10-KT

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended                     

OR

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

For the transition period from September 1, 2002 to March 31, 2003

Commission File Number 0-16986

ACCLAIM ENTERTAINMENT, INC.

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

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

(516) 656-5000

(Registrant’s telephone number)

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

None

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

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

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

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

As of May 14, 2003, 96,620,858 shares of common stock of the registrant were issued and outstanding and the aggregate market value of voting common stock held by non-affiliates was $57,328,820.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K, with respect to the 2003 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual Report on Form 10-K. This report consists of 99 sequentially numbered pages. The Exhibit Index is located at sequentially numbered page 90.

ACCLAIM ENTERTAINMENT, INC.

2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		Page No.
PART I		1
Item 1.	Business	1
Item 2.	Properties	20
Item 3.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	23
PART II		24
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	24
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8.	Financial Statements and Supplementary Data	50
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	90
PART III		90
Item 10.	Directors and Executive Officers of the Registrant	90
Item 11.	Executive Compensation	90
Item 12.	Security Ownership of Certain Beneficial Owners and Management	90
Item 13.	Certain Relationships and Related Transactions	90
Item 14.	Controls and Procedures	90
PART IV		90
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	90
	Signatures	96

i

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

This Annual Report on Form 10-K, including Item 1 (“Business”) and Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”), contains forward-looking statements about circumstances that have not yet occurred. All statements, trend analysis and other information contained below relating to markets, our products and trends in revenue, as well as other statements including words such as “anticipate”, “believe” or “expect” and statements in the future tense are forward-looking statements. These forward-looking statements are subject to business and economic risks, and actual events or our actual future results could differ materially from those set forth in the forward-looking statements due to such risks and uncertainties. We will not necessarily update this information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to, those discussed under the heading “Factors Affecting Future Performance” on pages 11 to 20. Our website is located at www.acclaim.com. On our website, we make available, as soon as reasonably practicable after electronic filing with the Securities and Exchange Commission, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports. All of these reports are provided to the public free of charge.

PART I

Item 1.    Business

Overview

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

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

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

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

Substantially all of our revenue is derived from one industry segment, the development, publication, marketing and distribution of interactive entertainment software. For information regarding our foreign and domestic operations, see Note 22 (Segment Information) of the notes to the Consolidated Financial Statements in Item 8 of this Form 10-K.

1

Strategy

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

Create and Maintain Diversity in Product Mix, Platforms and Markets.    We are committed to maintaining a diversified mix of product offerings because a diversified product mix mitigates our operating risks, and broadens our demographic market appeal. See “Factors Affecting Future Performance: We Depend on a Relatively Small Number of Franchises for a Significant Portion of Our Revenue and Profits.” Therefore, we strive to develop and publish products spanning a wide range of product categories, including action, action adventure, extreme sports, sports and racing. Products are designed for target audiences ranging from game enthusiasts and children to mass-market consumers and “value priced” buyers. Presently, we concentrate on developing, publishing and distributing products that operate on Sony’s PlayStation^® 2, Microsoft’s Xbox^™, and Nintendo’s GameCube^™ console systems and Nintendo’s Game Boy^™ Advance hand held device and personal computers. We may offer our products for use on multiple platforms, where economically justified, in order to leverage our costs of development over a larger installed hardware base, therefore increasing potential unit sales. Accordingly, there are a number of factors that we take into consideration in determining the appropriate platform for each of the products we develop, including, amongst other things, the platform user demographics, the potential growth of the installed base of each platform and the competitive landscape at the time of a product’s release. We also consider that on-line functionality in the console products will be increased in accordance with market acceptance and potential return on investment.

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

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

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

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

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

• They have more control over product quality, scheduling and costs; and

• They are not subject to the competing needs of other publishers.

2

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

Software Development

We have invested in the creation of modern software programming tools utilized in our product development process. Utilizing these programming tools provides us with greater flexibility to create game engines for each of the next-generation hardware systems. These tools provide a competitive advantage in the creation of next-generation software, since not all entertainment software publishers maintain their own internal development studios.

Our investment in software programming tools for the earlier hardware platforms has been strategically important in positioning us for the current generation of 128-bit hardware. These investments continue to provide value to Acclaim.

