investment rights are purchasable at $0.96 per share and the warrants underlying the additional investment rights have a five-year term and are exercisable at the greater of (i) $1.87 and (ii) the lesser of (x) the closing bid price of our common stock on the Nasdaq Stock Market on the business day immediately preceding the exercise date of the additional investment right, and (y) the average of the closing bid price of our common stock on the Nasdaq Stock Market for the five business days immediately preceding the exercise date of the additional investment right. The additional investment rights are exercisable until 45 business days after the effectiveness of a registration statement covering the shares and warrants sold.

We need to raise additional funds. These funds may come from either one or a combination of additional financings, exercise of outstanding warrants and additional investment rights, mergers or acquisitions, or otherwise obtain capital via sale or license of certain of our assets, in order to satisfy our future liquidity requirements. Current market conditions present uncertainty as to our ability to secure additional financing or effectuate any merger or acquisition, as well as our ability to reach profitability. There can be no assurances that we will be able to secure additional financing or effectuate any such merger or acquisition, or obtain favorable terms on such financing if it is available, or as to our ability to achieve positive cash flow from operations. Continued negative cash flows create significant uncertainty about our ability to implement our operating plan and we may have to further reduce the scope of our planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy our liquidity requirements, we will not have sufficient resources to continue operations for the next six months.

As of September 30, 2003, we had $4.9 million of capitalized development costs and licensed assets, and $993,000 of prepaid royalties. Should we not be able to effectuate either a merger or acquisition or to secure sufficient additional financing, part or all of development projects in progress might have to be abandoned and the related costs would have to be written off.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief discussion of the more significant

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accounting policies and methods used by us. In addition, Financial Reporting Release No. 61 requires all companies to include a discussion addressing, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments.

Use of estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. These estimates affect the reported amounts of assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. By their nature, these judgments are subject to an inherent degree of uncertainty. The most significant estimates and assumptions relate to revenue recognition, adequacy of allowances for returns and price protection, doubtful accounts receivable, and cooperative advertising, carrying values of inventories, the future recoverability of prepaid royalties, capitalized software costs and licensed assets, and foreign currency translation.

Net revenues

We recognize revenue in accordance with Statement of Position 97-2, Software Revenue Recognition, and related interpretations, when persuasive evidence of an arrangement exists, delivery has occurred, the price has been fixed or is determinable and collectibility has been reasonably assured.

We derive our revenues from either the shipment of packaged or licensed products to our customers.

Packaged products: Our sales of packaged product are typically made on credit, with terms that vary depending upon the customer and other factors. Under certain conditions, we may allow customers to exchange and return packaged products and from time to time provide price protection or allow returns on certain unsold merchandise in the form of a credit against amounts due from the customer. Net revenues from product sales are reflected after deducting the estimated cost of allowances for returns and price protection as well as discounts given. These estimates are based upon currently known circumstances and historical results. The calculation of net revenues will be affected by many factors, including pricing strategies, the channels through which products are distributed, product maturity, exchange and return provisions and price protection.

If a sale is made on credit, and a significant portion of the fee is due after our normal payment terms, which are normally 30 to 90 days from invoice date, we account for the fee as not being fixed or determinable and will not recognize revenue until such time as the fee becomes due. While we attempt to carefully monitor the creditworthiness of our customers and distributors, we bear the risk of their inability to pay our receivables and of any delay in payment. If the collectibility of a receivable becomes uncertain after revenue has been recognized, we will record an allowance for doubtful accounts against our accounts receivable.

When we recognize revenue, we account for the estimate of future returns and price protection on the sale as allowances against receivables. We also estimate cooperative marketing costs on the sale and account for these costs as a marketing expense and as an allowance against receivables. We continually monitor, reassess and adjust the adequacy of all these allowances, along with the allowance for doubtful accounts, based on known circumstances, historical results, commitments made, anticipated events and anticipated commitments. Adjustments to these allowances will affect the reported amounts of revenues and expenses during the reporting periods the adjustments are made.

Licensed products: Our licensed product sales are typically made on terms requiring either an upfront minimum prepayment or payment upon delivery of the product, followed by subsequent payments based upon a percentage of monies received by the licensee, in excess of the prepayment, from products distributed by them. These subsequent payments are made at the time the licensee reports products distributed by them, normally on a quarterly basis. If our sale is made requiring an upfront prepayment or payment at the time of delivery, and that sum is non-refundable, we will recognize revenue, equal to that sum, at the time we deliver the product, provided we have no future deliverables, which is normally the case. We will only recognize subsequent revenue when we

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receive the licensee report of products distributed by them and of monies due by them, provided the revenue is considered collectible. We bear the risk of the inability of a customer to pay our receivables and of any delay in payment. If the collectibility of a receivable becomes uncertain after revenue has been recognized, we will record an allowance for doubtful accounts against our accounts receivable. We continually monitor, reassess and adjust the adequacy of the allowance for doubtful accounts, based on known circumstances, historical results, commitments made, anticipated events and anticipated commitments. Adjustments to this allowance will affect the reported amounts of expenses during the reporting periods the adjustments are made.

General: We expect that substantially all of our net revenues for a particular quarter will be generated by titles released in that quarter or in the immediately prior quarter. The market for interactive entertainment software is characterized by short product life cycles, changing consumer preferences and frequent introduction of new products. The life cycle of a title generally consists of a relatively high level of sales during the first few months after introduction, followed by a decline in sales, with only a small percentage of sales occurring more than six months after release.

We have experienced, and are likely to continue to experience, quarterly fluctuations in net revenues. We believe the factors which influence these fluctuations include (i) the timing of our introduction of new products, (ii) the level of consumer acceptance of new and existing products, (iii) general economic and industry conditions that affect consumer spending and retail purchasing, (iv) the timing of the placement, cancellation or pickup of customer orders, (v) the timing of expenditures in anticipation of increased sales, (vi) actions by competitors, (vii) location of product releases, and (viii) the number of titles released in the period and the hardware platforms on which they are released. The timing of our introduction of new products is affected by uncertainties associated with software development, lengthy manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors. The interactive entertainment industry is highly seasonal, with net revenues typically significantly higher during the fourth and first calendar quarters, due primarily to the increased demand for titles during the year-end holiday buying season. A failure or inability to introduce products on a timely basis to meet seasonal increases in demand will harm our business and operating results. Due to these and other factors, the operating results for any particular quarter are not necessarily indicative of the results for the entire fiscal year.

Cost of revenues

Cost of revenues consists of cost of goods sold, royalties, software costs and license costs, and project abandonment.

Cost of goods sold. Cost of goods sold includes manufacturing costs of finished goods, freight, inventory management costs and inventory obsolescence costs. Cost of goods sold will vary depending on the volume of products manufactured and shipped, the mix of products sold and the shipping channel used.

Royalties, software costs, and license costs. Royalties, software costs, and license costs include royalties paid to software licensors, software amortization and amortization of non-cash charges related to warrants and rights to acquire our common stock issued to certain production companies. These costs will be affected in particular periods by many factors, including the specific terms or agreements under which royalties are paid to third parties, the commercial acceptance of products, the cost of developing a product and the timing of stock and warrants issued pursuant to the terms of our license agreements.

Our agreements with licensors and developers generally require us to make advance royalty payments and pay royalties based on product sales, which may have guaranteed minimum payments. Prepaid royalties are amortized commencing upon the product release at the greater of the contractual royalty rate based on actual product sales, or the ratio of current revenues to total projected revenues. We evaluate the future recoverability of prepaid royalties on a quarterly basis and expense costs if and when they are deemed unrecoverable. We cannot assure you that the sales of products for which these royalties are paid or guaranteed payments are made will be sufficient to cover the amount of these required payments.

Commencing upon product release, we begin to amortize capitalized software development costs. We capitalize software development costs subsequent to establishing technological feasibility of a title. Technological feasibility is evaluated on a product-by-product basis. For products where proven game engine technology exists, this may be

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early in the development cycle. Prior to establishing technological feasibility, software development costs are expensed to research and development, and to cost of revenues subsequent to establishing technological feasibility. The following criteria are used to evaluate recoverability of software development costs: historical performance of comparable products; the commercial acceptance of prior products released on a given hardware platform; orders for a product prior to its release and actual development costs of a product as compared to forward-looking projections. Amortization of software development costs is based on the greater of the proportion of current revenues to total projected revenues or the straight-line method over the estimated product life, generally three to six months. We analyze our capitalized costs quarterly and take write-offs when, based on our estimates, future individual product revenues will not be sufficient to recover our investment.

Project abandonment costs. If we terminate a development project prior to completion, we expense the capitalized software development costs and licensed assets costs to project abandonment.

Research and development

Research and development expenses relate to the design and development of new interactive entertainment software products. Payments made to independent software developers under development agreements are capitalized to software development costs once technological feasibility is established or if the development costs have an alternative future use. Prior to establishing technological feasibility, software development costs are expensed to research and development and to cost of revenues subsequent to confirmation of technological feasibility. Technological feasibility is evaluated on a product-by-product basis. For products where proven game engine technology exists, this may occur early in the development cycle.

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RESULTS OF OPERATIONS

The following table sets forth the unaudited condensed consolidated results of operations as a percentage of net revenues for the three months ended September 30, 2003 and 2002.

				Three months ended
				September 30,
				2003			2002
Net revenues					100.0	%		100.0	%
Costs and expenses:
	Cost of revenues
		Cost of goods sold			46.4			50.8
		Royalties, software costs, and license costs			50.0			48.0
		Project abandonment			7.7			22.0
		Total cost of revenues			104.1			120.8
	Research and development (exclusive of amortization of deferred stock compensation)				39.5			14.8
	Sales and marketing (exclusive of amortization of deferred stock compensation)				13.3			32.7
	General and administrative (exclusive of amortization of deferred stock compensation)				92.4			23.4
	Amortization of deferred stock compensation				5.4			1.8
	Litigation settlement				(47.7	)		—
	Restructuring costs				12.9			—
			Total costs and expenses		219.9			193.5
Loss from operations					(119.9	)		(93.5	)
Interest income					0.1			0.7
Interest expense					(2.1	)		(3.1	)
Other expense					(0.2	)		(0.5	)
Net loss					(122.1	)%		(96.4	)%
*Amortization of deferred stock compensation:
	Research and development				0.1	%		0.1	%
	Sales and marketing				0.1			0.1
	General and administrative				5.2			1.6
Total amortization of deferred stock compensation					5.4	%		1.8	%

Net revenues

Net revenues were $1.4 million for the three months ended September 30, 2003 compared to $8.7 million for the comparable period in 2002. During the three months ended September 30, 2003, we recognized revenue on five products licensed to Acclaim under an exclusive distribution agreement with them for PAL territories. PAL is the television standard for the United Kingdom, continental Europe and Australia. With the exception of revenue from Acclaim, all revenue was derived from packaged product sales. Revenue from Acclaim is recognized as licensed products revenue. For a description of revenue recognition accounting policies, see Critical Accounting Policies - net revenues.

We did not release any new products in North America during the quarter, but did make sales of products first released in prior quarters. During the three months ended September 30, 2002 we released six new titles, comprising our first Microsoft Xbox title, one Sony PlayStation2 title, one PC title and three Nintendo Game Boy Advance titles.

The products licensed to Acclaim in the three months ended September 30, 2003 were Wallace & Gromit in Project Zoo for the Sony PlayStation 2, the Microsoft Xbox and the Nintendo GameCube, Ed, Edd, n Eddy: Jawbreakers for the Nintendo Game Boy Advance, and Samurai Jack — The Amulet of Time for the Nintendo Game Boy Advance.

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Net revenues by geographical region for the three months ended September 30, 2003 and 2002 is summarized below (in thousands):

		Three months ended
		September 30,
		2003		2002
Net revenues from unaffiliated customers:
	North America	$	479	$	7,289
	Europe		782		1,419
	Other		102		32
Total net revenues		$	1,363	$	8,740

The following table sets forth our net revenues by customer representing more than 10% of each period’s net revenues for the three months ended September 30, 2003 and 2002 (percentages):

		Three months ended
		September 30,
		2003			2002
Customer
	Acclaim		65	%		*	%
	Kmart		18			11
	Majesco		15			*
	Wal-Mart		*			12
	Toys “R” Us		*			11
	Electronics Boutique		*			10
Total net revenues by customer representing more than 10% of the period’s net revenues			98	%		44	%

*  less than 10%

Net revenues to Kmart in the three months ended September 30, 2002 were made under Kmart’s debtor-in-possession financing arrangement.

Cost of revenues

Cost of goods sold was $633,000, or 46% of net revenues, for the three months ended September 30, 2003 as compared to $4.4 million, or 51% of net revenues, for the comparable period in 2002. The decrease in absolute dollars was due to decreased sales of products. There are no cost of goods sold on products licensed to Acclaim as they are responsible for all manufacturing costs. Excluding net revenue arising from products licensed to Acclaim, the percentage of cost of goods sold compared to net revenue deteriorated when compared to the comparable period in 2002, and this was due to a number of factors, including selling products at low margins to reduce inventory, price protection allowances and returns reserved against sales. In absolute dollars, Cost of goods sold decreased compared to the comparable period in 2002 as less product was sold.

Royalties, software costs, and license costs were $681,000, or 50% of net revenues, for the three months ended September 30, 2003 as compared to $4.2 million, or 48% of net revenues, for the comparable period in 2002. The decrease in absolute dollars was due to fewer releases of new products in the period, and no carryover costs amortized from products released in prior quarters.

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Project abandonment costs were $105,000, or 8% of net revenues, for the three months ended September 30, 2003 as compared to $1.9 million, or 22% of net revenues for the comparable period in 2002. During the three months ended September 30, 2003 and 2002 we abandoned one project and six projects, respectively.

Research and development

Research and development expenses were $538,000, or 39% of net revenues, for the three months ended September 30, 2003, as compared to $1.2 million, or 15% of net revenues, for the comparable period in 2002. The decrease in absolute dollars was primarily as a result of reduced headcount and development activity. The increase in percentage was due to reduced sales volumes.

Sales and marketing

Sales and marketing expenses were $182,000, or 13% of net revenues, for the three months ended September 30, 2003, as compared to $2.9 million, or 33% of net revenues, for the comparable period in 2002. The decrease was primarily a result of reduced headcount, reversals of accrued sale related expenses, and no releases of new products in North America during the period, resulting in limited marketing and selling expenses, as compared the comparable period a year ago where we released six titles.

General and administrative

General and administrative expenses were $1.3 million, or 92% of net revenues, for the three months ended September 30, 2003, as compared to $2.0 million, or 23% of net revenues, for the comparable period in 2002. In the three months ended September 30, 2002 we incurred an allowance of $547,000 against our receivable balance from Kmart. In the three months ended September 30, 2003 we did not incur any allowances against receivables. The remaining decrease was due to decreased headcount, and lower professional fees.

Amortization of deferred stock compensation

Amortization of deferred stock compensation was $73,000, or 5% of net revenues, for the three months ended September 30, 2003, as compared to $161,000, or 2% of net revenues, for the comparable period in 2002. Amortization of deferred stock compensation resulted from varying terms of stock option grants previously made during the period, and by using the multiple option award valuation and amortization approach, which is an accelerated amortization method to account for compensatory stock options granted to employees and directors during the six months ended September 30, 2001. We expect to amortize $91,000 during the remainder of fiscal 2004 and $34,000 during fiscal 2005.

Litigation settlement

Litigation settlement was $650,000, or 48% of net revenues, for the three months ended September 30, 2003, as compared to $0 for the comparable period in 2002, and comprises sums receivable from the settlement of a legal dispute with Amaze Entertainment, Inc.

Restructuring costs

Restructuring costs were $176,000, or 13% of net revenues, for the three months ended September 30, 2003, as compared to $0 for the comparable period in 2002, and comprise the estimated costs of our early termination of our lease on our former London premises.

Interest income

Interest income was $1,000 for the three months ended September 30, 2003, as compared to $64,000, or 1% of net revenues, for the comparable period in 2002. Interest income in each period relates to interest earned on funds deposited in money market accounts and decreased as a result of lower money market account balances.

Interest expense

Interest expense was $28,000, or 2% of net revenues, for the three months ended September 30, 2003, as compared to $268,000, or 3% of net revenues, for the comparable period in 2002. There was less borrowing under the short-term borrowing facilities during the three months ended September 30, 2003 as compared to the comparable period a year ago. During the three months ended September 30, 2003, interest expense included a $25,000 factoring line

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termination fee. No interest expense was incurred in the quarter ended September 30, 2003 under a new short-term facility that commenced in September 2003.

Other expense

Other expense was $3,000 for the three months ended September 30, 2003, as compared to $43,000 for the comparable period in 2002 and comprises realized exchange losses.

LIQUIDITY AND CAPITAL RESOURCES

In October 2003, we completed the sale of 1,850,000 shares of our common stock and warrants to purchase another 1,665,000 shares of its common stock, resulting in gross proceeds (assuming no exercise of the warrants) of $1.8 million, in a private offering to institutional and accredited investors. Of these proceeds, $503,000 was received during the three months ended September 30, 2003.

We need to raise additional funds. These funds may come from either one or a combination of additional financings, exercise of outstanding warrants and additional investment rights, mergers or acquisitions, or otherwise obtain capital via sale or license of certain of its assets, in order to satisfy its future liquidity requirements. Current market conditions present uncertainty as to our ability to secure additional financing or effectuate any merger or acquisition, as well as our ability to reach profitability. There can be no assurances that we will be able to secure additional financing or effectuate any such merger or acquisition, or obtain favorable terms on such financing if it is available, or as to our ability to achieve positive cash flow from operations. Continued negative cash flows create significant uncertainty about our ability to implement its operating plan and we may have to further reduce the scope of our planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy our liquidity requirements, we will not have sufficient resources to continue operations for the next six months.

Net cash used in operating activities was $3.0 million for the three months ended September 30, 2003, as compared to $2.3 million for the comparable period in 2002. For the three months ended September 30, 2003 and 2002, net cash used in operating activities was the result of net losses, net of depreciation, amortization, provision for price protection and cooperative advertising, offset by net increases in operating assets, primarily prepaid royalties, capitalized software costs and licensed assets.

Net cash used in investing activities was $4,000 for the three months ended September 30, 2003, as compared to net cash provided by investing activities of $1.1 million for the comparable period in 2002. Net cash used in investing activities during the three months ended September 30, 2003, consisted of the purchase of property and equipment. For the comparative period, net cash provided by investing activities consisted of the sale of short-term investments offset by the purchase of property and equipment.

Net cash provided by financing activities was $2.6 million for the three months ended September 30, 2003, as compared to net cash used in financing activities of $1.3 million for the comparable period in 2002. Net cash provided by financing activities during the three months ended September 30, 2003 consisted mostly of advances under a finance agreement with a finance company, funds received in advance of a future private placement, and a loan from a director. For the comparable period, net cash used in financing activities consisted mostly of net repayments under a finance agreement with a finance company.

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In September 2003, we entered into a six month agreement (the “Agreement”) with a finance company, pursuant to which the finance company extends us a line of credit facility to fund domestic inventory purchases. We may sell the inventory purchased under the Agreement. We are required to remit customer receipts from those sales directly to the finance company up to the amounts funded by them. We retain collections in excess of the amounts funded by the finance company, we are responsible for collecting the customer receivables, and we bear the risk of loss on all uncollectible accounts. The finance company has a security interest in our accounts receivable and inventory.

Under the terms of the Agreement, the finance company’s aggregate outstanding funding is limited to $3.2 million. We are required to pay the finance company’s expenses under the contract, a facility fee equal to 5.0% of the funds advanced by the finance company, and interest at prime plus 0.5%. The Agreement terminates on March 31, 2004 and any sums outstanding become repayable on that date. We may repay any sums advanced prior to the due date of payment without penalty. As of September 30, 2003, we had advances of $1,745,000 outstanding under the Agreement.

Prior to entering into the Agreement, we had entered into a two year factoring agreement (the “Factoring Agreement”) with a different finance company in February 2002, pursuant to which we assigned our North American receivables to the finance company. The finance company was responsible for collecting customer receivables, and upon collection, remitted the funds to us, less a service fee. Under the Factoring Agreement, we could obtain advances, subject to the finance company’s discretion and our compliance with certain liquidity covenants, in the form of cash or as collateral for letters of credit, up to a maximum of 75% of outstanding domestic receivables at any point in time.

Under the terms of the Factoring Agreement, we paid a service fee on all receivables assigned, with a minimum annual fee of $150,000, interest at prime plus 1% on all cash sums advanced. All fees were included in interest expense. We bore the collection risk on the accounts receivable that were assigned, unless the finance company approved the receivable at the time of assignment, in which case the finance company bore the risk. The finance company had a security interest in our accounts receivable, inventory, fixed assets and intangible assets.

As of June 30, 2003 we did not meet the Factoring Agreement’s liquidity covenants and we had no sums advanced under the Factoring Agreement. The Factoring Agreement was mutually terminated in September 2003, and all liabilities settled. Upon the termination of the Factoring Agreement, the minimum annual fee for the second year of the Factoring Agreement was waived, and we paid a termination payment of $25,000.

As of September 30, 2003 and June 30, 2003 we had no outstanding letters of credit issued on our behalf.

During the three months ended September 30, 2003, we used cash in operating activities of $3.0 million and incurred a net loss of $1.7 million. As of September 30, 2003, we had cash and cash equivalents of $617,000 and an accumulated deficit of $61.5 million. As of June 30, 2003, we had cash and cash equivalents of $1.1 million. During the year ended June 30, 2003, we undertook measures to reduce spending and restructured our operations. In February 2003 we retained, through July 31, 2003, the investment banking firm of Gerard Klauer Mattison & Co., Inc. to assist us in reviewing a range of potential strategic alternatives. No transactions arose from this assistance or were consummated during this period.

Capital expenditures were $4,000 and $236,000 for the three months ended September 30, 2003 and 2002, respectively. We did not have any material commitments for capital expenditures at either of those dates.

In January 2003 we granted, subject to landlord’s consent, a sublease on our London premises. In October 2003, the lessee advised us that they were terminating the sublease effective November 30, 2003.

Our principal commitments at September 30, 2003 comprised operating leases, guaranteed royalty payments, and contractual marketing commitments. As of September 30, 2003, we had commitments to spend $1.6 million under operating leases, prepay $400,000 for royalties under an agreement with a content provider, of which $200,000 was due by September 30, 2003, and spend $943,000 in advertising on the networks and websites of these content providers, of which $180,000 was due by September 30, 2003. Of these amounts, $1.9 million must be paid no later than September 30, 2004. Guaranteed royalty payments will be applied against any royalties that may become payable to the content providers. Sublease income is offset against operating lease expense.

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RISK FACTORS

In addition to the other information in this quarterly report, the following factors should be considered in evaluating us and our business.

RISKS RELATED TO OUR FINANCIAL RESULTS

If we are unable to successfully obtain additional financing or enter into a merger or acquisition, we may not have sufficient cash to continue operations for the next six months.

Although we raised gross proceeds of approximately $1.8 million through the sale of our common stock, warrants and additional investment rights in October 2003, we will need to raise additional funds. These funds may come from either one or a combination of additional financings, exercise of outstanding warrants and additional investment rights, mergers or acquisitions, or otherwise obtain capital via sale or license of certain of our assets, in order to satisfy our future liquidity requirements. Current market conditions present uncertainty as to our ability to secure additional financing or effectuate any merger or acquisition, as well as our ability to reach profitability. There can be no assurances that we will be able to secure additional financing or effectuate any such merger or acquisition, or obtain favorable terms on such financing if it is available, or as to our ability to achieve positive cash flow from operations. Continued negative cash flows create significant uncertainty about our ability to implement our operating plan and we may have to further reduce the scope of our planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy our liquidity requirements, we will not have sufficient resources to continue operations for the next six months.

Because we have a limited operating history, it is difficult to evaluate an investment in our common stock.

We were organized in October 1999 and released our first interactive entertainment software product in June 2000. It is difficult to evaluate our future prospects and an investment in our common stock because we have a limited operating history and the market for our products is rapidly evolving. Our prospects are uncertain and must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stage of development.

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Our future performance will depend upon a number of factors, including our ability to:

• secure additional financing and fund purchases of inventory;

• expand our domestic and international customer base;

• secure popular entertainment properties upon which to base future products;

• develop and enhance products in response to new interactive entertainment hardware platform releases, customer demand and competitive market conditions;

• expand our interactive entertainment software development and sales and marketing capabilities;

• expand our international operations;

• attract, retain and motivate qualified personnel; and

• maintain adequate control of our expenses.

We have a history of operating losses and may never achieve profitability.

We incurred net losses of $1.7 million for the three months ended September 30, 2003, $36.2 million for the year ended June 30, 2003, $15.7 million for the year ended June 30, 2002, and $1.6 million for the year ended June 30, 2001. We will need to generate significant revenues and control expenses to achieve profitability. There can be no assurance that our revenues will grow in the future or that we will achieve sufficient revenues for profitability. If we fail to achieve profitability, or sustain or increase profitability if we achieve it, this will have a negative impact on our operating results.

Our revenues fluctuate due to seasonal demand and the nature of the interactive entertainment industry.

We have experienced and may continue to experience significant quarterly fluctuations in net sales and operating results. The interactive entertainment industry is highly seasonal, with sales typically higher during the fourth and first calendar quarters. This is due primarily to the increased demand for games during and immediately following the holiday buying season. Our failure or inability to introduce products on a timely basis to meet seasonal fluctuations in demand will, and historically have, harmed our business and operating results.

Our operating results would be, and historically have been, harmed by a decrease in sales, price erosions, and a failure to meet our sales expectations. Uncertainties associated with interactive entertainment software development, lengthy manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship.

These and other factors could harm our business and have a material adverse effect on our operating results.

Product development schedules are frequently unpredictable, which may result in revenues and earnings not meeting analysts’ expectations.

Product development schedules for software products, particularly for new hardware platforms such as Sony’s PlayStation 2, Nintendo’s GameCube and Microsoft’s Xbox, are difficult to predict because they involve creative processes, use of new development tools for new platforms and the learning process, research and development, and experimentation associated with development for new technologies. Our revenues and earnings are dependent on our ability to meet our product release schedules, and our failure to meet those schedules have resulted in, and may

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again result in, revenues and earnings that fall short of analysts’ expectations for any individual quarter and the fiscal year.

Our earnings will be affected upon the issuance of shares of our common stock pursuant to third-party entertainment property license agreements.

Pursuant to a license agreement with a production company, we are obligated to issue 68,738 shares of our common stock after the release of any film for which we elect to produce interactive entertainment software products, up to 10 films or 687,375 shares of common stock. To date, we have elected to produce titles for three films and have issued 137,476 shares under this agreement for an aggregate value of $816,000. We are required to issue these shares when the films are released and will then incur a non-cash charge. We cannot estimate the aggregate dollar amount of these future non-cash charges as they will be based on our share price at a future point in time, but they may be substantial. All of the non-cash charges on the shares issued to date under the agreement had been amortized as of September 30, 2003.

In connection with the issuance of warrants pursuant to a separate license agreement with another production company, we incurred a non-cash charge of $97,000, of which $8,000 was amortized to project abandonment in the year ended June, 30, 2003. We are amortizing the remaining licensed asset of $89,000 over the life of the software products on which the warrants are exercisable, expected to be between three and six months, commencing upon release of the products, which occurred in September 2003. As of September 30, 2003, we had amortized $12,000 of this charge. Under the agreement, additional warrants to purchase up to an additional 15,000 shares may be issued, contingent upon certain future events occurring, such as exercising the right to develop a product. Upon issuance of the warrants we will incur an additional non-cash charge. We cannot estimate the aggregate dollar amount of these future non-cash charges as they are based on our share price at future points in time. Each of these future charges will affect our gross margins and profitability.

In connection with the issuance of warrants pursuant to a first look agreement with another production company, we granted a warrant to purchase up to 200,000 shares of our common stock, of which 15,000 became immediately exercisable upon the signing of the agreement. The remaining 185,000 will only become exercisable, in multiples of either 4,625 or 13,875 shares, upon certain future events occurring relating to the development and release of products. Upon the warrant for 15,000 shares becoming exercisable, we incurred a non-cash charge of $29,000, which had been fully amortized as of June 30, 2003. We will incur additional non-cash charges as the remaining 185,000 shares become exercisable. Upon release of the software products on which the warrants are exercisable, we will amortize the non-cash charges over the life of the products, which are expected to be between three and six months. We cannot estimate the aggregate dollar amount of these future non-cash charges as they will be based on our share price at future points in time. Each of these future charges will affect our gross margins and profitability.

RISKS RELATED TO OUR BUSINESS

Our ability to effectuate additional financing transactions to fund our operations could impair the value of your investment.

Although we raised gross proceeds of approximately $1.8 million through the sale of our common stock, warrants and additional investment rights in October 2003, if we are not acquired by or merge with another entity or if we are not able to raise additional capital via sale or license of certain of our assets, we will need to consummate additional financing transactions pursuant to which we receive additional liquidity. These additional financings will likely take the form of us raising additional capital through either one or a combination of public or private equity offerings or debt financings and the exercise of outstanding warrants and additional investment rights. To the extent we raise additional capital by issuing equity securities, our stockholders will likely experience substantial dilution. Also, any new equity securities may have greater rights, preferences or privileges than our existing common stock.

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We cannot assure you that we will be able to meet our future capital requirements.

If we are not acquired by or merge with another entity or if we are not able to raise additional capital via sale or license of certain of our assets, we will need to consummate additional financing transactions pursuant to which we receive additional liquidity. We cannot be certain that additional capital will be available to us on favorable terms, or at all. If we cannot effectuate financing transactions to raise needed funds on acceptable terms, we will not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. A material shortage of capital will require us to take drastic steps such as reducing our level of operations, disposing of selected assets or seeking protection under federal bankruptcy laws.

We depend on a relatively limited number of products for a significant portion of our revenues.

A significant portion of our revenues is derived each quarter from a relatively limited number of products that were released in that quarter or the or in the immediately preceding quarter. During the three months ended September 30, 2003, sales of four products each accounted for between 9% and 41% of our net revenues. During the three months ended September 30, 2002, sales of four products each accounted for between 3% and 40% of our net revenues. We expect that a limited number of products will continue to produce a disproportionately large amount of our net revenues. Due to this dependence on a limited number of brands, the failure of one or more products to achieve anticipated results could, and in the past has, significantly harmed our business and operating results.

We cannot assure you that new products introduced by us will achieve significant market acceptance and be sufficient in order for us to achieve profitability.

The interactive entertainment software market is characterized by short product life cycles, continually changing consumer preferences that are difficult to predict and frequent introduction of new products. The life cycle of a game generally consists of a relatively high level of sales during the first few months after introduction, followed by a decline in sales, and sales price erosion. Even the most successful titles remain popular for only limited periods of time, often less than six months. We believe that our success will be dependent on the production of successful titles on a continuous basis. We cannot assure you that new products introduced by us will achieve significant market acceptance or that such acceptance, if achieved, will be sufficient in order for us to achieve profitability.

The development cycle for new titles is long and during this time the market appeal of a title may decline.

We believe the development cycle for new titles is long, typically ranging from 12 to 24 months. After development of the initial product, we believe it may take between six and 12 additional months to develop the product for additional hardware platforms. In order to distribute a product, we must develop and test the necessary game software, obtain approval from the manufacturer and licensor if required, and have the initial order of cartridges or disks manufactured. During the development cycle, the market appeal of a title or of a property on which the title is based may decline. If market acceptance is not achieved, we may, and historically have, granted markdown allowances to maintain our relationship with retailers and our access to distribution channels. Because we introduce a relatively limited number of new products in a given period, the failure of one or more of our products to achieve market acceptance could and have harmed our business.

The introduction of new interactive entertainment hardware platforms creates risks relating to the development of titles for those hardware platforms.

The interactive entertainment industry is also characterized by rapid technological change. For example, the 128-bit hardware platform was released within five years of the release of the 64-bit hardware platform. As a result, we must continually anticipate these changes and adapt our offerings to emerging hardware platforms and evolving consumer preferences. Generally, because of the length of the development cycle, our development efforts must begin well in advance of the release of new hardware platforms in order to introduce titles on a timely basis with the release of such hardware platforms. Further, we have no control over the release dates of new hardware platforms or the number of units that will be shipped upon such release. It is difficult to ensure that our schedule for releasing new titles will coincide with the release of the corresponding hardware platforms. Additionally, if fewer than expected

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units of a new hardware platform are produced or shipped, such as occurred with Microsoft’s Xbox and Nintendo’s GameCube and Game Boy Advance, developers of titles for those hardware platforms may experience lower than expected sales.

The introduction of new hardware platforms and technologies can also render existing titles obsolete and unmarketable. Generally, as more advanced hardware platforms are introduced, consumer demand for titles for older hardware platforms diminishes. In addition, a broad range of competing and incompatible emerging technologies may lead consumers to postpone buying decisions until a particular hardware platform gains widespread acceptance. As a result of such reduced consumer demand for titles on older hardware platforms, our titles for older hardware platforms may not generate sufficient sales to make our titles profitable.

The development of software products is complex and time consuming and may not lead to marketable titles.

The development of software products is complex and time consuming. Our development efforts may not lead to marketable titles or titles that generate sufficient revenues to recover their development and marketing costs, especially if a hardware platform does not reach or sustain an expected level of acceptance. This risk may increase in the future, as continuing increases in development costs require corresponding increases in net sales in order for us to achieve profitability.

The technological advancements of the most popular hardware platforms also allow more complex software products. As software products become more complex, the risk of undetected errors in products when first introduced increases. We cannot assure you that, despite testing, errors will not be found in new products or releases after shipments have been made, resulting in loss of or delay in timely market acceptance, product returns, loss of revenues and damage to our reputation. In the past, we have experienced delays in the introduction of new titles and we anticipate that we will experience similar delays in the future in connection with the introduction of additional new titles, including products currently under development. Because net revenues associated with the initial shipments of a new product generally constitute a high percentage of the total net revenues associated with the life of a product, any delay in the introduction of, or the presence of a defect in, one or more new products could harm the ultimate success of the products or our business and operating results.

The costs of developing and marketing products for existing and anticipated interactive entertainment hardware platforms can be substantial and could harm our business.

The costs associated with the introduction of products for new hardware platforms, such as Sony’s PlayStation 2, Nintendo’s GameCube and Microsoft’s Xbox, could harm our business as we believe the costs of developing and publishing titles for these hardware platforms require greater financial and technical resources than prior development and publishing efforts. Additionally, during periods of new technology introductions, forecasting our revenues and earnings is more difficult than in more stable or rising product markets.

If interactive entertainment hardware platforms fail to achieve significant market acceptance, it may negatively impact our business.

Our sales are dependent on, among other factors, the popularity and unit sales of the interactive entertainment hardware platforms of the various manufacturers. The interactive entertainment industry has experienced periods of significant growth in consumer interest and popularity, followed by periods in which consumer demand for interactive entertainment products has slowed. Unexpected shortfalls in the market acceptance of a particular hardware platform, such as occurred with Microsoft’s Xbox and Nintendo’s GameCube and Game Boy Advance, can and have significantly harmed consumer demand for titles released or scheduled for release for that hardware platform. Therefore, we are dependent upon the successful marketing efforts of the manufacturers of the various hardware platforms to meet financial expectations.

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Over 98% of our net revenues are derived from sales to our three largest customers. We could be adversely affected if any of them reduced or terminated their purchases from us or did not pay their obligations to us.

Revenues from our three largest customers collectively accounted for 98% of our net revenues for the three months ended September 30, 2003, as compared to 34% of our net revenues for the three months ended September 30, 2002. As of September 30, 2003, four customers each accounted for between 5% and 28% of our gross trade accounts receivable, and as of June 30, 2003, four customers each accounted for between 8% and 19% of our gross trade accounts receivable. We have no written agreements or other understandings with any of our customers that relate to future purchases. Therefore, purchases by these customers or any others could be reduced or terminated at any time. A substantial reduction or a termination of purchases by any of our largest customers would negatively impact us.

Substantially all of our sales are made on credit, which exposes us to bad debt risk.

Our sales are typically made on credit, with terms that vary depending upon the customer and other factors. While we attempt to carefully monitor the creditworthiness of our customers and distributors, we bear the risk of their inability to pay our receivables and of any delay in payment. A business failure by any of our largest customers, such as occurred with Kmart in January 2002, would negatively impact us, as could a business failure by any of our distributors or other retailers.

Product returns and markdown allowances could negatively impact our business.

We have experienced, and are exposed to the risk of product returns and markdown allowances with respect to our customers. The decrease in demand for products based upon older hardware platforms may lead to a high level of these product returns and markdown allowances. We also allow distributors and retailers to return defective and damaged products in accordance with negotiated terms. Product returns and markdown allowances that exceed our expectations could negatively impact our business.

We cannot publish our interactive entertainment software titles without the approval of hardware manufacturers. Our ability to continue to develop and market our titles is dependent on the hardware manufacturers continuing to do business with us.

We are wholly dependent on the manufacturers of interactive entertainment hardware platforms and our ability to obtain or maintain non-exclusive licenses with them, both for the rights to publish and to manufacture titles for their hardware platforms. We are required to obtain a license to develop and publish titles for each hardware platform for which we develop and publish titles. Each license specifies the territory to which it applies, and such licenses range from as broad as multi-national distribution to as narrow as approval on a title-by-title basis. Our existing hardware platform licenses for Sony’s PlayStation and PlayStation 2, Nintendo’s Game Boy Color and Game Boy Advance, Nintendo 64, Nintendo GameCube, and Microsoft’s Xbox require that we obtain approval for the publication of new titles on a title-by-title basis. As a result, the number of titles we are able to publish for these hardware platforms, along with our ability to time the release of these titles is dependent upon decisions made by third party manufacturers. Accordingly, our revenues from titles for these hardware platforms may be limited. Should any manufacturer choose not to renew or extend our license agreement at the end of its current term, or if the manufacturer were to terminate our license for any reason, we would be unable to publish additional titles for that manufacturer’s hardware platform.

We are dependent on Sony and Nintendo for the manufacture of products that we develop for their hardware platforms.

When we develop interactive entertainment software titles for a hardware platform offered by Sony or Nintendo, the products are manufactured exclusively by that hardware manufacturer. Our hardware platform licenses with Sony and Nintendo provide that the manufacturer may change prices for the manufacturing of products at any time. In addition, these licenses include other provisions that give the manufacturer substantial control over our costs and the release of new titles. Since each of the manufacturers is also a publisher of games for its own hardware platforms and manufactures products for all of its other licensees, a manufacturer may give priority to its own products or

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those of our competitors in the event of insufficient manufacturing capacity. We would be materially harmed by unanticipated delays in the manufacturing and delivery of products.

If we cannot retain our key personnel and attract and retain additional key personnel, our business will be harmed.

We depend to a significant extent on the contributions and industry experience of our key personnel, in particular our Chief Executive Officer, Raymond C. Musci, and our Vice Chairman, Anthony R. Williams. If we fail to retain the services of our key personnel, our ability to secure additional licenses and develop and sell new products might be impaired. In addition, our future success will also depend upon our ability to continue to attract, motivate and retain highly qualified employees and third-party contractors, particularly software design and development personnel and outside sales representatives. Competition for highly skilled employees is intense and we may not be successful in attracting and retaining such personnel.

We are dependent upon licenses to properties originated and owned by third parties for the development of our titles.

Many of our titles, such as those from our Wallace & Gromit series, Powerpuff Girls series, and Dexter’s Laboratory series are based upon entertainment properties licensed from third parties. We cannot assure you that we will be able to obtain new licenses, or renew existing ones, on reasonable terms, if at all. If we are unable to obtain licenses for the properties which we believe offer significant consumer appeal, we would be required to obtain licenses for less popular properties or would have to develop all of our titles based upon internally developed concepts.

To the extent a licensed property is less popular than we anticipate, or is unsuccessful, sales of titles based on that property may be negatively impacted.

We have in the past experienced unsuccessful releases of titles based on properties that we licensed from third parties. Titles based on less popular properties, or on internally developed concepts, typically require greater marketing expense in order to establish brand identity and may not achieve broad market acceptance or prove to be successful.

We are dependent on third-party interactive entertainment software developers for developing and completing our titles.

We rely on third-party interactive entertainment software developers for the development of our interactive entertainment software titles. Quality third-party developers are continually in high demand. For this reason, we cannot assure you that the third-party software developers who have developed titles for us in the past will continue to be available to develop software for us in the future. Due to the limited number of third-party software developers and the lack of control that we exercise over them, we cannot assure you that these developers will complete titles for us on a timely basis or within acceptable quality standards, if at all.

Our future success is highly dependent on our proprietary software and intellectual property.

We rely primarily on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other methods to protect our proprietary rights. We require our employees, consultants and other outside individuals and entities to execute confidentiality and nondisclosure agreements upon the start of employment, consulting or other contractual relationships with us. However, our ability to police these individuals and entities and enforce these agreements is costly and uncertain. We are aware that unauthorized copying occurs within our industry. If a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, our business would be harmed. We generally obtain ownership of the software code and related documentation from third-party software developers. In instances where we do not retain sole ownership of the source code, the owner may use or license the code for development of other software

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products that may compete directly with our products and we may not have sufficient rights in the source code to produce derivative products.

We rely on existing copyright laws to prevent unauthorized distribution of our products. Existing copyright laws afford only limited protection. Policing unauthorized use of our products is difficult, and software piracy is a persistent problem, especially in international markets. In addition, the laws of some 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 United States or are weakly enforced. Legal protection of our rights may be ineffective in these countries. Any unauthorized use of our proprietary information could result in costly and time-consuming litigation to enforce our proprietary rights.

Other parties may assert claims against us that we are infringing upon their intellectual property rights and we are required to indemnify hardware manufacturers from certain claims in exchange for the right to purchase titles and manufacture our software for their hardware application.

We cannot be certain that our products do not infringe upon the intellectual property rights of others. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties. If our products violate third-party proprietary rights, we cannot assure you that we would be able to obtain licenses to continue offering such products on commercially reasonable terms, or at all. In addition, we must indemnify the hardware manufacturers with respect to all loss, liability and expense resulting from any claim against them involving the development, marketing, sale or use of our products. This includes any claims for copyright or trademark infringement brought against them. As a result, we bear the risk that the properties upon which our software titles are based, or that the information and technology licensed from the hardware manufacturer and incorporated in our software, may infringe the rights of third parties. Any claims against us or the parties we indemnify relating to the infringement of third-party proprietary rights, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Their claims could also result in injunctions preventing us from offering these products. Such claims could severely harm our financial condition and ability to compete.