During the seven months ended March 31, 2003, approximately 39% of our gross revenue was derived from software developed at our internal studios. The balance of our gross revenue for the seven months ended March 31, 2003 was derived from software development which was contracted through third-party developers. In fiscal 2004, we anticipate that the majority of our revenue will be derived from software developed in our own studios, through the release of our major franchise titles such as Alias, All Star Baseball, Gladiator: Sword of Vengeance, and NBA Jam.

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

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

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

Products

We utilize a brand structure and market our products under four distinct key brands: Acclaim, AKA Acclaim, Acclaim Sports, and Club Acclaim. We support this strategy through the regularly scheduled introduction of new titles featuring these brands. In the seven months ended March 31, 2003, we released a total of twenty-eight titles for PlayStation 2, Xbox, GameCube, Game Boy Advance and personal computers. In fiscal 2004, we currently

3

plan on releasing a total of approximately twenty-eight titles for PlayStation 2, Xbox, Gamecube, Game Boy Advance and personal computers. In the first quarter of fiscal 2004, we have released, to date, one title for PlayStation 2, two titles for Xbox, and two titles for Gamecube. See “Factors Affecting Future Performance: Our Future Success Depends on our Ability to Release “Popular Products”.

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

Our software titles come from a variety of sources, including our own intellectual property assets, such as, Vexx (released domestically in fiscal 2003), Speed Kings, Summer Heat Beach Volleyball, XGRA and Gladiator: Sword of Vengeance (scheduled for release in fiscal 2004) and a variety of exclusive and non-exclusive licenses, including:

• professional sports—Major League Baseball, Major League Baseball Players Association and The National Basketball Association;

• television and film—Alias;

• sports personalities Derek Jeter and Hulk Hogan;

• extreme sports personalities—Dave Mirra;

• racing—Paris Dakar, Burnout, Speed Kings and XGRA;

• arcade—Crazy Taxi; and

• comic books—Turok and Shadow Man.

Some of the agreements granting us the rights to use these brands are restricted to individual properties, while some of the agreements cover a series of properties or grant rights to create software based on or featuring particular brands over a period of time. See “Factors Affecting Future Performance: Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales” and Note 2 (License Agreements) to the Notes to the Consolidated Financial Statements at Item 8 in this Form 10-K.

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

	Seven Months Ended March 31, 2003	Fiscal Years Ended August 31,
		2002	2001	2000
Sony PlayStation 2	9	11	9	—
Sony PlayStation	—	—	12	9
Nintendo Gamecube	8	13	—	—
Microsoft Xbox	6	6	—	—
Nintendo Game Boy	4	11	6	9
Sega Dreamcast	—	—	5	16
Nintendo 64	—	—	—	10
Personal Computers	1	1	3	4
Total	28	42	35	48

Market

We do, and will continue to, develop and publish products for multiple hardware platforms, as this diversification is a key element of our business strategy. In the past, no hardware platform or video game system

4

has achieved substantial long-term dominance in the interactive entertainment market, however, Sony Playstation 2 maintains the largest installed base of console systems. New entrants into the interactive entertainment and multimedia industries, such as cable television, telephone companies, and diversified media and entertainment companies, in addition to a proliferation of new technologies, such as online networks and the Internet, have increased the competition in our markets. See “Factors Affecting Future Performance: Industry Trends, Platforms Transitions and Technological Change May Adversely Affect Our Revenue and Profitability” and “Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition with the Hardware Manufacturers Affects Our Revenue and Profitability.”

Sony released the PlayStation 2 platform in Japan in March 2000, in North America in October 2000 and in Europe in November 2000. The PlayStation 2 platform is a 128-bit, Digital Versatile Disk (“DVD”) based system that is Internet and cable ready, as well as backward compatible with the current PlayStation platform software. Nintendo launched the Nintendo GameCube platform in Japan in September 2001, North America in November 2001 and in Europe in May 2002. Nintendo GameCube provides for games which are delivered and played using a proprietary optical format. Microsoft launched the Xbox platform in North America in November 2001, in Japan in February 2002 and in Europe in March 2002. The Microsoft Xbox is a 128-bit DVD based system.

Platform License Agreements

We and various Sony computer entertainment companies (collectively, “Sony”) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the “Sony” name and its proprietary information and technology in order to develop and distribute software for PlayStation and PlayStation 2 in various territories throughout the world, including North America, Australia, Europe and Asia. We pay to Sony a royalty fee, plus the manufacturing cost, for each unit Sony manufactures for us. This payment is made upon the manufacture of the units. In March 2003, our agreements with Sony for the Playstation platforms renewed automatically and expire in March 2004. We do not expect any difficulties in renewing these licenses in the future. See “Factors Affecting Future Performance: If We are Unable to Obtain or Renew Licenses from Hardware Developers, We Will Not be Able to Release Software for Popular Systems.”

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

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

5

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

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

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

Marketing and Advertising

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

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

• television, radio, print, outdoor and Internet advertising;

• our website (www.acclaim.com) and the Internet sites of others;

• product sampling through demonstration software;

• consumer contests and promotions;

• in-store promotions, displays and retailer assisted co-operative advertising;

• publicity activities; and

• trade shows.

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

Online, Broadband and Wireless Technologies

We think that there will be opportunities for further exploitation of our intellectual properties through the Internet, online services, hand held and other wireless devices and dedicated Internet online game services, as the hardware platform technology evolves and becomes more accepted. We are actively exploring the establishment of online game playing opportunities for the Internet and wireless services as (1) a method for realizing

6

additional revenue from our products and (2) an additional platform for our products. We also plan to develop online components which will support online play for certain of our existing franchises, as well as for new software titles currently being developed for the next generation platforms. As an example, we intend to release an online version of All-Star Baseball 2005 for one or more of the game platforms. As wireless and online technologies evolve, we think that a number of our intellectual properties may have the potential to be exploited through these mediums.

Manufacturing

We prepare a set of master program copies, documentation and packaging materials for our products for each respective hardware platform upon which the product is released. Except with respect to products for use on the Sony and Nintendo systems, our disc duplication, packaging, printing, manufacturing, warehousing, assembly and shipping are performed by third party subcontractors. In order to maintain protection over their hardware technologies, Sony and Nintendo generally specify or control the manufacturing of the finished products. We deliver the master materials to the licensor or its approved replicator, which then manufactures the finished goods and delivers them to us and/or our warehouse facility for distribution to our customers. At the time our product unit orders are filled by the manufacturer, we become responsible for the costs of manufacturing and the applicable per unit royalty on such units, even if the units do not ultimately sell. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products or material returns due to product defects.

Production, Sales and Distribution

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

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

We distribute our software by tailoring our distribution methods to each geographic market. In North America, our software is sold directly by our sales force, complemented by regional sales representative organizations which receive commissions based on the net sales of each product sold. We maintain an in-house sales management team to supervise the regional sales representatives. These sales representatives also act as sales representatives for some of our competitors. One of the sales representative organizations marketing our software is owned by James Scoroposki, an officer, director and principal stockholder of Acclaim. Please see Note 21B (Related Party Transactions) of the notes to Consolidated Financial Statements in Item 8 in this Annual Report on Form 10-K.

We market our software domestically, primarily to mass merchants, large retail toy store chains, department stores and specialty stores. Our key domestic retail customers include Wal-Mart, Toys R Us, Best Buy and Circuit City. Our sales to Wal-Mart accounted for approximately 6%, 10%, 12% and 15% of our gross revenue for the seven months ended March 31, 2003, fiscal 2002, 2001 and 2000, respectively. Sales to Toys R Us accounted for approximately 8%, 9%, 11% and 10% of our gross revenue for the seven months ended March 31, 2003, fiscal 2002, 2001 and 2000, respectively. Our customers do not have any commitments to purchase our software.