We face risks associated with doing business in foreign countries, including our ability to generate international demand for our products.

We intend to increase our international revenues. We cannot assure you that we will be able to generate international market demand for our products. International sales and operations are subject to a number of risks, including:

• international consumer acceptance of existing and proposed titles;

• the impact of possible recessions in foreign economies;

• our ability to protect our intellectual property;

• the time and costs associated with translating and localizing products for foreign markets;

• foreign currency fluctuations;

• unexpected changes in regulatory requirements;

• difficulties and costs of staffing and managing foreign operations, or licensing to foreign entities; and

• political and economic instability.

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A significant downturn in general economic condition which results in a reduction in discretionary spending has reduced, and may continue to reduce, demand for our products and could harm our business.

Our product sales are affected by a retail customer’s ability and desire to spend disposable income on the purchase of our software titles. Any significant downturn in general economic conditions which results in a reduction of discretionary spending could result in a reduction in demand for our products and could harm our business. The United States economy is currently undergoing a period of slowdown, which some observers view as a recession. The United States and world economic condition has been worsened by the terrorist attacks on September 11, 2001. Moreover, any further terrorist activities, or the effect of the United States’ political, economic or military response to such activities, could result in the further deterioration of the United States and world economy. Such industry downturns have been, and may continue to be, characterized by diminished product demand and erosion of average selling prices. A continued economic downturn or recession would have a significant adverse effect on our operating results in future periods.

RISKS RELATED TO OUR INDUSTRY

Competition within the interactive entertainment software industry is intense and poses an ongoing threat to the success of our business.

The interactive entertainment industry is intensely competitive. Many of our competitors have greater name recognition among consumers and licensors of entertainment properties, broader product lines and greater financial, marketing and other resources than us. Accordingly, these competitors may be able to market their products more effectively, make larger offers or guarantees in connection with the acquisition of licensed entertainment properties, adopt more aggressive pricing policies or pay more to third-party developers. We believe that other technology, entertainment and media companies are increasing their focus on the interactive entertainment software market, which might result in greater competition for us. In addition, many of our competitors are developing online interactive entertainment software products and interactive networks that will be competitive with our interactive entertainment software products.

Competitive pressures could have the following effects on us:

• as competition for popular entertainment properties increases, our cost of acquiring licenses for those properties may increase, resulting in reduced margins;

• we might not be able to achieve full distribution of our products with our customers;

• as competition for retail shelf space becomes more intense, we may need to increase our marketing expenditures to maintain sales of our interactive entertainment software titles; and

• we could be required to reduce the wholesale unit prices of our titles.

Competition for limited shelf space and promotional resources among interactive entertainment software publishers is intense and poses an ongoing threat to the success of our business.

There is intense competition among developers and publishers of interactive entertainment software products for high quality retail shelf space and promotional support from retailers. As the number of titles and hardware platforms increases, competition for shelf space will intensify and may require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products constitute a relatively small percentage of any retailer’s sales volume, and we cannot assure you that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support. As a result of their positions in the industry, the

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manufacturers of interactive entertainment hardware platforms generally have better bargaining positions with respect to retail pricing, shelf space and retailer accommodations than do any of their licensees, including us.

Government restrictions including the possible adoption of an interactive entertainment software rating system could harm our business.

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. Under such a system, interactive entertainment software publishers would be expected to comply by identifying particular products within defined rating categories. In addition, these publishers would be required to communicate these ratings to consumers through appropriate package labeling and through advertising and marketing presentations consistent with each product’s rating. Many foreign countries have laws which permit governmental entities to censor the content of products, including interactive entertainment software. In some instances, we may be required to modify our products to comply with the requirement of such governmental entities, which could delay the release of those products in such countries. These delays could harm our business. We currently voluntarily submit our products to industry-created review boards and publish their ratings on our game packaging. Some retailers may refuse to carry titles that bear an unacceptable rating. We believe that mandatory government-run interactive entertainment software products rating systems eventually will be adopted in many countries which represent significant markets or potential markets for us. Due to the uncertainties in the implementation of such a rating system, confusion in the marketplace may occur. We are unable to predict what effect, if any, such a rating system would have on our business.

Potential opposition by consumer advocacy groups to certain software content could harm our business.

Consumer advocacy groups have in the past opposed sales of interactive entertainment software products containing graphic violence and sexually explicit content. These groups have pressed for legislation in these areas and engaged in public demonstrations and media campaigns. While to date such actions have not harmed our business, we cannot assure you that these groups will not target our products in the future. If that occurs, we may be required to significantly change or discontinue one or more of our titles.

RISKS RELATED TO OUR COMMON STOCK

Our stock price has been volatile and we expect it to continue to be volatile.

Prior to our initial public offering in November 2001, there was no public market for our common stock. Since our initial public offering the market price of our common stock has been volatile. We have experienced a decline in the market price of our common stock from the initial public offering price. The stock market has experienced significant price and volume fluctuations that affected the market price for the common stock of many technology, communications and entertainment and media companies. These market fluctuations were sometimes unrelated or disproportionate to the operating performance of these companies. Any significant stock market fluctuations in the future, irrespective of our actual performance or prospects, could result in a further decline in the market price of our common stock.

If our common stock is delisted from The Nasdaq SmallCap Market, the liquidity and price of our common stock may be adversely affected.

Our common stock is listed on The Nasdaq SmallCap Market. In order for our common stock to continue to be listed on The Nasdaq SmallCap Market, however, we must continue to satisfy specified listing maintenance standards established by Nasdaq, including (i) required levels of stockholders’ equity, net income or market value of listed securities, (ii) minimum market value of our public float and (iii) a minimum bid price per share.

We transferred to The Nasdaq SmallCap Market from The Nasdaq National Market on March 27, 2003. Nasdaq advised us at the time of transfer that we met all the specified listing requirements of The Nasdaq SmallCap Market with the exception of the minimum $1.00 bid price per share requirement and that we had until November 17, 2003

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to regain compliance with this requirement. On September 29, 2003, Nasdaq advised us that we had regained compliance with the $1.00 bid price per share requirement, and that we now met all the specified listing requirements of Nasdaq SmallCap Market.

We currently do not meet The Nasdaq SmallCap Market’s required levels of stockholders’ equity, net income or market value of listed securities, one of which must be met to satisfy the listing maintenance standards. While we have not received a notification letter from Nasdaq that our common stock fails to meet these required listing standards, we may receive such notification letter at any time. If we do receive such notification letter, we will have 10 days to provide Nasdaq with a plan setting forth how we expect to regain compliance with the required listing standards. The notification letter does not result in the delisting of our common stock; however, if our plan of compliance is not accepted by Nasdaq, we will receive a staff determination letter of delisting. At that time, we would have the opportunity to appeal Nasdaq’s decision to delist our common stock.

If our common stock is delisted from The Nasdaq SmallCap Market, our common stock would trade on the Over-The-Counter Bulletin Board, which is viewed by most investors as a less desirable and less liquid marketplace. Thus, delisting from The Nasdaq SmallCap Market could adversely affect the liquidity and price of our common stock and could have a long-term impact on our ability to raise additional capital in the future.

Anti-takeover provisions in our charter documents and in Delaware law could prevent or delay a change in control and, as a result, negatively impact our stockholders.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition or make removal of incumbent directors or officers more difficult. These provisions may discourage takeover attempts and bids for our common stock at a premium over the market price. These provisions include:

• the ability of our board of directors to alter our bylaws without stockholder approval;

• the restriction on the ability of stockholders to call special meetings;

• the restriction on the ability of our stockholders to act by written consent;

• the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholders meetings; and

• the establishment of a classified board of directors with staggered, three-year terms, which prevents a majority of the board from being elected at one time.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from engaging in a merger, asset or stock sale or other transaction with an interested stockholder for a period of three years following the date such person became an interested stockholder, unless prior approval of our board of directors is obtained or as otherwise provided. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us without obtaining the prior approval of our board of directors, which may cause the market price of our common stock to decline.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from the adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. Changes in interest rates and, in the future, changes in foreign currency exchange rates have and will have an impact on our results of operations.

FOREIGN CURRENCY EXCHANGE RATE RISK

We face market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. Dollar functional currency foreign operations. The functional currency for our foreign operations is the applicable local

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foreign currency. The translation of the applicable foreign currencies into U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The gains or losses resulting from such translation are reported as a separate component of equity as accumulated other comprehensive income, whereas gains or losses resulting from foreign currency transactions are included in results of operations. We do not engage in hedging activities with respect to foreign exchange rate fluctuations.

INTEREST RATE RISK

We do not consider our cash and cash equivalents to be subject to interest rate risk due to the short maturities of the instruments in which we have invested. We are exposed to interest rate risk on our financing arrangement with a finance company. We do not enter into derivative securities or other financial instruments for trading or speculative purposes. We estimate that a 10% change in interest rates would have impacted our results of operations by less than $5,000 for the three months ended September 30, 2003.

INFLATION

Inflation has not had a material adverse effect on our results of operations; however, our results of operations may be materially and adversely affected by inflation in the future.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

The term “disclosure controls and procedures” refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under Rule 13a - 14 of the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. As of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed with the Securities and Exchange Commission under the Exchange Act.

(b) Changes in internal controls

There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On April 1, 2003, Amaze Entertainment, Inc. asserted counterclaims against us in an action captioned BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC. et. al. that we commenced in the Superior Court of California, County of Santa Clara (Case No. CV814820) on February 18, 2003, and which Amaze had removed to the United States District Court for the Northern District of California (Case No. C03 01286 PVT) on or about March 24, 2003. Our action asserted claims for, inter alia, relief based on rescission, breach of contract, declaratory relief, and money paid and received with regard to an agreement for a video game titled “Crushed Baseball” that Amaze Entertainment was developing for us. Amaze Entertainment’s counterclaims alleged breach of contract and unjust enrichment with regard to each of the “Crushed Baseball” development agreement and a separate development agreement for another video game titled “Samurai Jack.” The counterclaims sought, inter alia, compensatory damages of approximately $3.5 million and additional damages to be proven at trial. On July 11, 2003 we and Amaze agreed to compromise and settle all claims either asserted or that could be asserted in connection with the dispute and to mutually release any and all future claims and contentions we have against each other. This compromise required Amaze to make us two payments, one in July 2003 and one in October 2003 of $325,000 each. We have received both of these two payments and we recorded them in the three months ended September 30, 2003. The settlement agreement stipulated that upon payment by Amaze to us of the payment due in October 2003, the parties would execute a stipulation for dismissal of the legal actions. The parties executed the stipulation for dismissal on October 21, 2003.

We occasionally become involved in litigation arising from the normal course of business. Other than the foregoing, we believe that any liability with respect to pending legal actions, individually or in the aggregate, will not have a material adverse effect on our business, financial condition or results of operations.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS — Not Applicable

ITEM 3. DEFAULTS UPON SENIOR NOTES — Not Applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS — None

ITEM 5. OTHER INFORMATION — Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

10.1*	Letter of Intent dated July 17, 2003 between BAM Entertainment Limited, a subsidiary of the Registrant, and Acclaim Entertainment, Ltd., a subsidiary of Acclaim Entertainment, Inc.
10.1(a)*	Amendment to Letter of Intent dated September 30, 2003 between BAM Entertainment Limited, a subsidiary of the Registrant, and Acclaim Entertainment, Ltd., a subsidiary of Acclaim Entertainment, Inc.
10.2	Loan and Security Agreement dated September 25, 2003 between the Registrant and Phillips Land LLC.
10.2(a)	Amendment to Loan and Security Agreement dated October 17, 2003 between the Registrant and Phillips Land LLC.
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a - 14(a).
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a - 14(a).
32	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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*     The Company has applied with the Secretary of the Securities and Exchange Commission for confidential treatment of certain information pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. The Company has filed separately with its application a copy of the exhibit including all confidential portions, which may be made available for public inspection pending the Securities and Exchange Commission’s review of the application in accordance with Rule 24b-2.

(b)  Reports on Form 8-K

On July 23, 2003, under Item 5 — Other events. Regarding the registrant’s announcement on July 23, 2003 that its subsidiary, Bam Entertainment Ltd., had entered into a distribution agreement whereby Acclaim Entertainment Ltd, a subsidiary of Acclaim Entertainment, Inc. (NASDAQ: AKLM), would distribute certain computer and video game titles of the Registrant in PAL territories, including Europe and Australia. A copy of the press release was furnished as Exhibit 99.1 to the Form 8-K.

On August 20, 2003, under Item 5 — Other events. The registrant announced that two members of its Board of Directors had resigned from the Board on August 14, 2003 to pursue other interests.

On September 30, 2003, under Item 12 — Results of Operation and Financial Condition. Regarding the registrant’s announcement on September 30, 2003 of its financial results for the quarter and fiscal year ended June 30, 2003. A copy of the press release was furnished as Exhibit 99.1 to the Form 8-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BAM! ENTERTAINMENT, INC.
Date: November 14, 2003	By:	/S/ RAYMOND C. MUSCI
		Raymond C. Musci Chief Executive Officer
Date: November 14, 2003	By:	/S/ STEPHEN M. AMBLER
		Stephen M. Ambler Chief Financial Officer and Vice President of Finance

39 EX-10.1 3 v94442exv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 [Confidential Portions Omitted] Acclaim Entertainment Entertainment, Ltd. Moreau House 112-120 Brompton Road London SW3 1JJ July 17, 2003 BAM Entertainment Limited Upper Borough Court Borough Wells Bath BAl 1Rg RE: ACCLAIM ENTERTAINMENT, INC. -W- BAM ENTERTAINMENT LIMITED Gentlemen: Set forth below are the principal terms and conditions agreed by you and us regarding our exclusive distribution of certain of your videogame titles: 1. GAME TITLES : The term "Game Titles" means the videogames listed on Schedule "A" attached hereto in the formats listed on Schedule "A" (collectively the "Game Titles"). 2. EXCLUSIVE DISTRIBUTION: We shall act as your sole and exclusive seller and distributor of the Game Titles throughout the PAL territories as such territories are defined in the Sony Computer Entertainment Limited publisher agreement (the "Territory") during the Exploitation Period (as defined below) through any and all means of distribution, whether now known or hereafter devised, including, without limitation, through normal retail channels, through "bundling"sales, through budget sales and compilations, shareware, or to end-users by direct mail or other direct response marketing, and over the air, and by telephone, satellite, cable, and by electronic and digital delivery systems. As the distributor of the Game Titles, we shall undertake the manufacture, sale, distribution and marketing of the Game Titles, In that regard we shall use commercially reasonable efforts to market the Software Products (as defined below) exercised in our good faith business judgement; provided that we have not heretofore made and do not hereby make any representation or warranty with respect to the quantity of sales (if any) of Software Products which we may sell. You recognize and acknowledge that the sale of Software Products is speculative and agree that our judgment and the judgment of our subsidiaries and affiliated companies with regard to the sales of any of the Software Products and with regard to the marketing, promotion, advertising and exploitation of the Software Products shall be binding and conclusive on you. (a) Notwithstanding the foregoing to the contrary: (i) You shall not exploit or allow the exploitation or distribution of any of the Game Titles through OEM type sales for at least 9 months following our release of such Game Title in the Territory. 3. DEVELOPMENT: You shall complete the development of the Game Titles at your sole expense. The Game Title "Ice 9" shall be subject to our approval as complying with the approved Game Design Document and Technical Design Documents for such Game Title. Each Game Title shall be , developed to operate on the appropriate television formats in the Territory (i.e. PAL, etc.). Each Game Title shall be localized for the country in which it is being released, however the extent of the localization for each Game Title shall be hereafter discussed, provided that each Game Title shall be shall have "in text" localizations for the following languages: English, French, German, Spanish. You shall be responsible for obtaining the approval by the applicable hardware manufacturer of each Game Title, including, without limitation, concept approval, and, upon request, you shall provide us with documentation thereof. We shall have the right to approve the PC skus prior to manufacture. 4. EXPLOITATION PERIOD: The Exploitation Period for each Game Title, other than the Game Titles Samurai Jack, Dexter's Laboratory and Power Puff Girls, shall be for a period of 3 years from the release of each such Game Title. The Exploitation Period for the Game Title Samurai Jack, Dexter's Laboratory and Power Puff Girls shall be as follows: Samurai Jack shall be through June 30, 2004, Dexter's Laboratory shall be through April 30, 2005 and Power Puff Girls through November 30, 2005. 5. DELIVERY DATE: The gold master for each completed version of each Game Title shall be delivered to us at least 4 weeks prior to the release date for such version of the Game Title as reflected on Schedule "A" attached hereto (the "Delivery Date"). The terms "Delivery" and "Delivered" shall mean the physical transfer to us of the fully debugged software for each version of each Game Title as such software is ultimately approved by the applicable hardware manufacturer without any need for resubmission due to any bug or bugs and ready for manufacture. Notwithstanding the foregoing, the PC Game Titles and the Game Title "Ice 9" are to be approved by us as provided herein. For purposes of clarification it is understood that if you deliver the software for a Game Title which software is thereafter not approved by us or the applicable manufacturer, then such version of such Game Title shall not be deemed Delivered. 6. MINIMUM GUARANTEE, ADVANCE AND NET MONIES: (a)Minimum Guarantee: We shall guarantee to pay you a minimum of [*] the sale and exploitation of the Game Titles. We shall pay you advances ("Advances") against such Minimum guarantee as follows: (i) $[*] on execution of this letter of intent ('LOI"); (ii) $[*] not later than August 8, 2003; ________________ *Confidential portion omitted and filed separately with the Commission. (iii) $[*] not later than August 29, 2003; (iv) $[*] not later than September 5, 2003; (v) $[*] within 2 days following the Delivery to us of the gold masters for all versions of the Wallace & Gromit Game Title; (vi) $[*] within 7 days following our shipment of all versions of the Wallace & Gromit Game Title in the United Kingdom; (vii) $[*] per month commencing October, 2003 and ending February, 2004; provided that at such point in time as the Minimum Guarantee as set forth in paragraph 6(a) has been paid through Advances and Net Monies, the payments pursuant to this paragraph 6(a)(vii) shall cease; (viii) Within 7 days following the shipment of any version of a Game Title to us, other than Wallace & Gromit, we will pay to you as an Advance against the Minimum Guarantee [*] of the estimated Net Receipts to be payable to you from the initial shipment of the Game Title in the Territory, less any Advances previously paid to you pursuant to paragraphs 6(a)(i) through (vii). Within 7 days following the shipment of all versions of the Wallace & Gromit Game Title, we will pay to you as an Advance against the Minimum Guarantee [*] of the estimated Net Receipts to be payable to you from the initial shipment of the Game Title in the Territory in excess of [*] units of such Game Title, less any Advances previously paid to you pursuant to paragraphs 6(a)(i) through (vii). (b) Each guarantee payment set forth above, shall be recoupable on a fully cross-collateralized basis against all Net Monies payable to you hereunder. (c) Notwithstanding anything contained herein to the contrary: (i) In the event that a version of a Game Title is canceled, then the Minimum Guarantee shall be reduced by the guarantee payment opposite such version of such Game Title on Schedule "A" and the guarantee payment for such canceled version of such Game Title, if paid, shall be recoupable from subsequent payments of the Minimum Guarantee or returned to us at our election. (ii) In the event that the concept for a version of a Game Title is not approved by the applicable hardware manufacturer, then we shall have right to terminate the agreement with respect to such version of such Game Title and reduce the Minimum Guarantee by the amount set forth on Schedule "A" opposite such version of such Game Title as the guarantee payment for such version of such Game Title, provided if at such point we have, after taking into consideration such reduction, paid you the full Guarantee, you shall return to us any overpayment for such terminated Game Title. (iii) In the event that a Game Title, or version thereof, is not delivered to us by the Delivery Date, then we shall have the right to terminate such Game Title, or version thereof, at our election, which it may exercise at any time following your failure to timely Deliver such Game Title or version thereof. If we terminate the Game Title or version thereof, then the Minimum Guarantee shall be reduced by the amount set forth on Schedule "A" opposite such version of such Game Title (or for all ________________ *Confidential portion omitted and filed separately with the Commission. versions if we cancel the Game Title) as the guarantee payment for such version of such Game Title, provided if at such point we have, after taking into consideration such reduction, paid you the full Guarantee, you shall return to us any overpayment for such terminated Game Title. (iv) In the event that you fail to Deliver any version of any Game Title to us by the Delivery Date therefor, then the guarantee payment opposite such version of such Game Title on Schedule "A" otherwise payable to you shall be reduced by [*] percent for each thirty day period (or portion thereof) thereafter in which you are late in Delivery to us of such version of such Game Title or we may terminate our obligation to release such version of such Game Title and the Minimum Guarantee shall be reduced by the amount set forth on Schedule A opposite such version of the Game Title as the guarantee payment for such version of such Game Title. All such amounts as described above may be deducted from payments to be made to you hereunder. Notwithstanding the foregoing to the contrary, we shall have no right to reduce the guarantee on any Game Title as provided in this paragraph 6 (c) (iv), if at the time of such reduction the Minimum Guarantee, as provided in paragraph 6(a), has already been paid to you. (d) (i) On sales of Software Products we shall pay you the following: (A) Console: [*]% of Net Receipts. (B) Handheld cartridge: [*]% of Net Receipts. (C) PC: [*]% of Net Receipts. (ii) We shall hereafter mutually agree a royalty with respect to our exploitation of a Game Title by electronic distribution. (iv) Notwithstanding any of the foregoing to the contrary: (A) you shall be paid [*]% of Net Receipts on Software Products sold in the form of Console or Handheld products for less than an amount equal to the cost of goods, plus royalties to the hardware vendors and freight and handling charges plus [*]% of such amount but more than an amount equal to the cost of goods plus freight and handling charges plus royalties to the hardware vendor. (B) you shall be paid [*]% of Net Receipts on Software Products sold in the form of CD Roms for PCs for less than an amount equal to the cost of goods and freight and handling charges plus [*]% of such amount but more than an amount equal to the cost of goods plus freight and handling charges. (iv) Notwithstanding any of the foregoing to the contrary, no monies shall be payable to you on Software Products which are: (A) furnished on a so-called "no charge basis" or sold as "cut-outs" or ________________ *Confidential portion omitted and filed separately with the Commission. "scrap"; (B) sold in the form of Console or Handheld products for less than our cost of goods (manufacture and royalty payments to the hardware vendors) plus freight and handling charges. (C) sold in the form of PC products for less than our cost of goods plus freight and handling costs. 7. ACCOUNTINGS: We shall send statements as to Net Monies payable to you hereunder to you within sixty (60) days following the end of each quarterly calendar period for such preceding quarterly period together with payment of accrued Net Monies, if any, earned by you hereunder during such quarterly period less all advances and/or guarantee payments previously made to you hereunder. We shall have the right to retain, as a reserve against charges, credits, or returns, such portion of accrued Net Monies as shall be reasonable in our best business judgment, provided that such reserve shall not exceed [*] percent [*] of such accrued Net Monies and, further, that each such reserve shall be liquidated within four (4) accounting periods after such reserve is first established. 8. MARKETING: You and we shall coordinate marketing and public relations relating to the Game Titles. You shall assist us in relationships with your licensors. You will communicate all co-op marketing activities relating to the Games Titles to us. You shall provide us with details with respect to marketing support provided with respect to the Game Titles by the applicable hardware manufacturers, and pass on to us all financial marketing commitments with respect to the Game Titles paid to you by such hardware manufacturers. 9. CURRENT SALES: You will communicate all current sales activities relating to the Game Titles to us. 10. Not used. 11. ADDITIONAL VIDEOGAME TITLES: You and we may mutually agree to add additional videogame titles to the agreement without increasing the Minimum Guarantee. 12. SUBSTITUTION OF X-BOX DEVELOPMENT FOR GAMECUBE: You and we shall discuss the cessation of the development of GameCube versions of Game Titles and the substitution of X-Box versions therefor. 13. CURE CLUASE: Neither party shall be deemed to be in breach of any of its obligations hereunder unless and until it shall have been given specific written notice (delivered in the manner permitted pursuant to Paragraph 14 below) of the nature of such breach and it shall have failed to cure such breach within thirty (30) days except 5 days with respect to money breaches) after receipt of such written notice. 14. NOTICES: All notices, statements and/or payments to be given to the parties hereunder shall be addressed to the parties at the addresses set forth on the first page hereof or at such other address as the parties shall designate in writing from time to time. All notices shall be in writing and shall either be served by personal delivery (to an officer of each company), mail, or facsimile (if confirmed, by mail or ________________ *Confidential portion omitted and filed separately with the Commission. personal delivery of the hard copy), all charges prepaid. Except as otherwise provided herein, such notices shall be deemed given when personally delivered, all charges prepaid, or on the date five (5) days following the date of mailing, except that notices of change of address shall be effective only after the actual receipt thereof. Copies of all notices to Acclaim should be sent to Acclaim at its address set forth above, attention: Office of the President, and to Fischbach, Perlstein & Lieberman, LLP, 1875 Century Park East, Suite 850, Los Angeles, CA 90067, Attention: Bernard J. Fischbach. 16. PARENT GUARANTEES: It is a condition of this agreement that Acclaim Entertainment, Inc. execute a guarantee in favor of BAM Entertainment Limited in the form attached hereto as Exhibit A-l and that BAM Entertainment, Inc. execute a guarantee in favor of Acclaim Entertainment, Ltd in the form attached hereto as Exhibit A-2. 15. DEFINITIONS: (a) "Net Monies" shall mean monies payable to you, other than Advances, in connection with our sale and exploitation of Software Products. (b) "Net Receipts" shall mean all monies actually received by us from its customers on sales of Software Products embodying the Game Titles less (i) any and all excise, sales, value added or comparable or similar taxes; and (ii) freight and similar third party handling charges paid or payable by us (but no more $1.50 per unit); (iii) returns, discounts, allowances or credits (inclusive of discounts and allowances);. (c)The term "Software" means the fully-debugged computer software embodying a Game Title containing full and complete computer code, including source code, assembly code, object code and all data files and other files as are necessary for such computer software to achieve its functional purpose whereby data and visual images, with or without sound, can be manipulated, communicated, reproduced and/or perceived directly or with the aid of a machine or device, whether now known or hereafter developed. (d) The term "Software Device" means any device, whether now known or unknown, on or by which computer software and its associated visual images, with or without sound, may be embodied or recorded for later operation, manipulation or communication to users, including without limitation semiconductor devices, magnetic discs (whether floppy or otherwise) of any size, tapes, cartridges, compact discs, boards, cassettes, or other prerecorded devices whatsoever existing now or later developed by which a computer or video game can be perceived, reproduced or, otherwise communicated directly or with the aid of a machine or device. (e) The term "Software Product(s)" means Software Devices embodying the Software. END OF PAGE The balance of the agreement would be on our standard form distribution agreement, embodying the above terms and conditions as well as customary provisions regarding accounting and audit matters, approvals, warranties and representations, indemnification, etc., subject to such changes as the parties may agree after good faith negotiation. The parties agree that they will use their commercially reasonable efforts to conclude the formal distribution agreement by no later than August 8, 2003 but until such date this agreement shall be deemed a binding agreement provided that that this agreement shall be deemed to include normal and customary accounting provisions, warranties and representations, indemnification provisions and other usual and customary terms contained in a distribution agreement. Sincerely, Acclaim Entertainment, Limited By /s/ Simon Hosken -------------------------- Agreed and Accepted BAM Entertainment Limited By /s/ Anthony Williams ----------------------- SCHEDULE "A"