7

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

We are not contractually obligated to accept returns except for defective products, however, we grant price concessions to our customers who primarily are major retailers that control market access to the consumer, when those concessions are necessary to maintain our relationships with the retailers and access to their retail channel customers. If the consumers’ demand for a specific title falls below expectations or significantly declines below previous rates of sell-through, then, we may negotiate a price concession or credit to spur further sales by retailers to maintain the relationship. As the market for each generation of game consoles matures and as more titles become available, the risk of product price concessions and returns increases. We establish sales allowances at the time we record revenue for expected product price concessions and returns based primarily on (1) market acceptance of our products, (2) level of retail inventories, (3) seasonal factors, and (4) historical price concession and return rates. Management continually monitors and adjusts these allowances to take into account actual developments and sales results in the marketplace. There can be no assurance that actual price concessions will not exceed our established allowances and reserves. See “Factors Affecting Future Performance: If Price Concessions and Returns Exceed Allowances, We May Incur Losses” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Revenue” at Item 7 in this Form 10-K.

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

Intellectual Property Licenses

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

Our licenses relating to South Park and World Wrestling Entertainment (“WWE”) game software were either not renewed or were terminated in fiscal 2001 based on our product release strategy, financial resources and the economic viability of the products. As a result of Extreme Championship Wrestling’s (“ECW’s”) bankruptcy in fiscal 2000, we can no longer use the ECW license. Sales of titles using ECW properties aggregated 10%, using WWE properties aggregated 11% and using South Park properties aggregated 20% of our gross revenue for fiscal 2000.

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

Patent, Trademark, Copyright and Product Protection

Each hardware manufacturer incorporates a security device in the software and in each of their respective hardware platforms. This is done in an effort to prevent unlicensed manufacture of software and infringement of the hardware manufacturers proprietary rights. Under our various license agreements with Sony, Microsoft and

8

Nintendo, we are obligated to obtain all available trademark, copyright and patent protection for the original work we develop and embody in, or use in conjunction with, the software we create. We are also required to display on game packaging materials the proper notice of such protection, as well as notice of the licensor’s intellectual property rights.

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

We have registered the “Acclaim” logo and name in the United States and in numerous foreign territories and we own the copyrights for many of our game programs. “Nintendo,” “Game Boy,” “Game Boy Color,” “GameCube,” “Game Boy Advance,” and “N64” are trademarks of Nintendo; “Sony,” “Sony Computer Entertainment,” “PlayStation,” and “PlayStation 2” are trademarks of Sony; “Microsoft” and “Xbox” are trademarks of Microsoft and “Sega,” “Saturn” and “Dreamcast” are trademarks of Sega. We do not own the trademarks, copyrights or patents covering the proprietary information and technology utilized in the game systems marketed by Sony, Microsoft or Nintendo. Additionally, in certain instances, we do not own the trademarks, copyrights or patents for properties licensed from third parties, or the brands, concepts or game programs featured in and comprising the software. Accordingly, we must rely on the trademarks, copyrights and patents of these third-party licensors for protection from infringement of such intellectual property. Under our license agreements with certain independent software developers, we may bear the risk of claims of infringement brought by third parties and arising from the sale of our software.

Competition

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

We compete with Sony, Microsoft and Nintendo, which each publish software for their respective hardware platforms. We also compete with numerous companies which are, like us, licensed by the platform manufacturers to develop software products for use on their systems. These competitors include Activision, Capcom, Eidos, Electronic Arts, Atari, Konami, Lucas Arts, Midway, Namco, Sega, Take-Two Interactive, THQ, 3DO and Ubi Soft, among others. Although Sega no longer manufactures videogame platforms, it continues to be a major videogame software publisher. We also face additional competition from the entry of new companies, including large diversified entertainment companies such as Disney Interactive and Fox Interactive, into our market.

Data derived from the Toy Retail Sales Tracking Service (“TRSTS”) indicates that, for calendar 2002, our market share of software sold for PlayStation 2 was 3.1%, for Xbox was 2.6%, for GameCube was 4.4% and for Game Boy Advance was 1.6%. For calendar 2001, our market share of software sold for PlayStation 2 was 4.1%, for Xbox was 0.9%, for GameCube was 5.9% and for Game Boy Advance was 0.4%. The market for software for PCs is fragmented and we have a small share of that market.

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

• availability of significant financial resources;

• the quality of titles;

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

9

• publisher’s access to retail shelf space;

• the success of the game console for which the title is written;

• the price of each title;

• the number of titles then available for the system for which each title is published; and

• the marketing campaign supporting a title at launch and through its life.