Title Format Release Date Guarantee The Powerpuff Girls: Relish GC 26th September $ [*] Rampage 2003 Ed, Edd n Eddy: Jawbreakers! GBA 26th September $ [*] 2003 Ice Nine GBA 12th March 2004 $ [*] Ice Nine Xbox 12th March 2004 $ [*] Ice Nine PS2 12th March 2004 $ [*] Wallace & Gromit in Project Zoo PS2 26th September $ [*] 2003 Wallace & Gromit in Project Zoo PC 17th October 2003 $ [*] Wallace & Gromit in Project Zoo Xbox 26th September $ [*] 2003 Wallace & Gromit in Project Zoo GC 26th September $ [*] 2003 Carmen San Diego PS2 28th November 2003 $ [*] Carmen San Diego GC 28th November 2003 $ [*] Samurai Jack GBA 26th September $ [*] 2003 Dexter's Laboratory PS2 28th November 2003 $ [*] Dexter's Laboratory GC 28th November 2003 $ [*] Sound of Thunder PS2 26th March 2004 $ [*] Sound of Thunder Xbox 26th March 2004 $ [*] Sound of Thunder GBA 26th March 2004 $ [*] Total $ [*]

________________ *Confidential portion omitted and filed separately with the Commission. EX-10.1.(A) 4 v94442exv10w1wxay.txt EXHIBIT 10.1(A) Exhibit 10.1(a) [Confidential Portions Omitted] Acclaim Entertainment Ltd. Moreau House 112-120 Brompton Road London SW3 1JJ September 30, 2003 BAM Entertainment Limited Upper Borough Court Borough Wells Bath BA1 1RG RE ACCLAIM ENTERTAINMENT INC. -W- BAM ENTERTAINMENT LIMITED Gentlemen: We would like to clarify a number of provisions of the letter of intent entered into between our companies dated July 17, 2003. Specifically: 1. Wallace and Gromit PS2 - This product will be developed as 3 SKU's with associated minimum guaranteed royalties on each SKU payable as follows: a. PAL English $ [*] b. PAL German $ [*] c. PAL French, Italian, German, Spanish $ [*] Excess royalties are only payable once the total minimum guarantee is exceeded. 2. Wallace and Gromit XBox - This product will be developed as 2 SKU's with associated minimum guaranteed royalties on each SKU payable as follows: a. PAL English $ [*] b. PAL French, Italian, German, Spanish $ [*] Excess royalties are only payable once the total minimum guarantee is exceeded. ________________ *Confidential portion omitted and filed separately with the Commission. 3. Wallace and Gromit Gamecube - This product will be developed as 2 SKU's with associated minimum guaranteed royalties on each SKU payable as follows: a. PAL English $ [*] b. PAL French, Italian, German, Spanish $ [*] Excess royalties are only payable once the $[*] total minimum guarantee is exceeded. 4. Samarai Jack - This product will be developed as an English language Version only. Sincerely Acclaim Entertainment Limited By /s/ Simon Hosken ---------------- Agreed and Accepted BAM Entertainment Limited By /s/ Stephen Ambler ---------------------- ________________ *Confidential portion omitted and filed separately with the Commission. EX-10.2 5 v94442exv10w2.txt EXHIBIT 10.2 EXHIBIT 10.2 LOAN AND SECURITY AGREEMENT This Agreement ("Agreement") is entered into effective as of September 25, 2003 (the "Effective Date"), by and between PHILLIPS LAND LLC, a Virginia limited liability company ("Lender"), and BAM! ENTERTAINMENT, INC., a Delaware corporation ("Borrower"): R E C I T A L S A. Borrower is in the business of selling video game software to its customers ("Customers"). B. In order to operate its business, Borrower desires to borrow funds and obtain other financial accommodations from Lender, and Lender is willing to provide inventory purchase financing and provide other financial accommodations to Borrower upon the terms and conditions set forth herein and in the other documents executed and delivered in connection herewith. C. In consideration of the terms and conditions contained in this Agreement, and of any extensions of credit made or to be made to or for the benefit of Borrower by Lender, the parties, therefore, agree as follows: 1. DEFINITIONS. 1.1 "Account Debtor" means the Customers or any other person or entity who is or may become obligated upon a Receivable. 1.2 "Accounts" means all amounts due and to become due to Borrower from the Customers and other accounts, contract rights, chattel paper, instruments and documents, whether now owned or to be acquired by Borrower, provided that the same arise in connection with the sale of Inventory. 1.3 "Affiliates" means any and all Persons which, in the sole and absolute judgment of Lender, directly or indirectly, own or control, are controlled by or are under common control with Borrower, and any and all Persons from whom, in the sole and absolute judgment of Lender, Borrower has not or is not likely to exhibit independence of decision or action. For the purpose of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 1.4 "Business Days" means any day other than Saturday or Sunday on which the Depository Bank is open for business with the general public. 1.5 "Collateral" means the Inventory and Receivables and proceeds thereof. 1.6 "Costs" means the costs and expenses listed in Section 2.8. 1 1.7 "Depository Bank" means Suntrust Bank, located at 919 East Main Street, 8th Floor General Office, Richmond, Virginia, 23219, Attn: Wendy O'Brien, or such other commercial bank designated by Lender. 1.8 "Event of Default" means any event listed in Section 8 of this Agreement. 1.9 "Facility Fee" means the fee charged by Lender with respect to Borrower's purchase of Inventory from Lender as described in Section 2.6 hereof. 1.10 "Indebtedness" means and includes the aggregate of the unpaid amounts due Lender under this Agreement, of every kind and description, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising. 1.11 "Inventory" means all of Borrower's inventory (as inventory is defined in the California Commercial Code) purchased by Borrower from a Manufacturer, provided that the same arise in connection with a Loan to Borrower by Lender pursuant to this Agreement. 1.12 "Loan(s)" means the outstanding loan(s) described in Section 2. 1.13 "Loan Interest" means the interest charged on a Loan as described in the Note. 1.14 "Lock Box Account" means account # __________ with Depository Bank, or such other account designated by Lender. 1.15 "Material Adverse Effect" means a material adverse effect on (i) the business, assets, operations, or condition (financial or otherwise) of the Borrower or (ii) the ability of the Borrower to pay any Indebtedness and perform its obligations under this Agreement or (iii) the ability of Lender to enforce any of its rights or to collect any of the Indebtedness then due and payable. 1.16 "Maximum Amount" means an amount not to exceed $3,200,000. 1.17 "Manufacturers" means Microsoft, Nintendo, Sony or other manufacturers selected by Borrower in its sole discretion. 1.18 "Person" means any individual or entity, including, but not limited to, corporations, partnerships, limited liability companies, limited partnerships etc. 1.19 "Receivables" means all rights to the payment of money now owned or hereafter acquired by Borrower, whether due or to become due and whether or not earned by performance including, but not limited to, Accounts, chattel paper, instruments, general intangibles, and all guaranties and security therefor and all contracts relating thereto and all returned and repossessed goods; provided that the same arise in connection with the extension of credit provided to Borrower by Lender pursuant to this Agreement. 1.20 "Termination Date" has the meaning specified in Section 2.7. 2 1.21 All computations required under this Agreement shall otherwise be made in accordance with U.S. generally accepted accounting principles ("GAAP") and practices consistently applied. Accounting terms used herein not otherwise defined shall have the meaning attributable thereto under generally accepted accounting principles, and practices. 2. LOANS. 2.1 Subject to the terms and conditions hereof, Lender hereby extends to Borrower a line of credit facility under which Lender may, at Lender's sole discretion, make Loans to Borrower at Borrower's request from time to time during the term of this Agreement in amounts not to exceed the, in aggregate, Maximum Amount. 2.2 The Loan proceeds will be used to fund certain inventory purchases from Manufacturers as described in Exhibit A or in the request for a Loan submitted in accordance with Section 2.4. 2.3 On the Effective Date, Borrower will execute and deliver to Lender a Promissory Note in the form of Exhibit B (the "Note"), in the principal amount of $3,200,000, bearing interest as specified in the Note. 2.4 Each request for a Loan shall be made in writing in the form attached hereto as Exhibit C or in any other manner acceptable to Lender. 2.5 Each Loan shall be made by a deposit to Borrower's account designated in Exhibit D or by direct payment to the Manufacturer for the benefit of Borrower at Lender's discretion; and if a Loan is so disbursed, it is deemed to have been validly requested by Borrower. 2.6 For each Loan advanced from Lender to Borrower, Borrower shall pay to Lender an amount equal to 5% of any amounts actually advanced for such Loan as a Facility Fee. 2.7 The term of this Agreement will expire on March 31, 2004 (the "Termination Date") and the Note will become payable in full on that date. Borrower may prepay the principal balance of the Note in whole or part at any time without penalty. 2.8 Borrower will pay to Lender its fees, costs and expenses, including without limitation reasonable attorneys' fees, other professionals' fees, court costs, litigation and other expenses and wire transfer and bank fees (collectively, "Costs"), incurred or paid by Lender in connection with the negotiating, documenting, administering and enforcing this Agreement or related documents, including without limitation the Note, and the defense, preservation and protection of Lender's rights and remedies thereunder, including without limitation, its security interest in the Collateral or any other property pledged to secure the Loans, whether incurred in bankruptcy, insolvency, foreclosure or other litigation or proceedings or otherwise. The Costs will be due and payable within ten (10) business days of Lender's submission to Borrower of a reasonable accounting of such costs. If Borrower fails to pay any Costs in a timely manner, Lender is entitled to disburse such sums as a Loan under this Agreement. Thereafter, the Costs will bear interest from the date incurred or disbursed at the highest rate set forth in the Note. This provision will survive the termination of this Agreement 3 and the repayment of any amounts due or the performance of any obligation under this Agreement. 3. SECURITY INTEREST/COLLATERAL. 3.1 As security for the Loans, Borrower hereby grants Lender a first priority security interest in the Collateral. As long as the Loans are outstanding, and until this Agreement is terminated as provided herein, Borrower will execute and deliver to Lender such assignments, notices, financing statements and other documents (including any original instruments, documents and chattel paper, endorsed or assigned as Lender shall specify) as Lender may request in order to perfect or confirm Lender's security interest in the Collateral or to give any third parties, notice of Lender's interest in the Collateral. 3.2 Notwithstanding any termination, until all of the Indebtedness with respect to Inventory financed by a Loan shall have been fully paid and satisfied, Lender shall be entitled to retain its security interest in the Collateral; and Borrower shall continue to remit collections of Accounts and Receivables as provided in this Agreement; and Lender shall retain all of its rights and remedies under this Agreement. 3.3 Upon payment in full of the Indebtedness with respect to Inventory financed by a Loan, Lender shall release its security interest in the respective Collateral. 4. DISTRIBUTION OF ACCOUNTS RECEIVABLE. 4.1 Deposits. (a) Borrower will cause the Account Debtor's deposit of all remittances and proceeds with respect to the sale or transfer of the Inventory, whether by wire, cash or check, into the Lock Box Account with the Depository Bank. Borrower and any Affiliates, shareholders, directors, officers, employees, agents of Borrower and all Persons acting for or in concert with Borrower shall, acting as trustee for Lender, receive, as the sole and exclusive property of Lender, any monies, checks, notes, drafts or any other payments relating to or proceeds of Accounts or Collateral which come into their possession or under their control and immediately upon receipt, shall remit the same or cause the same to be remitted, in kind, to the Lock Box Account. (b) Borrower agrees that all payments made to such Lock Box Account or otherwise received by Lender as proceeds of the Inventory or Receivables, constitutes Collateral and will be applied on account of the Indebtedness. (c) Borrower agrees to pay to Lender any and all fees, costs and expenses (if any) which Lender incurs in connection with opening and maintaining the Lock Box Account and depositing for collection by Lender any check or item of payment received or delivered to Depository Bank or Lender on account of the Indebtedness and Borrower further agrees to reimburse Lender for any claims asserted by Depository Bank in connection with the Lock Box Account or any returned or uncollected checks received by Depository Bank for deposit in the Lock Box Account. 4 4.2 Application of Collected Receivables. Within five (5) Business Days of Lender's receipt of any Receivables in the Lock Box arising from the sale of Inventory financed by a Loan, such Receivables will be applied in the following manner and priority: (a) 100% of each dollar of Receivable will be paid and retained by Lender until payment in full of the following: (i) The aggregate amount of the respective Loan Interest; (ii) Any other fees and charges due to Lender with respect to the Loan; and (iii) The aggregate amount of Indebtedness under this Agreement. (b) All remaining proceeds will be paid to the Borrower. 5. CONDITIONS PRECEDENT TO LOAN ADVANCES. 5.1 Without detracting from Lender's right to refuse any requested Loans hereunder, Lender's obligations hereunder are subject to the condition that there shall have been delivered to Lender, in form and substance satisfactory to Lender, all of the following: (a) Evidence that the execution, delivery, and performance by Borrower of this Agreement and the execution, delivery, and performance by Borrower and subordinating creditor of any instrument or agreement required under this Agreement, as appropriate, have been duly authorized; (b) An executed Promissory Note in the form of Exhibit B attached hereto; (c) Financing statement(s)(Form UCC-1); (d) Evidence that all security interests required to be provided in favor of Lender are valid, enforceable, and prior to the rights and interests of others and any other documents that Lender may reasonably request to reflect, perfect or protect the Lender's first priority lien in the Collateral; (e) A Certificate of Insurance as described in Section 7.5 hereof; (f) A favorable opinion of counsel to Borrower in a form satisfactory to Lender; and (g) Such other documents and instruments as Lender may reasonably require. 5.2 Each request for a Loan under this Agreement shall be deemed a representation by Borrower that the representations and warranties contained in Section 6 and in 5 any other agreement, instrument, or document executed and delivered in connection herewith are then true and accurate in all material respects as though made on and as of the day of such request, and that no further action, including any filing or recording of any agreement or statement, is necessary in order to establish and perfect Lender's first lien on, and prior perfected security interest in, all the Collateral. 6. REPRESENTATIONS AND WARRANTIES. Except as disclosed in Borrower's Disclosure Schedule attached hereto as Exhibit E, Borrower represents and warrants that: 6.1 Borrower is a corporation duly organized and validly existing under the laws of the state of its incorporation and that the execution, delivery, and performance of this Agreement are within Borrower's powers, have been duly authorized, and are not in conflict with the terms of its Certificate of Incorporation and Bylaws, as amended, of Borrower. 6.2 The execution, delivery, and performance of this Agreement and of any instrument or agreement required by this Agreement are not in conflict with any law or any indenture, agreement, or undertaking to which Borrower is a party or by which Borrower is bound or affected. 6.3 All financial information submitted by Borrower to Lender is true and correct in all material respects and is complete insofar as may be necessary to give Lender true and accurate knowledge of the subject matter thereof. Borrower is not in default under any indenture, loan agreement, mortgage, lease, trust deed, deed of trust or other similar agreement relating to the borrowing of monies to which it is a party or which it is bound. 6.4 All Collateral shall be owned by Borrower, free and clear of all clouds to title and of all security interests, liens, encumbrances and rights of others except the rights of Lender under this Agreement. 6.5 There is no litigation, tax claim, proceeding or dispute pending, or, to the knowledge of Borrower, threatened, against or affecting Borrower or its property, the adverse determination of which might have a Material Adverse Effect. 6.6 The Borrower is not a party to or subject to any agreement or restriction which in the opinion of Borrower's management is so unusual or burdensome that it might have a Material Adverse Effect. 6.7 Borrower maintains Inventory only at the following locations: Xbox and GCN: Ditan Distribution 3335 Arden Road Hayward, California 94545 6 PS2: Ditan Distribution 909 Whitaker Road, Suite A Plainfield, Indiana 46168 6.8 Records relating to the Receivables of Borrower are maintained only at the following locations: 333 West Santa Clara Street, Suite 716 San Jose, California 95113 6.9 Borrower's chief executive office is located at: 333 West Santa Clara Street, Suite 716 San Jose, California 95113 6.10 Borrower has conducted business only in the following other names: Bay Area Multimedia, Inc. 6.11 No event has occurred and is continuing or would result from the making of a Loan which constitutes an Event of Default or which, upon lapse of time or notice or both, would become an Event of Default. 7. COVENANTS. Borrower covenants and agrees that so long as the credit facility established under this Agreement shall remain available and until the full and final payment of the Loans and all other Indebtedness incurred hereunder, Borrower will do all of the following, unless Lender waives compliance in writing: 7.1 Payments. Pay principal and interest on the Loans and all other Indebtedness incurred hereunder according to the terms hereof or thereof. 7.2 Notice to Lender. Promptly give written notice to Lender of any of the following: (a) Any substantial dispute which may exist between Borrower and any governmental on regulatory body or law enforcement authority; (b) An Event of Default or any event which, upon a lapse of time or notice or both, would become an Event of Default; (c) Any other matter that has resulted or might result in a material adverse change in Borrower's financial condition or operations; and (d) Any event that adversely affects the value of the Collateral, the ability of Borrower or Lender to dispose of any of the Collateral, or the rights and remedies of Lender in relation thereto, including, but not limited to, the levy of any legal process against any 7 Collateral and the adoption of any marketing order, arrangement or procedure affecting the Collateral, whether governmental or otherwise. 7.3 Financial Information. Keep books of account and prepare financial statements and furnish to Lender the following (all of the foregoing and following to be kept and prepared in accordance with generally accepted accounting principles applied on a basis consistent, unless Borrower's independent certified public accountants concur in any changes and such changes are disclosed to Lender and are consistent with the then generally accepted accounting principles): (a) as soon as available, but not later than one hundred twenty (120) days after the close of each fiscal year of Borrower, financial statements of Borrower (including a balance sheet and profit and loss statement with supporting footnotes) as of the end of such year and for the year then ended all in reasonable detail as requested by Lender and examined by a firm of independent certified public accountants of recognized national standing selected by Borrower and containing the unqualified opinion of such independent certified public accountants with respect to the financial statements; (b) as soon as available, but no later than thirty (30) days after the end of each month, (A) an unaudited financial statement of Borrower (including a statement of profit and loss and of surplus for the month then ended and a balance sheet as of the end of such month) as of the end of the portion of Borrower's fiscal year then elapsed, all in reasonable detail as requested by Lender and certified by Borrower's principal financial officer as prepared in accordance with generally accepted accounting principles and fairly presenting the financial position and results of operations of Borrower for such period and (B) a cash flow projection for the following three-month period, together with appropriate supporting documents reasonably acceptable to Lender; (c) as soon as available, but not later than sixty (60) days before the beginning of each fiscal year, a cash flow projection for such fiscal year, together with appropriate supporting document reasonably acceptable to Lender; and (d) such other data and information (financial and otherwise) as Lender from time to time may reasonably request, bearing upon or related to the Collateral, Borrower's financial condition or results of its operations. 7.4 Additional Obligations. Perform, on request of Lender, such acts or execute and deliver such documents as may be necessary or advisable to perfect any liens or security interests provided for herein or otherwise to carry out the intent of this Agreement. 7.5 Insurance. Maintain and keep in force in adequate amounts of such insurance, including property and liability insurance and fire and hazard insurance policies on Borrower's Inventory as is usual in the business carried on by Borrower, all of which will be evidenced by a Certificate of Insurance delivered to Lender by Borrower on the Effective Date. 7.6 Information. Cause all financial information, including information relating to Receivables, upon submission by Borrower to Lender to be true and correct in all 8 material respects and complete to the extent necessary to give Lender a true and accurate knowledge of the subject matter thereof. 7.7 Inspection and Disclosure of Discounts. Permit Lender, by its representatives and agents, to inspect the Collateral, to examine and make copies of the records of the Borrower relating thereto, and to discuss the Collateral, and the records of the Borrower with respect thereto with, and to be advised as to the same by the Borrower's officers and, in the case of any Receivable, with any person or entity which is or may be obligated thereon, all at such reasonable times and intervals as Lender may determine. If any discount, credit, agreement to make a rebate or to otherwise reduce the amount owing on a Receivable exists or if, to the knowledge of the Borrower, any dispute, setoff, claim, counterclaim or defense exists or has been asserted or threatened with respect to a Receivable, such fact shall be disclosed to Lender in writing in connection with the inspection by Lender of any records of the Borrower relating to that Receivable and in connection with any invoice or report furnished by the Borrower to Lender relating to that Receivable. 7.8 Taxes. Pay when due all taxes, assessments and governmental charges and levies upon the Collateral, except those which are being contested in good faith by appropriate proceedings. 