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

Comic Book and Other Publishing

Our subsidiary, Acclaim Comics, publishes strategy guides relating to our software products and “special issue” comic books. We have not derived significant revenue and profit from the sale of Acclaim Comics’ products. Although we intend to continue releasing software for multiple platforms based on characters licensed or created by Acclaim Comics, as well as strategy guides relating to our software and, at times, “special issue” comic books, as a result of our exiting the comic book publishing business in fiscal 2000, future revenue derived by Acclaim Comics will primarily depend on: (1) the licensing and merchandising of certain characters, such as, Shadow Man and Turok, in interactive entertainment and other media, such as motion pictures or television, (2) the use of those characters in our software, and (3) the publication and sale of software strategy guides and “special issue” comic books.

Seasonality

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

Employees

As of March 31, 2003, we had 512 employees. We believe that our relationship with our employees is good. None of our employees are subject to a collective bargaining agreement, and we have not experienced any labor-related work stoppages.

Financial Information about Foreign and Domestic Operations and Export Sales

See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 22 (Segment Information) of the notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Executive Officers

The following table sets forth information regarding our executive officers, who are chosen by and serve at the pleasure of our Board of Directors:

Name	Position and Principal Occupation	Age
Gregory E. Fischbach	Co-Chairman of the Board and Chief Executive Officer	61
James Scoroposki	Co-Chairman of the Board, Senior Executive Vice President, Secretary and Treasurer	55
Rodney Cousens	Global President and Chief Operating Officer	52
Gerard F. Agoglia	Executive Vice President and Chief Financial Officer	52

10

Gregory E. Fischbach, a founder of our Company, has been our Chief Executive Officer since its formation, a member of our Board of Directors since 1987 and Co-Chairman of our Board of Directors since March 1989. Mr. Fischbach was also our President from its formation to January 1990 and again from October 1996 to December 2001.

James Scoroposki, a founder of our Company, has been our Senior Executive Vice President since December 1993, a member of our Board of Directors since 1987, Co-Chairman of our Board of Directors since March 1989 and our Secretary and Treasurer since our formation. Mr. Scoroposki was also Chief Financial Officer from April 1988 to May 1990, Executive Vice President from formation to November 1993 and acting Chief Financial Officer from November 1997 to August 1999. Since December 1979, he has also been the President and sole shareholder of Jaymar Marketing Inc., a sales representative organization. Please see Note 21B (Related Party Transactions) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

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

Gerard F. Agoglia became an executive officer in August 2000, when he joined us as Executive Vice President and Chief Financial Officer. Mr. Agoglia was Senior Vice President, Chief Financial Officer of Lantis Eyewear Corporation from October, 1998 to September 2000 and prior to that, Mr. Agoglia served as Corporate Controller of Calvin Klein, Inc. from June, 1997 to September, 1998. Mr. Agoglia has over 20 years of corporate financial management experience in the apparel and accessories industries. Mr. Agoglia is a Certified Public Accountant and has a Masters of Business Administration degree.

FACTORS AFFECTING FUTURE PERFORMANCE

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

Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary Lender and Vendors, and Our Ability to Achieve Our Projected Revenue Levels and Reduced Operating Expenses

Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with GMAC Commercial Credit LLC, our primary lender. To enhance our short-term liquidity, during the seven months ended March 31, 2003, we implemented targeted expense reductions through a business restructuring. In connection with the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff related expenses and lowered our overall marketing expenditures. Additionally, on March 31, 2003, our primary lender advanced to us a supplemental discretionary loan of up to $11,000,000 through May 31, 2003, which thereafter is reduced to $5,000,000 through September 29, 2003. In May 2003, two of our executive officers, referred to as the Affiliates, each committed to our Board of Directors to prepay $2,000,000 of their outstanding loans due to us. Based on our cash resources, including the $11,000,000 supplemental discretionary loan provided by our primary lender and assuming our primary lender consents, based upon our existing collateral, to provide us supplemental financing during the second half of fiscal 2004, although we can provide no assurance to our stockholders that we will be able to receive such consent, and the $4,000,000 cash commitment from the Affiliates, and assuming we