7.9 Notification of Account Debtors. Upon the request of Lender, notify all or such of the Account Debtors as Lender shall specify to make payment thereon at such place and in such manner as Lender shall specify. 7.10 Disposition of Collateral. Not sell, lease or otherwise dispose of the Collateral except, prior to the occurrence of an Event of Default: (a) Sales of Inventory in the ordinary course of business; and (b) Receivables or other proceeds of Inventory collected in the ordinary course of business. 7.11 Change in Location or Name. (a) Not have any Inventory at a location other than a location specified in Section 6.7; (b) Not maintain records concerning the Receivables at a location other than a location specified in Section 6.8; (c) Not maintain its chief executive office at a location other than that specified in Section 6.9; (d) Not change its name; and (e) Not change its mailing address without Lender's prior written consent. 9 8. EVENTS OF DEFAULT. 8.1 Default. (a) The occurrence of any one or more of the following events shall constitute a Default: (i) Borrower fails to pay any part of the Indebtedness on the date due and payable or declared due and payable by Lender and the same is not cured within five (5) days after Lender gives Borrower notice identifying such default; (ii) Borrower fails or neglects to perform, keep or observe any other term, provision, condition or covenant contained in this Agreement, which is required to be performed, kept or observed by Borrower and the same is not cured to Lender's satisfaction within five (5) days after Lender gives Borrower notice identifying such default; (iii) Any statement, warranty, representation, report, financial statement, or certificate made or delivered by Borrower, or any of its officers, employees or agents, to Lender is not true and correct in any material respect; (iv) There shall occur any material uninsured damage to or loss, theft, or destruction of any of the Collateral; (v) The Collateral or any of Borrower's other assets are attached, seized, levied upon or subjected to a writ or distress warrant, or come within the possession of any receiver, trustee, custodian or assignee for the benefit or creditors and the same is not cured within thirty (30) days thereafter; (vi) An application is made by any Person other than Borrower for the appointment of a receiver, trustee, or custodian for any of the Collateral or any of Borrower's other assets and the same is not dismissed within thirty (30) days after the application therefor; (vii) An application is made by Borrower for the appointment of a receiver, trustee or custodian for any of the Collateral or any of Borrower's other assets; or a petition under any section or chapter of the Bankruptcy Code or any similar law or regulation is filed by or against Borrower or any guarantor of the Liabilities and, if filed against Borrower or any guarantor, is not dismissed within thirty (30) days after filing; or Borrower makes an assignment for the benefit of its creditors or any case or proceeding is filed by or against Borrower for its dissolution, liquidation, or termination; or Borrower ceases to conduct its business as now conducted or is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business affairs; or (viii) Borrower becomes insolvent or fails generally to pay its debts as they become due. (b) Default Rate. After an Event of Default, all amounts of principal outstanding as of the date of such Event of Default will accrue interest at the Default Rate, in 10 Lender's sole discretion, with prior notice to Borrower. This provision does not constitute a waiver of any Event of Default or an agreement by Lender to permit any late payments whatsoever. The Default Rate is 3% in excess of the interest rate otherwise in effect under amounts outstanding under the Note. In no event will the interest rate accruing under such Note be increased to be in excess of the maximum interest rate permitted by applicable state or federal usury laws then in effect. 8.2 Remedies. Upon and after the occurrence of a Default, Lender shall have all of the following rights and remedies: (a) All of the rights and remedies of a secured party under the California Uniform Commercial Code or other applicable law, all of which rights and remedies shall be cumulative and non-exclusive to the extent permitted by law, and in addition to any other rights and remedies contained in this Agreement; (b) The right to (i) peacefully enter upon the premises of Borrower or any other place or places where the Collateral is located and kept, without any obligation to Borrower or any other person, through self-help and without judicial process or first obtaining a final judgment or giving Borrower notice and opportunity for a hearing on the validity of Lender's claim, and remove the Collateral from such premises and places to the premises of Lender or any agent of Lender, for such time as Lender may require to collect or liquidate the Collateral, and/or (ii) require Borrower to assemble and deliver the Collateral to Lender at a place to be designated by Lender; (c) The right to open Borrower's mail and collect any and all amounts due from Account Debtors; (d) The right to sell, lease or otherwise dispose of any of the Collateral in its then condition, or after any further manufacturing or processing, at public or private sale or sales, with such notice as provided in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. At any such sale or sales of the Collateral, the Collateral need not be in view of those present and attending the sale, nor at the same location at which the sale is being conducted. Lender shall have the right to conduct such sales on Borrower's premises or elsewhere and shall have the right to use Borrower's premises without charge for such sales for such time or times as Lender may see fit. Lender is granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral, and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit but Lender shall have no obligations thereunder. Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set-off the amount of such price against the Indebtedness. The proceeds realized from the sale of any Collateral shall be applied first to the reasonable costs, expenses and attorneys' and paralegals' fees and expenses incurred by Lender for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; and then as set forth in Section 4.2. Lender shall account to Borrower for any surplus. If any deficiency shall arise, Borrower shall remain liable to Lender. 11 (e) Borrower recognizes that in the event Borrower fails to pay, perform, observe or discharge any of its obligations under this Agreement, the Note or other Loan documents, no remedy at law will provide adequate relief to Lender. Borrower further agrees that Lender shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving that it has incurred actual damages. 8.3 Notice. Borrower agrees that any notice required to be given by Lender of a sale, lease, other disposition of any of the Collateral or any other intended action by Lender, which is personally delivered to Borrower or which is deposited in the United States mail, postage prepaid and duly addressed to Borrower at the address set forth in Section 10.1, at least ten (10) days prior to any such public sale, lease or other disposition or other action being taken, or the time after which any private sale of the Collateral is to be held, shall constitute commercially reasonable and fair notice thereof to Borrower. 9. TERMINATION WITHOUT CAUSE. Upon ten (10) Business Days prior written notice to the other party, either Lender or Borrower, at its sole discretion, may without cause, terminate the arrangement under this Agreement with respect to Lender's making Loans, provided that such a termination will not affect Borrower's obligations or Lender's rights under this Agreement, including Lender's rights with respect to the Collateral, until all Borrower's Indebtedness are paid in full. 10. MISCELLANEOUS. 10.1 Notices. Any notice required or permitted to be given under this Agreement may be, and shall be deemed, given and sent when deposited in the United States mail, postage prepaid, or by telegraph or telex when delivered to the appropriate office for transmission, charges prepaid, addressed: To Borrower as follows: BAM! Entertainment, Inc. 333 West Santa Clara Blvd., Suite 716 San Jose, CA 95113 Attention: Raymond Musci, CEO Facsimile No.: (408) 298-9600 To Lender as follows: Phillips Land LLC 2900 Polo Parkway, Suite 200 Midlothian, VA 28113 Attention: Greg Phillips Facsimile No.:______________________ 10.2 Successors. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that Borrower 12 shall not assign this Agreement or any of the rights, duties or obligations of Borrower hereunder without the prior written consent of Lender. 10.3 Waivers. No consent or waiver under this Agreement shall be effective unless in writing. No waiver of any breach or default shall be deemed a waiver of any breach or default thereafter occurring. 10.4 Governing Law, Jurisdiction, and Venue. This Agreement shall be governed and interpreted in accordance with the laws of the State of California, as such laws are applied to agreements between residents of California to be performed entirely within the State of California. Each party hereby consents to jurisdiction of and venue in the federal district court for the Northern District of California and in the courts of the State of California in Santa Clara County, California. 10.5 Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this Agreement, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation. This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 10.6 Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party also shall be entitled to receive from the party held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party. This Section is severable from the other provisions of this Agreement and survives any judgment and is not deemed merged into any judgment. 10.7 Indemnification. If after receipt of any payment of all or part of the Indebtedness, Lender is for any reason compelled to surrender such payment to any person or entity, because such payment is determined to be void or voidable as a preference, impermissible setoff, or diversion of trust funds, or for any other reason, this Agreement will continue in full force and effect and Borrower will be liable to, and will indemnify, save and hold Lender, its officers, directors, attorneys, and employees harmless of and from the amount of such payment surrendered. The provisions of this Section will be and remain effective notwithstanding any contrary action which may have been taken by Lender in reliance on such payment, and any such contrary action so taken will be without prejudice to Lender's rights under this Agreement and will be deemed to have been conditioned upon such payment becoming final, indefeasible and irrevocable. In addition, Borrower will indemnify, defend, save and hold Lender harmless of, from and against all claims, demands, liabilities, judgments, losses, damages, costs and expenses, joint or several (including all accounting fees and attorneys' fees reasonably incurred), that Lender or any such indemnified party may incur arising out of this Agreement, any other loan documents or any act taken by Lender hereunder except for the willful misconduct or gross negligence of such indemnified party. The provisions of this Section will survive the termination of this Agreement. 10.8 Confidentiality. Any financial information provided pursuant to Section 7 hereof shall be used by Lender solely in furtherance of its interests as a Lender to Borrower, and the Lender shall (except as otherwise required by law) use its best efforts to maintain the 13 confidentiality of all non-public information of the Company obtained pursuant to this Agreement. 10.9 Construction. The headings of this Agreement are for convenience only and are not to be considered in construing this Agreement. The language of this Agreement shall be construed according to its fair meaning and not strictly for or against any party. 10.10 Entire Agreement. This Agreement and any agreement, document or instrument attached hereto or referred to herein integrates all the terms and conditions mentioned in or incidental to this Agreement, and supersedes all oral negotiations and prior writings in respect to the subject matter of this Agreement. In the event of any conflict between the terms, conditions and provisions of this Agreement and any such agreement, documents or instrument, the terms, conditions and provisions of this Agreement shall prevail. 10.11 Counterparts and Facsimile Signatures. This Agreement may be executed in one or more counterparts and each of such counterparts shall be deemed to be an original for all purposes, and all of such counterparts shall together constitute one and the same document. Any signature required for the execution of this Agreement may be in the form of either an original signature or a facsimile transmission bearing the signature of any party to this Agreement. No objection shall be raised as to the authenticity of any signature due solely to the fact that said signature was transmitted via facsimile. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement as of the day and year first above written. BORROWER: BAM! ENTERTAINMENT, INC. By: /s/ Stephen Ambler ------------------------ Its: CFO/VP Finance ----------------------- LENDER: PHILLIPS LAND LLC By: /s/ G.R. Phillips ------------------------ Its: Sec/Tres. ----------------------- 15 EXHIBIT A INVENTORY Wallace & Gromit in Project Zoo (on the PS2) Wallace & Gromit in Project Zoo (on the Gamecube) Wallace & Gromit in Project Zoo (on the Xbox) i EXHIBIT B PROMISSORY NOTE $3,200,000 San Jose, California September 25, 2003 ("Effective Date") On March 31, 2004, BAM! ENTERTAINMENT, INC., a Delaware corporation (the "Borrower"), for value received, hereby promises to pay to the order of PHILLIPS LAND LLC, a Virginia limited liability company (the "Lender"), in lawful money of the United States of America and in immediately available funds, the principal sum of THREE MILLION TWO HUNDRED THOUSAND DOLLARS ($3,200,000) or such lesser unpaid principal amount as may be outstanding hereunder or may be advanced by Lender pursuant to the terms of the Loan and Security Agreement dated of even date herewith by and between Borrower and Lender, as the same may be further amended from time to time (the "Agreement"). The principal amounts outstanding under this Note shall bear interest commencing on the date of the first advance hereunder at the following rate (the "Interest Rate"): (i) the Prime Rate plus one half of one percentage point (.50%). "Prime Rate" shall mean the rate of interest per annum established from time to time by the SunTrust Bank at its office in Richmond, Virginia ("Bank"), whether or not Bank shall at times lend to borrowers at lower rates of interest or, if there is no such prime rate, then its base rate or such other rate as may be substituted by Bank for the prime rate; provided that in no event shall the Prime Rate exceed the highest rate permitted by law. Interest will be payable in immediately available funds to the address of the Lender set forth in the Agreement. Interest accruing under this Note shall accrue and shall be due and payable in arrears (together with principal) on the Termination Date (or on such earlier date as this Note is due as described below or in the Agreement). Interest due and unpaid will accrue and compound annually. Interest will be calculated based on a 360 day year and charged for the actual number of days elapsed. After maturity, whether by acceleration or otherwise, this Note will bear interest, at the election of Lender and upon notice to Borrower (computed and adjusted in the same manner, and with the same effect, as interest hereon prior to maturity), payable on demand, at a rate per annum equal to the Default Rate, until paid, and whether before or after the entry of judgment hereon. The principal amount of each loan made by Lender under this Note and the amount of each payment made by Borrower under this Note will be recorded by Lender in the regularly maintained data processing records of Lender. The aggregate unpaid principal amount of all loans set forth in such records will be presumptive evidence of the principal amount owing and unpaid on this Note. However, failure by Lender to make any such entry will not limit or otherwise affect Borrower's obligations under this Note or the Agreement with the exception of the erroneous or missing entry. All payments received by Lender under this Note will be applied first to payment of (i) accrued interest on this Note, (ii) any other fees or charges due to the Lender under the Agreement and related documents, and (iii) then to principal. This Note is the Promissory Note referred to in the Agreement, and is entitled to the benefits, and is subject to the terms, of the Agreement. Capitalized terms used but not otherwise defined herein will have the meanings attributed thereto in the Agreement. The principal of this Note is prepayable in the amounts and under the circumstances, and its maturity is subject to acceleration upon the terms, set forth in the Agreement. Except as otherwise expressly provided in the Agreement, if any payment on this Note becomes due and payable on a day which is not a Business Day, the maturity thereof will be extended to the next Business Day, and interest will be payable at the rate specified herein during such extension period. After the occurrence of an Event of Default, all amounts of principal outstanding as of the date of the occurrence of such Event of Default will bear interest at the Default Rate, in Lender's sole discretion, upon notice to ii Borrower. This provision does not constitute a waiver of any Events of Default or an agreement by Lender to permit any late payments whatsoever. In no event will the interest rate on this Note exceed the highest rate permissible under any law which a court of competent jurisdiction will, in a final determination, deem applicable hereto. In the event that a court determines that Lender has received interest and other charges under this Note in excess of the highest permissible rate applicable hereto, such excess will be deemed received on account of, and will automatically be applied to reduce the amounts due to Lender from Borrower under this Note, other than interest, and the provisions hereof will be deemed amended to provide for the highest permissible rate. If there are no such amounts outstanding, Lender will refund to Borrower such excess. Borrower and all endorsers, sureties, guarantors and other persons liable on this Note hereby waive presentment for payment, demand, notice of dishonor, protest, notice of protest and all other demands and notices in connection with the delivery, performance and enforcement of this Note, and consent to one or more renewals or extensions of this Note. This Note may not be changed orally, but only by an instrument in writing. This Note will be construed and enforceable in accordance with, and be governed by the internal laws of, the State of California, without regard to principles of conflict of laws. Borrower agrees that the State and Federal courts in Santa Clara County, California will have exclusive jurisdiction over all matters arising out of this Note; provided that nothing contained in this Agreement will prevent Lender from bringing any action, enforcing any award or judgment or exercising any rights against Borrower, against any security or against any property of Borrower within any other county, state or other foreign or domestic jurisdiction, and (b) that service of process in any such proceeding will be effective if mailed to Borrower at its address described in the Notices section of the Agreement. BORROWER HEREBY WAIVES THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS NOTE. EXECUTION PAGE TO FOLLOW (EXECUTION PAGE TO PHILLIPS LAND LLC $3,200,000 PROMISSORY NOTE) BAM! ENTERTAINMENT, INC. By: _________________________________ Print Name: _________________________ Title: ______________________________ PHILLIPS LAND LLC By: _________________________________ Print Name: _________________________ Title: ______________________________ EXHIBIT C REQUEST FOR LOAN iii EXHIBIT D BORROWER'S ACCOUNT Wire Instructions: Bank: Comerica Bank 333 W. Santa Clara Street San Jose, CA 95113 ABA#: 121137522 Account Name: BAM! Entertainment, Inc. Account #: 1891438333 iv EXHIBIT E BORROWER'S DISCLOSURES SECTION 6.4 A search of the records of the County Recorder for Santa Clara County (through September 22, 2003) revealed a county tax lien recorded as document number 15944727 on file for Bay Area Multimedia, Inc. The Tax Collector of the County of Santa Clara filed a Release of Lien on September 23, 2003 certifying the Release of Lien recorded against Bay Area Multimedia, Inc. as document number 19544727. SECTION 6.5 BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC. On April 1, 2003, Amaze Entertainment, Inc. ("Amaze") asserted counterclaims against the Borrower in an action entitled BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC. et. al. originally filed in the Superior Court of California, County of Santa Clara (Case No. CV814820) on February 18, 2003, and removed to the United States District Court for the Northern District of California (Case No. C03 01286 PVT) as a result of a motion filed by Amaze on or about March 24, 2003. Borrower asserted claims for relief based on rescission, breach of contract, declaratory relief, and money paid and received with regard to an agreement for a video game titled "Crushed Baseball" that Amaze was developing for Borrower. Amaze's counterclaims allege breach of contract and unjust enrichment with regard to each of the "Crushed Baseball" development agreement and a separate development agreement for another video game titled "Samurai Jack." The counterclaims sought compensatory damages of approximately $3.5 million and additional damages to be proven at trial. On July 11, 2003 Amaze and Borrower agreed to compromise and settle all claims either asserted or that could be asserted in connection with the dispute and to mutually release any and all future claims and contentions they have against each other. This compromise requires Amaze to make Borrower two payments, one in July 2003 and a second in October 2003. Upon payment by Amaze to Borrower of the sum due in October 2003, the parties will execute a stipulation for dismissal of the legal actions. v OVATION ENTERTAINMENT, LLC v. BAM! ENTERTAINMENT, INC. On March 27, 2003, a complaint captioned OVATION ENTERTAINMENT, LLC v. BAM! ENTERTAINMENT, INC. et. al. was filed against Borrower in the Superior Court of California, County of Los Angeles (Case No. SCO76530). The complaint alleges claims of breach of contract and fraud in connection with an exclusive first look agreement, which was assigned to Ovation Entertainment, LLC ("Ovation") by the licensor originally party to the agreement, for content relating to motion pictures and television projects to be licensed to Borrower for development in connection with video games. The lawsuit seeks compensatory damages believed to be in excess of $1 million and interest thereon, exemplary or punitive damages, and attorneys' fees. On August 4, 2003, Ovation and Borrower agreed to settle the litigation by amending the terms of the agreement, and the legal action was dismissed on August 25, 2003. vi EX-10.2.(A) 6 v94442exv10w2wxay.txt EXHIBIT 10.2(A) Exhibit 10.2(a) EXHIBIT A INVENTORY Wallace & Gromit in Project Zoo (on the PS2) Wallace & Gromit in Project Zoo (on the Gamecube) Wallace & Gromit in Project Zoo (on the Xbox) Carmen Sandiego (on the PS2, Gamecube and Xbox) Ed, Edd n Eddy (on the Advanced Game Boy) PPG Him & Seek (on the Advanced Game Boy) Samarai Jack (on the Advanced Game Boy) My Disney Kitchen (on the PSX) PPG (on the PS2) Amendment Date: October 17, 2003 Phillips Land LLC (initials of auth. rep) GRP BAM! Entertainment, Inc. (initials of auth. rep) SMA i EX-31.1 7 v94442exv31w1.htm EXHIBIT 31.1

Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Raymond C. Musci, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of BAM! Entertainment, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2003

/s/ Raymond C. Musci

Raymond C. Musci
Chief Executive Officer

40 EX-31.2 8 v94442exv31w2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen M. Ambler, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of BAM! Entertainment, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2003

/s/ Stephen M. Ambler

Stephen M. Ambler
Chief Financial Officer

41 EX-32 9 v94442exv32.htm EXHIBIT 32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of BAM! Entertainment, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission, each of the undersigned, in the capacities and on the date indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

     (1)  The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

     (2)  The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Raymond C. Musci

Raymond C. Musci
Chief Executive Officer
(Principal Executive Officer)
November 14, 2003

/s/ Stephen M. Ambler

Stephen M. Ambler
Chief Financial Officer
(Principal Financial and Accounting Officer)
November 14, 2003

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

42 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    EXHIBIT 10.1

                         [Confidential Portions Omitted]

                    Acclaim Entertainment Entertainment, Ltd.
                                  Moreau House
                              112-120 Brompton Road
                                 London SW3 1JJ

                                                     July 17, 2003

BAM Entertainment Limited
Upper Borough Court
Borough Wells
Bath BAl 1Rg

         RE:      ACCLAIM ENTERTAINMENT, INC. -W- BAM ENTERTAINMENT LIMITED

Gentlemen:

         Set forth below are the principal terms and conditions agreed by you
and us regarding our exclusive distribution of certain of your videogame titles:

         1.       GAME TITLES : The term "Game Titles" means the videogames
listed on Schedule "A" attached hereto in the formats listed on Schedule "A"
(collectively the "Game Titles").

         2.       EXCLUSIVE DISTRIBUTION: We shall act as your sole and
exclusive seller and distributor of the Game Titles throughout the PAL
territories as such territories are defined in the Sony Computer Entertainment
Limited publisher agreement (the "Territory") during the Exploitation Period (as
defined below) through any and all means of distribution, whether now known or
hereafter devised, including, without limitation, through normal retail
channels, through "bundling"sales, through budget sales and compilations,
shareware, or to end-users by direct mail or other direct response marketing,
and over the air, and by telephone, satellite, cable, and by electronic and
digital delivery systems. As the distributor of the Game Titles, we shall
undertake the manufacture, sale, distribution and marketing of the Game Titles,
In that regard we shall use commercially reasonable efforts to market the
Software Products (as defined below) exercised in our good faith business
judgement; provided that we have not heretofore made and do not hereby make any
representation or warranty with respect to the quantity of sales (if any) of
Software Products which we may sell. You recognize and acknowledge that the sale
of Software Products is speculative and agree that our judgment and the judgment
of our subsidiaries and affiliated companies with regard to the sales of any of
the Software Products and with regard to the marketing, promotion, advertising
and exploitation of the Software Products shall be binding and conclusive on
you.



             (a)  Notwithstanding the foregoing to the contrary:

                  (i) You shall not exploit or allow the exploitation or
distribution of any of the Game Titles through OEM type sales for at least 9
months following our release of such Game Title in the Territory.

         3.       DEVELOPMENT: You shall complete the development of the Game
Titles at your sole expense. The Game Title "Ice 9" shall be subject to our
approval as complying with the approved Game Design Document and Technical
Design Documents for such Game Title. Each Game Title shall be , developed to
operate on the appropriate television formats in the Territory (i.e. PAL, etc.).
Each Game Title shall be localized for the country in which it is being
released, however the extent of the localization for each Game Title shall be
hereafter discussed, provided that each Game Title shall be shall have "in text"
localizations for the following languages: English, French, German, Spanish. You
shall be responsible for obtaining the approval by the applicable hardware
manufacturer of each Game Title, including, without limitation, concept
approval, and, upon request, you shall provide us with documentation thereof. We
shall have the right to approve the PC skus prior to manufacture.

         4.       EXPLOITATION PERIOD: The Exploitation Period for each Game
Title, other than the Game Titles Samurai Jack, Dexter's Laboratory and Power
Puff Girls, shall be for a period of 3 years from the release of each such Game
Title. The Exploitation Period for the Game Title Samurai Jack, Dexter's
Laboratory and Power Puff Girls shall be as follows: Samurai Jack shall be
through June 30, 2004, Dexter's Laboratory shall be through April 30, 2005 and
Power Puff Girls through November 30, 2005.

         5.       DELIVERY DATE: The gold master for each completed version of
each Game Title shall be delivered to us at least 4 weeks prior to the release
date for such version of the Game Title as reflected on Schedule "A" attached
hereto (the "Delivery Date"). The terms "Delivery" and "Delivered" shall mean
the physical transfer to us of the fully debugged software for each version of
each Game Title as such software is ultimately approved by the applicable
hardware manufacturer without any need for resubmission due to any bug or bugs
and ready for manufacture. Notwithstanding the foregoing, the PC Game Titles and
the Game Title "Ice 9" are to be approved by us as provided herein. For purposes
of clarification it is understood that if you deliver the software for a Game
Title which software is thereafter not approved by us or the applicable
manufacturer, then such version of such Game Title shall not be deemed
Delivered.

         6.       MINIMUM GUARANTEE, ADVANCE AND NET MONIES:

                  (a)Minimum Guarantee: We shall guarantee to pay you a minimum
                     of [*] the sale and exploitation of the Game Titles. We
                     shall pay you advances ("Advances") against such Minimum
                     guarantee as follows:

                           (i) $[*] on execution of this letter of intent
('LOI");

                           (ii) $[*] not later than August 8, 2003;

________________

*Confidential portion omitted and filed separately with the Commission.


                           (iii) $[*] not later than August 29, 2003;

                           (iv) $[*] not later than September 5, 2003;

                           (v) $[*] within 2 days following the Delivery to
us of the gold masters for all versions of the Wallace & Gromit Game Title;

                           (vi) $[*] within 7 days following our shipment of
all versions of the Wallace & Gromit Game Title in the United Kingdom;

                           (vii) $[*] per month commencing October, 2003 and
ending February, 2004; provided that at such point in time as the Minimum
Guarantee as set forth in paragraph 6(a) has been paid through Advances and Net
Monies, the payments pursuant to this paragraph 6(a)(vii) shall cease;

                           (viii) Within 7 days following the shipment of any
version of a Game Title to us, other than Wallace & Gromit, we will pay to you
as an Advance against the Minimum Guarantee [*] of the estimated Net Receipts
to be payable to you from the initial shipment of the Game Title in the
Territory, less any Advances previously paid to you pursuant to paragraphs
6(a)(i) through (vii). Within 7 days following the shipment of all versions of
the Wallace & Gromit Game Title, we will pay to you as an Advance against the
Minimum Guarantee [*] of the estimated Net Receipts to be payable to you
from the initial shipment of the Game Title in the Territory in excess of
[*] units of such Game Title, less any Advances previously paid to you
pursuant to paragraphs 6(a)(i) through (vii).

                  (b)      Each guarantee payment set forth above, shall be
recoupable on a fully cross-collateralized basis against all Net Monies payable
to you hereunder.

                  (c)      Notwithstanding anything contained herein to the
contrary:

                           (i) In the event that a version of a Game Title is
canceled, then the Minimum Guarantee shall be reduced by the guarantee payment
opposite such version of such Game Title on Schedule "A" and the guarantee
payment for such canceled version of such Game Title, if paid, shall be
recoupable from subsequent payments of the Minimum Guarantee or returned to us
at our election.

                           (ii) In the event that the concept for a version of a
Game Title is not approved by the applicable hardware manufacturer, then we
shall have right to terminate the agreement with respect to such version of such
Game Title and reduce the Minimum Guarantee by the amount set forth on Schedule
"A" opposite such version of such Game Title as the guarantee payment for such
version of such Game Title, provided if at such point we have, after taking into
consideration such reduction, paid you the full Guarantee, you shall return to
us any overpayment for such terminated Game Title.

                           (iii) In the event that a Game Title, or version
thereof, is not delivered to us by the Delivery Date, then we shall have the
right to terminate such Game Title, or version thereof, at our election, which
it may exercise at any time following your failure to timely Deliver such Game
Title or version thereof. If we terminate the Game Title or version thereof,
then the Minimum Guarantee shall be reduced by the amount set forth on Schedule
"A" opposite such version of such Game Title (or for all

________________

*Confidential portion omitted and filed separately with the Commission.


versions if we cancel the Game Title) as the guarantee payment for such version
of such Game Title, provided if at such point we have, after taking into
consideration such reduction, paid you the full Guarantee, you shall return to
us any overpayment for such terminated Game Title.

                           (iv) In the event that you fail to Deliver any
version of any Game Title to us by the Delivery Date therefor, then the
guarantee payment opposite such version of such Game Title on Schedule "A"
otherwise payable to you shall be reduced by [*] percent for each thirty
day period (or portion thereof) thereafter in which you are late in Delivery to
us of such version of such Game Title or we may terminate our obligation to
release such version of such Game Title and the Minimum Guarantee shall be
reduced by the amount set forth on Schedule A opposite such version of the Game
Title as the guarantee payment for such version of such Game Title. All such
amounts as described above may be deducted from payments to be made to you
hereunder. Notwithstanding the foregoing to the contrary, we shall have no right
to reduce the guarantee on any Game Title as provided in this paragraph 6 (c)
(iv), if at the time of such reduction the Minimum Guarantee, as provided in
paragraph 6(a), has already been paid to you.

                  (d)      (i) On sales of Software Products we shall pay you
the following:

                                   (A) Console: [*]% of Net Receipts.

                                   (B) Handheld cartridge: [*]% of Net Receipts.

                                   (C) PC: [*]% of Net Receipts.

                           (ii) We shall hereafter mutually agree a royalty with
respect to our exploitation of a Game Title by electronic distribution.

                           (iv) Notwithstanding any of the foregoing to the
contrary:

                                   (A) you shall be paid [*]% of Net Receipts
on Software Products sold in the form of Console or Handheld products for less
than an amount equal to the cost of goods, plus royalties to the hardware
vendors and freight and handling charges plus [*]% of such amount but more than
an amount equal to the cost of goods plus freight and handling charges plus
royalties to the hardware vendor.

                                   (B) you shall be paid [*]% of Net Receipts
on Software Products sold in the form of CD Roms for PCs for less than an amount
equal to the cost of goods and freight and handling charges plus [*]% of such
amount but more than an amount equal to the cost of goods plus freight and
handling charges.

                           (iv) Notwithstanding any of the foregoing to the
contrary, no monies shall be payable to you on Software Products which are:

                                   (A) furnished on a so-called "no charge
basis" or sold as "cut-outs" or

________________

*Confidential portion omitted and filed separately with the Commission.


"scrap";

                                    (B) sold in the form of Console or Handheld
products for less than our cost of goods (manufacture and royalty payments to
the hardware vendors) plus freight and handling charges.

                                    (C) sold in the form of PC products for less
than our cost of goods plus freight and handling costs.

         7.       ACCOUNTINGS: We shall send statements as to Net Monies payable
to you hereunder to you within sixty (60) days following the end of each
quarterly calendar period for such preceding quarterly period together with
payment of accrued Net Monies, if any, earned by you hereunder during such
quarterly period less all advances and/or guarantee payments previously made to
you hereunder. We shall have the right to retain, as a reserve against charges,
credits, or returns, such portion of accrued Net Monies as shall be reasonable
in our best business judgment, provided that such reserve shall not exceed
[*] percent [*] of such accrued Net Monies and, further, that each such
reserve shall be liquidated within four (4) accounting periods after such
reserve is first established.

         8.       MARKETING: You and we shall coordinate marketing and public
relations relating to the Game Titles. You shall assist us in relationships with
your licensors. You will communicate all co-op marketing activities relating to
the Games Titles to us. You shall provide us with details with respect to
marketing support provided with respect to the Game Titles by the applicable
hardware manufacturers, and pass on to us all financial marketing commitments
with respect to the Game Titles paid to you by such hardware manufacturers.

         9.       CURRENT SALES: You will communicate all current sales
activities relating to the Game Titles to us.

         10.      Not used.

         11.      ADDITIONAL VIDEOGAME TITLES: You and we may mutually agree to
add additional videogame titles to the agreement without increasing the Minimum
Guarantee.

         12.      SUBSTITUTION OF X-BOX DEVELOPMENT FOR GAMECUBE: You and we
shall discuss the cessation of the development of GameCube versions of Game
Titles and the substitution of X-Box versions therefor.

         13.      CURE CLUASE: Neither party shall be deemed to be in breach of
any of its obligations hereunder unless and until it shall have been given
specific written notice (delivered in the manner permitted pursuant to Paragraph
14 below) of the nature of such breach and it shall have failed to cure such
breach within thirty (30) days except 5 days with respect to money breaches)
after receipt of such written notice.

         14.      NOTICES: All notices, statements and/or payments to be given
to the parties hereunder shall be addressed to the parties at the addresses set
forth on the first page hereof or at such other address as the parties shall
designate in writing from time to time. All notices shall be in writing and
shall either be served by personal delivery (to an officer of each company),
mail, or facsimile (if confirmed, by mail or

________________

*Confidential portion omitted and filed separately with the Commission.


personal delivery of the hard copy), all charges prepaid. Except as otherwise
provided herein, such notices shall be deemed given when personally delivered,
all charges prepaid, or on the date five (5) days following the date of mailing,
except that notices of change of address shall be effective only after the
actual receipt thereof. Copies of all notices to Acclaim should be sent to
Acclaim at its address set forth above, attention: Office of the President, and
to Fischbach, Perlstein & Lieberman, LLP, 1875 Century Park East, Suite 850, Los
Angeles, CA 90067, Attention: Bernard J. Fischbach.

         16.      PARENT GUARANTEES: It is a condition of this agreement that
Acclaim Entertainment, Inc. execute a guarantee in favor of BAM Entertainment
Limited in the form attached hereto as Exhibit A-l and that BAM Entertainment,
Inc. execute a guarantee in favor of Acclaim Entertainment, Ltd in the form
attached hereto as Exhibit A-2.

         15.      DEFINITIONS:

                  (a) "Net Monies" shall mean monies payable to you, other than
Advances, in connection with our sale and exploitation of Software Products.

                  (b) "Net Receipts" shall mean all monies actually received by
us from its customers on sales of Software Products embodying the Game Titles
less (i) any and all excise, sales, value added or comparable or similar taxes;
and (ii) freight and similar third party handling charges paid or payable by us
(but no more $1.50 per unit); (iii) returns, discounts, allowances or credits
(inclusive of discounts and allowances);.

                  (c)The term "Software" means the fully-debugged computer
software embodying a Game Title containing full and complete computer code,
including source code, assembly code, object code and all data files and other
files as are necessary for such computer software to achieve its functional
purpose whereby data and visual images, with or without sound, can be
manipulated, communicated, reproduced and/or perceived directly or with the aid
of a machine or device, whether now known or hereafter developed.

                  (d) The term "Software Device" means any device, whether now
known or unknown, on or by which computer software and its associated visual
images, with or without sound, may be embodied or recorded for later operation,
manipulation or communication to users, including without limitation
semiconductor devices, magnetic discs (whether floppy or otherwise) of any size,
tapes, cartridges, compact discs, boards, cassettes, or other prerecorded
devices whatsoever existing now or later developed by which a computer or video
game can be perceived, reproduced or, otherwise communicated directly or with
the aid of a machine or device.

                  (e) The term "Software Product(s)" means Software Devices
embodying the Software.

                                   END OF PAGE



The balance of the agreement would be on our standard form distribution
agreement, embodying the above terms and conditions as well as customary
provisions regarding accounting and audit matters, approvals, warranties and
representations, indemnification, etc., subject to such changes as the parties
may agree after good faith negotiation. The parties agree that they will use
their commercially reasonable efforts to conclude the formal distribution
agreement by no later than August 8, 2003 but until such date this agreement
shall be deemed a binding agreement provided that that this agreement shall be
deemed to include normal and customary accounting provisions, warranties and
representations, indemnification provisions and other usual and customary terms
contained in a distribution agreement.

                                                Sincerely,
                                               Acclaim Entertainment, Limited

                                                By /s/ Simon Hosken
                                                   --------------------------
Agreed and Accepted

BAM Entertainment Limited

By /s/ Anthony Williams
  -----------------------



                                  SCHEDULE "A"



             Title                Format       Release Date         Guarantee
                                                           
The Powerpuff Girls: Relish        GC       26th September          $   [*]
Rampage                                     2003

Ed, Edd n Eddy: Jawbreakers!       GBA      26th September          $   [*]
                                            2003

Ice Nine                           GBA      12th March 2004         $   [*]
Ice Nine                           Xbox     12th March 2004         $   [*]
Ice Nine                           PS2      12th March 2004         $   [*]

Wallace & Gromit in Project Zoo    PS2      26th September          $   [*]
                                            2003
Wallace & Gromit in Project Zoo    PC       17th October 2003       $   [*]
Wallace & Gromit in Project Zoo    Xbox     26th September          $   [*]
                                            2003
Wallace & Gromit in Project Zoo    GC       26th September          $   [*]
                                            2003

Carmen San Diego                   PS2      28th November 2003      $   [*]
Carmen San Diego                   GC       28th November 2003      $   [*]

Samurai Jack                       GBA      26th September          $   [*]
                                            2003

Dexter's Laboratory                PS2      28th November 2003      $   [*]
Dexter's Laboratory                GC       28th November 2003      $   [*]

Sound of Thunder                   PS2      26th March 2004         $   [*]
Sound of Thunder                   Xbox     26th March 2004         $   [*]
Sound of Thunder                   GBA      26th March 2004         $   [*]

                                            Total                   $   [*]


________________

*Confidential portion omitted and filed separately with the Commission.

EX-10.1.(A)

                                                                 Exhibit 10.1(a)


                        [Confidential Portions Omitted]

                           Acclaim Entertainment Ltd.
                                  Moreau House
                              112-120 Brompton Road
                                 London SW3 1JJ

                                                              September 30, 2003
BAM Entertainment Limited
Upper Borough Court
Borough Wells
Bath
BA1 1RG

           RE ACCLAIM ENTERTAINMENT INC. -W- BAM ENTERTAINMENT LIMITED

Gentlemen:

We would like to clarify a number of provisions of the letter of intent entered
into between our companies dated July 17, 2003.