11

achieve our sales forecast by successfully meeting our product release schedule as provided in our business operating plan, and giving effect to the continued realization of savings from our implemented expense reductions, and provided we continue to enjoy the support of our primary lender and vendors, we expect to have sufficient cash resources to meet our projected cash and operating requirements through the next twelve months. The Company continues to pursue financing and investing arrangements with outside investors. In order to meet our debt service obligations, at various times we may depend on obtaining dividends, advances and transfers of funds from our subsidiaries. State and foreign laws regulate the payment of dividends by these subsidiaries, which is also subject to the terms of our North American credit agreement. A significant portion of our assets, operations, trade payables and indebtedness is located among our foreign subsidiaries. The creditors of the subsidiaries would generally recover from these assets on the obligations owed to them by the subsidiaries before any recovery by our creditors and before any assets are distributed to our stockholders.

Our long-term liquidity will significantly depend on our ability to (1) timely develop and market new software products that achieve widespread market acceptance for use with the current hardware platforms dominating the market and (2) realize long-term benefits from our implemented expense reductions, as well as (3) continue to enjoy the support of our primary lender and vendors. If we do not substantially achieve the overall projected revenue levels nor realize any additional benefits from the expense reductions we have implemented, as reflected in our business operating plan, nor are able to obtain supplemental discretionary financing from our primary lender to fund operations, we will either need to make further significant expense reductions, including, without limitation, the sale of certain assets or the consolidation or closing of certain operations, staff reductions, and/or the delay, cancellation or reduction of certain product development and marketing programs. Additionally, some of these measures may require third party consents or approvals from our primary lender and there can be no assurance that such consents or approvals can be obtained. See “If Cash Flows from Operations Are Not Sufficient To Meet Our Operational Needs, We May Be Forced To Sell Assets, Refinance Debt, or Further Downsize Our Operations”.

In the event that we do not achieve the product release schedule, sales assumptions or continue to derive expense savings from our implemented expense reductions, or our primary lender does not consent, based upon our existing collateral, to provide us supplemental financing during the second half of fiscal 2004, we cannot assure investors that our future operating cash flows will be sufficient to meet our operating requirements, our debt service requirements or repay our indebtedness at maturity, including without limitation, repayment of the supplemental discretionary loan. In any such event, our operations and liquidity will be materially and adversely affected and we could be forced to cease operations.

Failing to substantially achieve our projected revenue levels for fiscal 2004 will also result in a default under our credit agreement with our primary lender. If a default were to occur under our credit agreement and it is not timely cured by us or waived by our lender, or if this were to happen and our debt could not be refinanced or restructured, our lender could pursue its remedies, including: (1) penalty rates of interest; (2) demand for immediate repayment of the debt; and/or (3) the foreclosure on any of our assets securing the debt. If this were to happen and we were liquidated or reorganized, after payment to our creditors, there would likely be insufficient assets remaining for any distribution to our stockholders.

As of December 1, 2002 and March 31, 2003, we received waivers from GMAC with respect to those financial covenants contained in the credit agreement for which we were not in compliance. If waivers from GMAC are necessary in the future, we cannot be assured that we will be able to obtain waivers of any future covenant violations, as we have in the past. During the seven months ended March 31, 2003, we implemented significant expense reductions. We cannot however assure our stockholders and investors that we will achieve the overall projected sales levels based on our planned product release schedule, achieve profitability or achieve the cash flows necessary to avoid further expense reductions in fiscal 2004. See “Factors Affecting Future Performance: If Cash Flows from Operations Are Not Sufficient to Meet Our Operational Needs, We May Be Forced To Sell Assets, Refinance Debt, or Further Downsize Our Operations”, and “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability.”

12

Going Concern Consideration

For the seven months ended March 31, 2003 we had a net loss of $67.8 million and used $20.7 million of cash in operating activities. As of March 31, 2003 we had a stockholders’ deficit of $46.2 million, a working capital deficit of $63.5 million and $4.5 million of cash and cash equivalents. While the accompanying financial statements have been prepared under the assumption that Acclaim will continue as a going concern, our independent auditors’ report, prepared by KPMG LLP, includes an explanatory paragraph relating to substantial doubt as to the ability of Acclaim to continue as a going concern, due to working capital and stockholders’ deficits as of March 31, 2003 and the recurring use of cash in operating activities. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

During the seven months ended March 31, 2003, we implemented certain expense reduction initiatives that have begun to reduce our operating expenses during the seven months ended March 31, 2003 and which reductions we plan to continue in fiscal 2004. Our operating plan for fiscal 2004 focuses on (1) maintaining our lowered fixed and variable expenses worldwide, (2) continuing to limit and eliminate non-essential marketing expenses and (3) maintaining our reduced employee related expenses. Although we believe the actions we are taking should return our operations to profitability, we cannot assure our stockholders and investors that we will achieve the sales necessary to achieve sufficient liquidity and avoid further expense reduction actions such as selling assets or consolidating operations, further reducing staff, refinancing debt and/or otherwise further restructuring our operations. See “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability” below and “Managements Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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

If we violate the financial or other covenants contained in our credit agreement with GMAC, we will be in default under the credit agreement. If a default occurs under the credit agreement and is not timely cured by us or waived by GMAC, GMAC could seek remedies against us, including: (1) penalty rates of interest; (2) immediate repayment of the debt; and/or (3) the foreclosure on any assets securing the debt. Pursuant to the terms of the credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other covenants. As of December 1, 2002 and March 31, 2003, we received waivers from GMAC with respect to those financial covenants contained in the credit agreement for which we were not in compliance. If waivers from GMAC are necessary in the future, we cannot be assured that we will be able to obtain waivers of any future covenant violations, as we have in the past. If Acclaim is liquidated or reorganized, after payment to the creditors, there are likely to be insufficient assets remaining for any distribution to our stockholders.

Revenue and Liquidity are Dependent on Timely Introduction of New Titles

The timely shipment of a new title depends on various factors, including the development process, debugging, approval by hardware licensors and approval by third-party licensors. It is likely that some of our titles will not be released in accordance with our operating plans. Because net revenue associated with the initial shipments of a new product generally constitute a high percentage of the total net revenue associated with the life of a product, a significant delay in the introduction of one or more new titles would negatively affect or limit sales (as was the case in the first and third quarters of fiscal 2002) and would have a negative impact on our financial condition, liquidity and results of operations. We cannot assure stockholders that our new titles will be released in a timely fashion in accordance with our business plan.

The average life cycle of a new title generally ranges from three months to upwards of twelve to eighteen months, with the majority of sales occurring in the first thirty to one hundred twenty days after release. Factors

13

such as competition for access to retail shelf space, consumer preferences and seasonality could result in the shortening of the life cycle for older titles and increase the importance of our ability to release new titles on a timely basis. Therefore, we are constantly required to introduce new titles in order to generate revenue and/or to replace declining revenue from older titles. In the past, we experienced delays in the introduction of new titles, which have had a negative impact on our results of operations. The complexity of next-generation systems has resulted in higher development expenditures, longer development cycles and the need to carefully monitor and plan the product development process. If we do not introduce titles in accordance with our operating plans for a period, our results of operations, liquidity and profitability in that period could be negatively affected.

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

A significant portion of our revenue is derived from products based on a relatively small number of popular franchises each year. In addition, many of these products have substantial production or acquisition costs and marketing budgets. During the seven months ended March 31, 2003, 55% of our gross revenue was derived from five franchises. In fiscal 2002, five franchises accounted for 61% of our gross revenue. In fiscal 2001, four franchises accounted for 53% of our gross revenue. In fiscal 2000, four franchises accounted for 51% of our gross revenue. We expect that a limited number of popular brands will continue to produce a disproportionately large amount of our revenue. Due to this dependence on a limited number of brands, the failure of one or more products based on these brands to achieve anticipated results may significantly harm our business and financial results. For example, during the fourth quarter of fiscal 2002, our failure to achieve our projected revenue from two titles, Turok: Evolution and Aggressive Inline, due to lower than anticipated consumer acceptance of the products, resulted in a net loss for the fourth quarter and fiscal year 2002 and continued to contribute to losses during the seven months ended March 31, 2003.