Specifically:

      1.    Wallace and Gromit PS2 - This product will be developed as 3 SKU's
            with associated minimum guaranteed royalties on each SKU payable as
            follows:

                  a.  PAL English                            $ [*]
                  b.  PAL German                             $ [*]
                  c.  PAL French, Italian, German, Spanish   $ [*]

                  Excess royalties are only payable once the total minimum
                  guarantee is exceeded.

      2.    Wallace and Gromit XBox - This product will be developed as 2 SKU's
            with associated minimum guaranteed royalties on each SKU payable as
            follows:

                  a.  PAL English                            $ [*]
                  b.  PAL French, Italian, German, Spanish   $ [*]

                  Excess royalties are only payable once the total minimum
                  guarantee is exceeded.

________________

*Confidential portion omitted and filed separately with the Commission.


      3.    Wallace and Gromit Gamecube - This product will be developed as 2
            SKU's with associated minimum guaranteed royalties on each SKU
            payable as follows:

                  a.  PAL English                             $   [*]
                  b.  PAL French, Italian, German, Spanish    $   [*]

                  Excess royalties are only payable once the $[*] total
                  minimum guarantee is exceeded.

      4.    Samarai Jack - This product will be developed as an English language
            Version only.

                                           Sincerely
                                           Acclaim Entertainment Limited

                                           By /s/ Simon Hosken
                                              ----------------

Agreed and Accepted

BAM Entertainment Limited

By /s/ Stephen Ambler
   ----------------------

________________

*Confidential portion omitted and filed separately with the Commission.

EX-10.2

                                                                    EXHIBIT 10.2

                           LOAN AND SECURITY AGREEMENT

         This Agreement ("Agreement") is entered into effective as of September
25, 2003 (the "Effective Date"), by and between PHILLIPS LAND LLC, a Virginia
limited liability company ("Lender"), and BAM! ENTERTAINMENT, INC., a Delaware
corporation ("Borrower"):

                                 R E C I T A L S

         A.       Borrower is in the business of selling video game software to
its customers ("Customers").

         B.       In order to operate its business, Borrower desires to borrow
funds and obtain other financial accommodations from Lender, and Lender is
willing to provide inventory purchase financing and provide other financial
accommodations to Borrower upon the terms and conditions set forth herein and in
the other documents executed and delivered in connection herewith.

         C.       In consideration of the terms and conditions contained in this
Agreement, and of any extensions of credit made or to be made to or for the
benefit of Borrower by Lender, the parties, therefore, agree as follows:

         1.       DEFINITIONS.

                  1.1      "Account Debtor" means the Customers or any other
person or entity who is or may become obligated upon a Receivable.

                  1.2      "Accounts" means all amounts due and to become due to
Borrower from the Customers and other accounts, contract rights, chattel paper,
instruments and documents, whether now owned or to be acquired by Borrower,
provided that the same arise in connection with the sale of Inventory.

                  1.3      "Affiliates" means any and all Persons which, in the
sole and absolute judgment of Lender, directly or indirectly, own or control,
are controlled by or are under common control with Borrower, and any and all
Persons from whom, in the sole and absolute judgment of Lender, Borrower has not
or is not likely to exhibit independence of decision or action. For the purpose
of this definition, "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.

                  1.4      "Business Days" means any day other than Saturday or
Sunday on which the Depository Bank is open for business with the general
public.

                  1.5      "Collateral" means the Inventory and Receivables and
proceeds thereof.

                  1.6      "Costs" means the costs and expenses listed in
Section 2.8.

                                       1


                  1.7      "Depository Bank" means Suntrust Bank, located at 919
East Main Street, 8th Floor General Office, Richmond, Virginia, 23219, Attn:
Wendy O'Brien, or such other commercial bank designated by Lender.

                  1.8      "Event of Default" means any event listed in Section
8 of this Agreement.

                  1.9      "Facility Fee" means the fee charged by Lender with
respect to Borrower's purchase of Inventory from Lender as described in Section
2.6 hereof.

                  1.10     "Indebtedness" means and includes the aggregate of
the unpaid amounts due Lender under this Agreement, of every kind and
description, direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising.

                  1.11     "Inventory" means all of Borrower's inventory (as
inventory is defined in the California Commercial Code) purchased by Borrower
from a Manufacturer, provided that the same arise in connection with a Loan to
Borrower by Lender pursuant to this Agreement.

                  1.12     "Loan(s)" means the outstanding loan(s) described in
Section 2.

                  1.13     "Loan Interest" means the interest charged on a Loan
as described in the Note.

                  1.14     "Lock Box Account" means account # __________ with
Depository Bank, or such other account designated by Lender.

                  1.15     "Material Adverse Effect" means a material adverse
effect on (i) the business, assets, operations, or condition (financial or
otherwise) of the Borrower or (ii) the ability of the Borrower to pay any
Indebtedness and perform its obligations under this Agreement or (iii) the
ability of Lender to enforce any of its rights or to collect any of the
Indebtedness then due and payable.

                  1.16     "Maximum Amount" means an amount not to exceed
$3,200,000.

                  1.17     "Manufacturers" means Microsoft, Nintendo, Sony or
other manufacturers selected by Borrower in its sole discretion.

                  1.18     "Person" means any individual or entity, including,
but not limited to, corporations, partnerships, limited liability companies,
limited partnerships etc.

                  1.19     "Receivables" means all rights to the payment of
money now owned or hereafter acquired by Borrower, whether due or to become due
and whether or not earned by performance including, but not limited to,
Accounts, chattel paper, instruments, general intangibles, and all guaranties
and security therefor and all contracts relating thereto and all returned and
repossessed goods; provided that the same arise in connection with the extension
of credit provided to Borrower by Lender pursuant to this Agreement.

                  1.20     "Termination Date" has the meaning specified in
Section 2.7.

                                       2


                  1.21     All computations required under this Agreement shall
otherwise be made in accordance with U.S. generally accepted accounting
principles ("GAAP") and practices consistently applied. Accounting terms used
herein not otherwise defined shall have the meaning attributable thereto under
generally accepted accounting principles, and practices.

         2.       LOANS.

                  2.1      Subject to the terms and conditions hereof, Lender
hereby extends to Borrower a line of credit facility under which Lender may, at
Lender's sole discretion, make Loans to Borrower at Borrower's request from time
to time during the term of this Agreement in amounts not to exceed the, in
aggregate, Maximum Amount.

                  2.2      The Loan proceeds will be used to fund certain
inventory purchases from Manufacturers as described in Exhibit A or in the
request for a Loan submitted in accordance with Section 2.4.

                  2.3      On the Effective Date, Borrower will execute and
deliver to Lender a Promissory Note in the form of Exhibit B (the "Note"), in
the principal amount of $3,200,000, bearing interest as specified in the Note.

                  2.4      Each request for a Loan shall be made in writing in
the form attached hereto as Exhibit C or in any other manner acceptable to
Lender.

                  2.5      Each Loan shall be made by a deposit to Borrower's
account designated in Exhibit D or by direct payment to the Manufacturer for the
benefit of Borrower at Lender's discretion; and if a Loan is so disbursed, it is
deemed to have been validly requested by Borrower.

                  2.6      For each Loan advanced from Lender to Borrower,
Borrower shall pay to Lender an amount equal to 5% of any amounts actually
advanced for such Loan as a Facility Fee.

                  2.7      The term of this Agreement will expire on March 31,
2004 (the "Termination Date") and the Note will become payable in full on that
date. Borrower may prepay the principal balance of the Note in whole or part at
any time without penalty.

                  2.8      Borrower will pay to Lender its fees, costs and
expenses, including without limitation reasonable attorneys' fees, other
professionals' fees, court costs, litigation and other expenses and wire
transfer and bank fees (collectively, "Costs"), incurred or paid by Lender in
connection with the negotiating, documenting, administering and enforcing this
Agreement or related documents, including without limitation the Note, and the
defense, preservation and protection of Lender's rights and remedies thereunder,
including without limitation, its security interest in the Collateral or any
other property pledged to secure the Loans, whether incurred in bankruptcy,
insolvency, foreclosure or other litigation or proceedings or otherwise. The
Costs will be due and payable within ten (10) business days of Lender's
submission to Borrower of a reasonable accounting of such costs. If Borrower
fails to pay any Costs in a timely manner, Lender is entitled to disburse such
sums as a Loan under this Agreement. Thereafter, the Costs will bear interest
from the date incurred or disbursed at the highest rate set forth in the Note.
This provision will survive the termination of this Agreement

                                       3


and the repayment of any amounts due or the performance of any obligation under
this Agreement.

         3.       SECURITY INTEREST/COLLATERAL.

                  3.1      As security for the Loans, Borrower hereby grants
Lender a first priority security interest in the Collateral. As long as the
Loans are outstanding, and until this Agreement is terminated as provided
herein, Borrower will execute and deliver to Lender such assignments, notices,
financing statements and other documents (including any original instruments,
documents and chattel paper, endorsed or assigned as Lender shall specify) as
Lender may request in order to perfect or confirm Lender's security interest in
the Collateral or to give any third parties, notice of Lender's interest in the
Collateral.

                  3.2      Notwithstanding any termination, until all of the
Indebtedness with respect to Inventory financed by a Loan shall have been fully
paid and satisfied, Lender shall be entitled to retain its security interest in
the Collateral; and Borrower shall continue to remit collections of Accounts and
Receivables as provided in this Agreement; and Lender shall retain all of its
rights and remedies under this Agreement.

                  3.3      Upon payment in full of the Indebtedness with respect
to Inventory financed by a Loan, Lender shall release its security interest in
the respective Collateral.

         4.       DISTRIBUTION OF ACCOUNTS RECEIVABLE.

                  4.1      Deposits.

                           (a)      Borrower will cause the Account Debtor's
deposit of all remittances and proceeds with respect to the sale or transfer of
the Inventory, whether by wire, cash or check, into the Lock Box Account with
the Depository Bank. Borrower and any Affiliates, shareholders, directors,
officers, employees, agents of Borrower and all Persons acting for or in concert
with Borrower shall, acting as trustee for Lender, receive, as the sole and
exclusive property of Lender, any monies, checks, notes, drafts or any other
payments relating to or proceeds of Accounts or Collateral which come into their
possession or under their control and immediately upon receipt, shall remit the
same or cause the same to be remitted, in kind, to the Lock Box Account.

                           (b)      Borrower agrees that all payments made to
such Lock Box Account or otherwise received by Lender as proceeds of the
Inventory or Receivables, constitutes Collateral and will be applied on account
of the Indebtedness.

                           (c)      Borrower agrees to pay to Lender any and all
fees, costs and expenses (if any) which Lender incurs in connection with opening
and maintaining the Lock Box Account and depositing for collection by Lender any
check or item of payment received or delivered to Depository Bank or Lender on
account of the Indebtedness and Borrower further agrees to reimburse Lender for
any claims asserted by Depository Bank in connection with the Lock Box Account
or any returned or uncollected checks received by Depository Bank for deposit in
the Lock Box Account.

                                       4


                  4.2      Application of Collected Receivables. Within five (5)
Business Days of Lender's receipt of any Receivables in the Lock Box arising
from the sale of Inventory financed by a Loan, such Receivables will be applied
in the following manner and priority:

                           (a)      100% of each dollar of Receivable will be
paid and retained by Lender until payment in full of the following:

                                    (i)      The aggregate amount of the
         respective Loan Interest;

                                    (ii)     Any other fees and charges due to
         Lender with respect to the Loan; and

                                    (iii)    The aggregate amount of
         Indebtedness under this Agreement.

                           (b)      All remaining proceeds will be paid to the
Borrower.

         5.       CONDITIONS PRECEDENT TO LOAN ADVANCES.

                  5.1      Without detracting from Lender's right to refuse any
requested Loans hereunder, Lender's obligations hereunder are subject to the
condition that there shall have been delivered to Lender, in form and substance
satisfactory to Lender, all of the following:

                           (a)      Evidence that the execution, delivery, and
performance by Borrower of this Agreement and the execution, delivery, and
performance by Borrower and subordinating creditor of any instrument or
agreement required under this Agreement, as appropriate, have been duly
authorized;

                           (b)      An executed Promissory Note in the form of
Exhibit B attached hereto;

                           (c)      Financing statement(s)(Form UCC-1);

                           (d)      Evidence that all security interests
required to be provided in favor of Lender are valid, enforceable, and prior to
the rights and interests of others and any other documents that Lender may
reasonably request to reflect, perfect or protect the Lender's first priority
lien in the Collateral;

                           (e)      A Certificate of Insurance as described in
Section 7.5 hereof;

                           (f)      A favorable opinion of counsel to Borrower
in a form satisfactory to Lender; and

                           (g)      Such other documents and instruments as
Lender may reasonably require.

                  5.2      Each request for a Loan under this Agreement shall be
deemed a representation by Borrower that the representations and warranties
contained in Section 6 and in

                                       5


any other agreement, instrument, or document executed and delivered in
connection herewith are then true and accurate in all material respects as
though made on and as of the day of such request, and that no further action,
including any filing or recording of any agreement or statement, is necessary in
order to establish and perfect Lender's first lien on, and prior perfected
security interest in, all the Collateral.

         6.       REPRESENTATIONS AND WARRANTIES. Except as disclosed in
Borrower's Disclosure Schedule attached hereto as Exhibit E, Borrower represents
and warrants that:

                  6.1      Borrower is a corporation duly organized and validly
existing under the laws of the state of its incorporation and that the
execution, delivery, and performance of this Agreement are within Borrower's
powers, have been duly authorized, and are not in conflict with the terms of its
Certificate of Incorporation and Bylaws, as amended, of Borrower.

                  6.2      The execution, delivery, and performance of this
Agreement and of any instrument or agreement required by this Agreement are not
in conflict with any law or any indenture, agreement, or undertaking to which
Borrower is a party or by which Borrower is bound or affected.

                  6.3      All financial information submitted by Borrower to
Lender is true and correct in all material respects and is complete insofar as
may be necessary to give Lender true and accurate knowledge of the subject
matter thereof. Borrower is not in default under any indenture, loan agreement,
mortgage, lease, trust deed, deed of trust or other similar agreement relating
to the borrowing of monies to which it is a party or which it is bound.

                  6.4      All Collateral shall be owned by Borrower, free and
clear of all clouds to title and of all security interests, liens, encumbrances
and rights of others except the rights of Lender under this Agreement.

                  6.5      There is no litigation, tax claim, proceeding or
dispute pending, or, to the knowledge of Borrower, threatened, against or
affecting Borrower or its property, the adverse determination of which might
have a Material Adverse Effect.

                  6.6      The Borrower is not a party to or subject to any
agreement or restriction which in the opinion of Borrower's management is so
unusual or burdensome that it might have a Material Adverse Effect.

                  6.7      Borrower maintains Inventory only at the following
locations:

                           Xbox and GCN:
                           Ditan Distribution
                           3335 Arden Road
                           Hayward, California 94545

                                       6


                           PS2:
                           Ditan Distribution
                           909 Whitaker Road, Suite A
                           Plainfield, Indiana 46168

                  6.8      Records relating to the Receivables of Borrower are
maintained only at the following locations:

                           333 West Santa Clara Street, Suite 716 San Jose,
                           California 95113

                  6.9      Borrower's chief executive office is located at:

                           333 West Santa Clara Street, Suite 716 San Jose,
                           California 95113

                  6.10     Borrower has conducted business only in the following
other names:

                           Bay Area Multimedia, Inc.

                  6.11     No event has occurred and is continuing or would
result from the making of a Loan which constitutes an Event of Default or which,
upon lapse of time or notice or both, would become an Event of Default.

         7.       COVENANTS. Borrower covenants and agrees that so long as the
credit facility established under this Agreement shall remain available and
until the full and final payment of the Loans and all other Indebtedness
incurred hereunder, Borrower will do all of the following, unless Lender waives
compliance in writing:

                  7.1      Payments. Pay principal and interest on the Loans and
all other Indebtedness incurred hereunder according to the terms hereof or
thereof.

                  7.2      Notice to Lender. Promptly give written notice to
Lender of any of the following:

                           (a)      Any substantial dispute which may exist
between Borrower and any governmental on regulatory body or law enforcement
authority;

                           (b)      An Event of Default or any event which, upon
a lapse of time or notice or both, would become an Event of Default;

                           (c)      Any other matter that has resulted or might
result in a material adverse change in Borrower's financial condition or
operations; and

                           (d)      Any event that adversely affects the value
of the Collateral, the ability of Borrower or Lender to dispose of any of the
Collateral, or the rights and remedies of Lender in relation thereto, including,
but not limited to, the levy of any legal process against any

                                       7


Collateral and the adoption of any marketing order, arrangement or procedure
affecting the Collateral, whether governmental or otherwise.

                  7.3      Financial Information. Keep books of account and
prepare financial statements and furnish to Lender the following (all of the
foregoing and following to be kept and prepared in accordance with generally
accepted accounting principles applied on a basis consistent, unless Borrower's
independent certified public accountants concur in any changes and such changes
are disclosed to Lender and are consistent with the then generally accepted
accounting principles):

                           (a)      as soon as available, but not later than one
hundred twenty (120) days after the close of each fiscal year of Borrower,
financial statements of Borrower (including a balance sheet and profit and loss
statement with supporting footnotes) as of the end of such year and for the year
then ended all in reasonable detail as requested by Lender and examined by a
firm of independent certified public accountants of recognized national standing
selected by Borrower and containing the unqualified opinion of such independent
certified public accountants with respect to the financial statements;

                           (b)      as soon as available, but no later than
thirty (30) days after the end of each month, (A) an unaudited financial
statement of Borrower (including a statement of profit and loss and of surplus
for the month then ended and a balance sheet as of the end of such month) as of
the end of the portion of Borrower's fiscal year then elapsed, all in reasonable
detail as requested by Lender and certified by Borrower's principal financial
officer as prepared in accordance with generally accepted accounting principles
and fairly presenting the financial position and results of operations of
Borrower for such period and (B) a cash flow projection for the following
three-month period, together with appropriate supporting documents reasonably
acceptable to Lender;

                           (c)      as soon as available, but not later than
sixty (60) days before the beginning of each fiscal year, a cash flow projection
for such fiscal year, together with appropriate supporting document reasonably
acceptable to Lender; and

                           (d)      such other data and information (financial
and otherwise) as Lender from time to time may reasonably request, bearing upon
or related to the Collateral, Borrower's financial condition or results of its
operations.

                  7.4      Additional Obligations. Perform, on request of
Lender, such acts or execute and deliver such documents as may be necessary or
advisable to perfect any liens or security interests provided for herein or
otherwise to carry out the intent of this Agreement.

                  7.5      Insurance. Maintain and keep in force in adequate
amounts of such insurance, including property and liability insurance and fire
and hazard insurance policies on Borrower's Inventory as is usual in the
business carried on by Borrower, all of which will be evidenced by a Certificate
of Insurance delivered to Lender by Borrower on the Effective Date.

                  7.6      Information. Cause all financial information,
including information relating to Receivables, upon submission by Borrower to
Lender to be true and correct in all

                                       8


material respects and complete to the extent necessary to give Lender a true and
accurate knowledge of the subject matter thereof.

                  7.7      Inspection and Disclosure of Discounts. Permit
Lender, by its representatives and agents, to inspect the Collateral, to examine
and make copies of the records of the Borrower relating thereto, and to discuss
the Collateral, and the records of the Borrower with respect thereto with, and
to be advised as to the same by the Borrower's officers and, in the case of any
Receivable, with any person or entity which is or may be obligated thereon, all
at such reasonable times and intervals as Lender may determine. If any discount,
credit, agreement to make a rebate or to otherwise reduce the amount owing on a
Receivable exists or if, to the knowledge of the Borrower, any dispute, setoff,
claim, counterclaim or defense exists or has been asserted or threatened with
respect to a Receivable, such fact shall be disclosed to Lender in writing in
connection with the inspection by Lender of any records of the Borrower relating
to that Receivable and in connection with any invoice or report furnished by the
Borrower to Lender relating to that Receivable.

                  7.8      Taxes. Pay when due all taxes, assessments and
governmental charges and levies upon the Collateral, except those which are
being contested in good faith by appropriate proceedings.

                  7.9      Notification of Account Debtors. Upon the request of
Lender, notify all or such of the Account Debtors as Lender shall specify to
make payment thereon at such place and in such manner as Lender shall specify.

                  7.10     Disposition of Collateral. Not sell, lease or
otherwise dispose of the Collateral except, prior to the occurrence of an
Event of Default:

                           (a)      Sales of Inventory in the ordinary course of
business; and

                           (b)      Receivables or other proceeds of Inventory
collected in the ordinary course of business.

                  7.11     Change in Location or Name.

                           (a)      Not have any Inventory at a location other
than a location specified in Section 6.7;

                           (b)      Not maintain records concerning the
Receivables at a location other than a location specified in Section 6.8;

                           (c)      Not maintain its chief executive office at a
location other than that specified in Section 6.9;

                           (d)      Not change its name; and

                           (e)      Not change its mailing address without
Lender's prior written consent.

                                       9


         8.       EVENTS OF DEFAULT.

                  8.1      Default.

                           (a)      The occurrence of any one or more of the
following events shall constitute a Default:

                                    (i)      Borrower fails to pay any part of
the Indebtedness on the date due and payable or declared due and payable by
Lender and the same is not cured within five (5) days after Lender gives
Borrower notice identifying such default;

                                    (ii)     Borrower fails or neglects to
perform, keep or observe any other term, provision, condition or covenant
contained in this Agreement, which is required to be performed, kept or observed
by Borrower and the same is not cured to Lender's satisfaction within five (5)
days after Lender gives Borrower notice identifying such default;

                                    (iii)    Any statement, warranty,
representation, report, financial statement, or certificate made or delivered by
Borrower, or any of its officers, employees or agents, to Lender is not true and
correct in any material respect;

                                    (iv)     There shall occur any material
uninsured damage to or loss, theft, or destruction of any of the Collateral;

                                    (v)      The Collateral or any of Borrower's
other assets are attached, seized, levied upon or subjected to a writ or
distress warrant, or come within the possession of any receiver, trustee,
custodian or assignee for the benefit or creditors and the same is not cured
within thirty (30) days thereafter;

                                    (vi)     An application is made by any
Person other than Borrower for the appointment of a receiver, trustee, or
custodian for any of the Collateral or any of Borrower's other assets and the
same is not dismissed within thirty (30) days after the application therefor;

                                    (vii)    An application is made by Borrower
for the appointment of a receiver, trustee or custodian for any of the
Collateral or any of Borrower's other assets; or a petition under any section or
chapter of the Bankruptcy Code or any similar law or regulation is filed by or
against Borrower or any guarantor of the Liabilities and, if filed against
Borrower or any guarantor, is not dismissed within thirty (30) days after
filing; or Borrower makes an assignment for the benefit of its creditors or any
case or proceeding is filed by or against Borrower for its dissolution,
liquidation, or termination; or Borrower ceases to conduct its business as now
conducted or is enjoined, restrained or in any way prevented by court order from
conducting all or any material part of its business affairs; or

                                    (viii)   Borrower becomes insolvent or fails
generally to pay its debts as they become due.

                           (b)      Default Rate. After an Event of Default, all
amounts of principal outstanding as of the date of such Event of Default will
accrue interest at the Default Rate, in

                                       10


Lender's sole discretion, with prior notice to Borrower. This provision does not
constitute a waiver of any Event of Default or an agreement by Lender to permit
any late payments whatsoever. The Default Rate is 3% in excess of the interest
rate otherwise in effect under amounts outstanding under the Note. In no event
will the interest rate accruing under such Note be increased to be in excess of
the maximum interest rate permitted by applicable state or federal usury laws
then in effect.

                  8.2      Remedies. Upon and after the occurrence of a Default,
Lender shall have all of the following rights and remedies:

                           (a)      All of the rights and remedies of a secured
party under the California Uniform Commercial Code or other applicable law, all
of which rights and remedies shall be cumulative and non-exclusive to the extent
permitted by law, and in addition to any other rights and remedies contained in
this Agreement;

                           (b)      The right to (i) peacefully enter upon the
premises of Borrower or any other place or places where the Collateral is
located and kept, without any obligation to Borrower or any other person,
through self-help and without judicial process or first obtaining a final
judgment or giving Borrower notice and opportunity for a hearing on the validity
of Lender's claim, and remove the Collateral from such premises and places to
the premises of Lender or any agent of Lender, for such time as Lender may
require to collect or liquidate the Collateral, and/or (ii) require Borrower to
assemble and deliver the Collateral to Lender at a place to be designated by
Lender;

                           (c)      The right to open Borrower's mail and
collect any and all amounts due from Account Debtors;

                           (d)      The right to sell, lease or otherwise
dispose of any of the Collateral in its then condition, or after any further
manufacturing or processing, at public or private sale or sales, with such
notice as provided in lots or in bulk, for cash or on credit, all as Lender, in
its sole discretion, may deem advisable. At any such sale or sales of the
Collateral, the Collateral need not be in view of those present and attending
the sale, nor at the same location at which the sale is being conducted. Lender
shall have the right to conduct such sales on Borrower's premises or elsewhere
and shall have the right to use Borrower's premises without charge for such
sales for such time or times as Lender may see fit. Lender is granted a license
or other right to use, without charge, Borrower's labels, patents, copyrights,
rights of use of any name, trade secrets, trade names, trademarks and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in advertising for sale and selling any Collateral, and Borrower's
rights under all licenses and all franchise agreements shall inure to Lender's
benefit but Lender shall have no obligations thereunder. Lender may purchase all
or any part of the Collateral at public or, if permitted by law, private sale
and, in lieu of actual payment of such purchase price, may set-off the amount of
such price against the Indebtedness. The proceeds realized from the sale of any
Collateral shall be applied first to the reasonable costs, expenses and
attorneys' and paralegals' fees and expenses incurred by Lender for collection
and for acquisition, completion, protection, removal, storage, sale and delivery
of the Collateral; and then as set forth in Section 4.2. Lender shall account to
Borrower for any surplus. If any deficiency shall arise, Borrower shall remain
liable to Lender.

                                       11


                           (e)      Borrower recognizes that in the event
Borrower fails to pay, perform, observe or discharge any of its obligations
under this Agreement, the Note or other Loan documents, no remedy at law will
provide adequate relief to Lender. Borrower further agrees that Lender shall be
entitled to temporary and permanent injunctive relief in any such case without
the necessity of proving that it has incurred actual damages.

                  8.3      Notice. Borrower agrees that any notice required to
be given by Lender of a sale, lease, other disposition of any of the Collateral
or any other intended action by Lender, which is personally delivered to
Borrower or which is deposited in the United States mail, postage prepaid and
duly addressed to Borrower at the address set forth in Section 10.1, at least
ten (10) days prior to any such public sale, lease or other disposition or other
action being taken, or the time after which any private sale of the Collateral
is to be held, shall constitute commercially reasonable and fair notice thereof
to Borrower.

                  9.       TERMINATION WITHOUT CAUSE. Upon ten (10) Business
Days prior written notice to the other party, either Lender or Borrower, at its
sole discretion, may without cause, terminate the arrangement under this
Agreement with respect to Lender's making Loans, provided that such a
termination will not affect Borrower's obligations or Lender's rights under this
Agreement, including Lender's rights with respect to the Collateral, until all
Borrower's Indebtedness are paid in full.

         10.      MISCELLANEOUS.

                  10.1     Notices. Any notice required or permitted to be given
under this Agreement may be, and shall be deemed, given and sent when deposited
in the United States mail, postage prepaid, or by telegraph or telex when
delivered to the appropriate office for transmission, charges prepaid,
addressed:

                           To Borrower as follows:

                           BAM! Entertainment, Inc.
                           333 West Santa Clara Blvd., Suite 716
                           San Jose, CA 95113
                           Attention: Raymond Musci, CEO
                           Facsimile No.: (408) 298-9600

                           To Lender as follows:

                           Phillips Land LLC
                           2900 Polo Parkway, Suite 200
                           Midlothian, VA  28113
                           Attention: Greg Phillips
                           Facsimile No.:______________________

                  10.2     Successors. This Agreement shall bind and inure to
the benefit of the parties hereto and their respective successors and assigns;
provided, however, that Borrower

                                       12


shall not assign this Agreement or any of the rights, duties or obligations of
Borrower hereunder without the prior written consent of Lender.

                  10.3     Waivers. No consent or waiver under this Agreement
shall be effective unless in writing. No waiver of any breach or default shall
be deemed a waiver of any breach or default thereafter occurring.

                  10.4     Governing Law, Jurisdiction, and Venue. This
Agreement shall be governed and interpreted in accordance with the laws of the
State of California, as such laws are applied to agreements between residents of
California to be performed entirely within the State of California. Each party
hereby consents to jurisdiction of and venue in the federal district court for
the Northern District of California and in the courts of the State of California
in Santa Clara County, California.

                  10.5     Attorneys' Fees. Should any litigation be commenced
between the parties concerning the rights or obligations of the parties under
this Agreement, the party prevailing in such litigation shall be entitled, in
addition to such other relief as may be granted, to a reasonable sum as and for
its attorneys' fees in such litigation. This amount shall be determined by the
court in such litigation or in a separate action brought for that purpose.

                  10.6     Post Judgment. In addition to any amount received as
attorneys' fees, the prevailing party also shall be entitled to receive from the
party held to be liable, an amount equal to the attorneys' fees and costs
incurred in enforcing any judgement against such party. This Section is
severable from the other provisions of this Agreement and survives any judgment
and is not deemed merged into any judgment.

                  10.7     Indemnification. If after receipt of any payment of
all or part of the Indebtedness, Lender is for any reason compelled to surrender
such payment to any person or entity, because such payment is determined to be
void or voidable as a preference, impermissible setoff, or diversion of trust
funds, or for any other reason, this Agreement will continue in full force and
effect and Borrower will be liable to, and will indemnify, save and hold Lender,
its officers, directors, attorneys, and employees harmless of and from the
amount of such payment surrendered. The provisions of this Section will be and
remain effective notwithstanding any contrary action which may have been taken
by Lender in reliance on such payment, and any such contrary action so taken
will be without prejudice to Lender's rights under this Agreement and will be
deemed to have been conditioned upon such payment becoming final, indefeasible
and irrevocable. In addition, Borrower will indemnify, defend, save and hold
Lender harmless of, from and against all claims, demands, liabilities,
judgments, losses, damages, costs and expenses, joint or several (including all
accounting fees and attorneys' fees reasonably incurred), that Lender or any
such indemnified party may incur arising out of this Agreement, any other loan
documents or any act taken by Lender hereunder except for the willful misconduct
or gross negligence of such indemnified party. The provisions of this Section
will survive the termination of this Agreement.

                  10.8     Confidentiality. Any financial information provided
pursuant to Section 7 hereof shall be used by Lender solely in furtherance of
its interests as a Lender to Borrower, and the Lender shall (except as otherwise
required by law) use its best efforts to maintain the

                                       13


confidentiality of all non-public information of the Company obtained pursuant
to this Agreement.

                  10.9     Construction. The headings of this Agreement are for
convenience only and are not to be considered in construing this Agreement. The
language of this Agreement shall be construed according to its fair meaning and
not strictly for or against any party.

                  10.10    Entire Agreement. This Agreement and any agreement,
document or instrument attached hereto or referred to herein integrates all the
terms and conditions mentioned in or incidental to this Agreement, and
supersedes all oral negotiations and prior writings in respect to the subject
matter of this Agreement. In the event of any conflict between the terms,
conditions and provisions of this Agreement and any such agreement, documents or
instrument, the terms, conditions and provisions of this Agreement shall
prevail.

                  10.11    Counterparts and Facsimile Signatures. This Agreement
may be executed in one or more counterparts and each of such counterparts shall
be deemed to be an original for all purposes, and all of such counterparts shall
together constitute one and the same document. Any signature required for the
execution of this Agreement may be in the form of either an original signature
or a facsimile transmission bearing the signature of any party to this
Agreement. No objection shall be raised as to the authenticity of any signature
due solely to the fact that said signature was transmitted via facsimile.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       14


         IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement as
of the day and year first above written.

                                                     BORROWER:

                                                     BAM! ENTERTAINMENT, INC.

                                                     By:  /s/ Stephen Ambler
                                                        ------------------------
                                                     Its: CFO/VP Finance
                                                         -----------------------

                                                     LENDER:

                                                     PHILLIPS LAND LLC

                                                     By:  /s/ G.R. Phillips
                                                        ------------------------
                                                     Its: Sec/Tres.
                                                         -----------------------

                                       15


                                    EXHIBIT A

                                    INVENTORY

Wallace & Gromit in Project Zoo (on the PS2)

Wallace & Gromit in Project Zoo (on the Gamecube)

Wallace & Gromit in Project Zoo (on the Xbox)

                                        i


                                   EXHIBIT B
                                PROMISSORY NOTE


$3,200,000                                             San Jose, California
                                                        September 25, 2003
                                                        ("Effective Date")

         On March 31, 2004, BAM! ENTERTAINMENT, INC., a Delaware corporation
(the "Borrower"), for value received, hereby promises to pay to the order of
PHILLIPS LAND LLC, a Virginia limited liability company (the "Lender"), in
lawful money of the United States of America and in immediately available funds,
the principal sum of THREE MILLION TWO HUNDRED THOUSAND DOLLARS ($3,200,000) or
such lesser unpaid principal amount as may be outstanding hereunder or may be
advanced by Lender pursuant to the terms of the Loan and Security Agreement
dated of even date herewith by and between Borrower and Lender, as the same may
be further amended from time to time (the "Agreement").

         The principal amounts outstanding under this Note shall bear interest
commencing on the date of the first advance hereunder at the following rate (the
"Interest Rate"): (i) the Prime Rate plus one half of one percentage point
(.50%). "Prime Rate" shall mean the rate of interest per annum established from
time to time by the SunTrust Bank at its office in Richmond, Virginia ("Bank"),
whether or not Bank shall at times lend to borrowers at lower rates of interest
or, if there is no such prime rate, then its base rate or such other rate as may
be substituted by Bank for the prime rate; provided that in no event shall the
Prime Rate exceed the highest rate permitted by law.

         Interest will be payable in immediately available funds to the address
of the Lender set forth in the Agreement. Interest accruing under this Note
shall accrue and shall be due and payable in arrears (together with principal)
on the Termination Date (or on such earlier date as this Note is due as
described below or in the Agreement). Interest due and unpaid will accrue and
compound annually. Interest will be calculated based on a 360 day year and
charged for the actual number of days elapsed.

         After maturity, whether by acceleration or otherwise, this Note will
bear interest, at the election of Lender and upon notice to Borrower (computed
and adjusted in the same manner, and with the same effect, as interest hereon
prior to maturity), payable on demand, at a rate per annum equal to the Default
Rate, until paid, and whether before or after the entry of judgment hereon.

         The principal amount of each loan made by Lender under this Note and
the amount of each payment made by Borrower under this Note will be recorded by
Lender in the regularly maintained data processing records of Lender. The
aggregate unpaid principal amount of all loans set forth in such records will be
presumptive evidence of the principal amount owing and unpaid on this Note.
However, failure by Lender to make any such entry will not limit or otherwise
affect Borrower's obligations under this Note or the Agreement with the
exception of the erroneous or missing entry.

         All payments received by Lender under this Note will be applied first
to payment of (i) accrued interest on this Note, (ii) any other fees or charges
due to the Lender under the Agreement and related documents, and (iii) then to
principal.

         This Note is the Promissory Note referred to in the Agreement, and is
entitled to the benefits, and is subject to the terms, of the Agreement.
Capitalized terms used but not otherwise defined herein will have the meanings
attributed thereto in the Agreement. The principal of this Note is prepayable in
the amounts and under the circumstances, and its maturity is subject to
acceleration upon the terms, set forth in the Agreement. Except as otherwise
expressly provided in the Agreement, if any payment on this Note becomes due and
payable on a day which is not a Business Day, the maturity thereof will be
extended to the next Business Day, and interest will be payable at the rate
specified herein during such extension period.

         After the occurrence of an Event of Default, all amounts of principal
outstanding as of the date of the occurrence of such Event of Default will bear
interest at the Default Rate, in Lender's sole discretion, upon notice to

                                       ii


Borrower. This provision does not constitute a waiver of any Events of Default
or an agreement by Lender to permit any late payments whatsoever.

         In no event will the interest rate on this Note exceed the highest rate
permissible under any law which a court of competent jurisdiction will, in a
final determination, deem applicable hereto. In the event that a court
determines that Lender has received interest and other charges under this Note
in excess of the highest permissible rate applicable hereto, such excess will be
deemed received on account of, and will automatically be applied to reduce the
amounts due to Lender from Borrower under this Note, other than interest, and
the provisions hereof will be deemed amended to provide for the highest
permissible rate. If there are no such amounts outstanding, Lender will refund
to Borrower such excess.

         Borrower and all endorsers, sureties, guarantors and other persons
liable on this Note hereby waive presentment for payment, demand, notice of
dishonor, protest, notice of protest and all other demands and notices in
connection with the delivery, performance and enforcement of this Note, and
consent to one or more renewals or extensions of this Note.

         This Note may not be changed orally, but only by an instrument in
writing.

         This Note will be construed and enforceable in accordance with, and be
governed by the internal laws of, the State of California, without regard to
principles of conflict of laws. Borrower agrees that the State and Federal
courts in Santa Clara County, California will have exclusive jurisdiction over
all matters arising out of this Note; provided that nothing contained in this
Agreement will prevent Lender from bringing any action, enforcing any award or
judgment or exercising any rights against Borrower, against any security or
against any property of Borrower within any other county, state or other foreign
or domestic jurisdiction, and (b) that service of process in any such proceeding
will be effective if mailed to Borrower at its address described in the Notices
section of the Agreement. BORROWER HEREBY WAIVES THE RIGHT TO TRIAL BY JURY OF
ANY MATTERS ARISING OUT OF THIS NOTE.

                            EXECUTION PAGE TO FOLLOW




        (EXECUTION PAGE TO PHILLIPS LAND LLC $3,200,000 PROMISSORY NOTE)

                                           BAM! ENTERTAINMENT, INC.

                                           By: _________________________________
                                           Print Name: _________________________
                                           Title: ______________________________

                                           PHILLIPS LAND LLC

                                           By: _________________________________
                                           Print Name: _________________________
                                           Title: ______________________________




                                    EXHIBIT C

                                REQUEST FOR LOAN

                                       iii


                                    EXHIBIT D

                               BORROWER'S ACCOUNT

Wire Instructions:

Bank:                      Comerica Bank
                           333 W. Santa Clara Street
                           San Jose, CA 95113

ABA#:                      121137522
Account Name:              BAM! Entertainment, Inc.
Account #:                 1891438333

                                       iv


                                    EXHIBIT E

                             BORROWER'S DISCLOSURES

SECTION 6.4

         A search of the records of the County Recorder for Santa Clara County
(through September 22, 2003) revealed a county tax lien recorded as document
number 15944727 on file for Bay Area Multimedia, Inc. The Tax Collector of the
County of Santa Clara filed a Release of Lien on September 23, 2003 certifying
the Release of Lien recorded against Bay Area Multimedia, Inc. as document
number 19544727.

SECTION 6.5

              BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC.

         On April 1, 2003, Amaze Entertainment, Inc. ("Amaze") asserted
counterclaims against the Borrower in an action entitled BAM! ENTERTAINMENT INC.
v. AMAZE ENTERTAINMENT, INC. et. al. originally filed in the Superior Court of
California, County of Santa Clara (Case No. CV814820) on February 18, 2003, and
removed to the United States District Court for the Northern District of
California (Case No. C03 01286 PVT) as a result of a motion filed by Amaze on or
about March 24, 2003.

         Borrower asserted claims for relief based on rescission, breach of
contract, declaratory relief, and money paid and received with regard to an
agreement for a video game titled "Crushed Baseball" that Amaze was developing
for Borrower.

         Amaze's counterclaims allege breach of contract and unjust enrichment
with regard to each of the "Crushed Baseball" development agreement and a
separate development agreement for another video game titled "Samurai Jack." The
counterclaims sought compensatory damages of approximately $3.5 million and
additional damages to be proven at trial.

         On July 11, 2003 Amaze and Borrower agreed to compromise and settle all
claims either asserted or that could be asserted in connection with the dispute
and to mutually release any and all future claims and contentions they have
against each other. This compromise requires Amaze to make Borrower two
payments, one in July 2003 and a second in October 2003. Upon payment by Amaze
to Borrower of the sum due in October 2003, the parties will execute a
stipulation for dismissal of the legal actions.

                                        v



             OVATION ENTERTAINMENT, LLC v. BAM! ENTERTAINMENT, INC.

         On March 27, 2003, a complaint captioned OVATION ENTERTAINMENT, LLC v.
BAM! ENTERTAINMENT, INC. et. al. was filed against Borrower in the Superior
Court of California, County of Los Angeles (Case No. SCO76530). The complaint
alleges claims of breach of contract and fraud in connection with an exclusive
first look agreement, which was assigned to Ovation Entertainment, LLC
("Ovation") by the licensor originally party to the agreement, for content
relating to motion pictures and television projects to be licensed to Borrower
for development in connection with video games. The lawsuit seeks compensatory
damages believed to be in excess of $1 million and interest thereon, exemplary
or punitive damages, and attorneys' fees. On August 4, 2003, Ovation and
Borrower agreed to settle the litigation by amending the terms of the agreement,
and the legal action was dismissed on August 25, 2003.

                                       vi

EX-10.2.(A)

                                                              Exhibit 10.2(a)


                                    EXHIBIT A

                                    INVENTORY

Wallace & Gromit in Project Zoo (on the PS2)

Wallace & Gromit in Project Zoo (on the Gamecube)

Wallace & Gromit in Project Zoo (on the Xbox)

Carmen Sandiego (on the PS2, Gamecube and Xbox)

Ed, Edd n Eddy (on the Advanced Game Boy)

PPG Him & Seek (on the Advanced Game Boy)

Samarai Jack (on the Advanced Game Boy)

My Disney Kitchen (on the PSX)

PPG (on the PS2)

Amendment Date: October 17, 2003

Phillips Land LLC (initials of auth. rep) GRP

BAM! Entertainment, Inc. (initials of auth. rep) SMA

                                        i

EX-31.1

Bam! Entertainment, Inc.

EX-31.2

Bam! Entertainment, Inc.

EX-32

Bam! Entertainment, Inc.