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

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

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

14

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

Our Future Success Depends On Our Ability To Release Popular Products

The life of any one software product is relatively short, in many cases less than one year. It is therefore important for us to be able to continue to develop new products that are favorably received by consumers. If we are unable to do this, our business and financial results may be negatively affected. We focus our development and publishing activities principally on products that are, or have the potential to become, franchise brand properties. Many of these products are based on intellectual property and other character or story rights acquired or licensed from third parties. These license and distribution agreements are limited in scope and time, and we may not be able to renew key licenses when they expire or to include new products in existing licenses. The loss of a significant number of our intellectual property licenses or of our relationships with licensors would have a material adverse effect on our ability to develop new products and therefore on our business and financial results.

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

Our cash outlays for product development for the seven months ended March 31, 2003 (a portion of which were expensed and the remainder of which were capitalized), were higher than the same period last year and our product development cash outlays may increase in the future as a result of releasing more games across multiple platforms, delayed attainment of technological feasibility and the complexity of developing games for the 128-bit game consoles, among other reasons. We anticipate that our profitability will continue to be impacted by the levels of research and development expenditures relative to revenue, and by fluctuations relating to the timing of development in anticipation of future platforms.

During the seven months ended March 31, 2003, we focused our development efforts and costs on the development of tools and engines necessary for PlayStation 2, Xbox and GameCube. Our fiscal 2003 release schedule was developed around PlayStation 2, GameCube, Xbox and Game Boy Advance. The release schedule for fiscal 2004 continues to support these same platforms.

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

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

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

15

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

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

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

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

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

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

Our titles often embody trademarks, trade names, logos, or copyrights licensed by third parties, such as the National Basketball Association, Major League Baseball and their respective players’ associations, and/or individual athletes or celebrities. The loss of one or more of these licenses would prevent us from releasing a title and limit our economic success. We cannot assure stockholders that our licenses will be extended on reasonable terms or at all, or that we will be successful in acquiring or renewing licenses to property rights with significant commercial value.

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

We Depend On Skilled Personnel

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

16

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

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

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

• availability of significant financial resources;

• the quality of titles;

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

• publisher’s access to retail shelf space;

• the success of the game console for which the title is written;

• the price of each title;

• the number of titles then available for the system for which each title is published; and

We compete primarily with other publishers of personal computer and video game console interactive entertainment software. Significant third party software competitors currently include, among others: Activision; Capcom; Eidos; Electronic Arts; Atari; Interplay Entertainment; Konami; Namco; Midway Games; Sega; Take-Two; THQ; 3DO and Vivendi Universal Publishing. In addition, integrated video game console hardware and software companies such as Sony, Nintendo and Microsoft compete directly with us in the development of software titles for their respective systems. The hardware developers have a price, marketing and distribution advantage with respect to software marketed by them.

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

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

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

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

The timing of the release of new titles can cause material quarterly revenue and earnings fluctuations. A significant portion of revenue in any quarter is often derived from sales of new titles introduced in that quarter or

17

shipped in the immediately preceding quarter. If we are unable to begin volume shipments of a significant new title during the scheduled quarter, as has been the case in the past (including the third and fourth quarters of fiscal 2001, the first and third quarters of fiscal 2002 and the first fiscal quarter of 2003), our revenue and earnings will be negatively affected in that period. In addition, because a majority of the unit sales for a title typically occur in the first thirty to one hundred twenty days following its introduction, revenue and earnings may increase significantly in a period in which a major title is introduced and may decline in the following period or in a period in which there are no major title introductions.

In the fourth quarter of fiscal 2002, due to domestic retail sales for Turok: Evolution and Aggressive Inline significantly falling below our projections and anticipated rates of product sell-through, our revenue and earnings for that period were substantially below expectations.

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

Our Software May Be Subject To Governmental Restrictions Or Rating Systems

Legislation is periodically introduced at the local, state and federal levels in the United States and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. In addition, many foreign countries have laws that permit governmental entities to censor the content and advertising of interactive entertainment software. We believe that mandatory government-run rating systems eventually may be adopted in many countries that are significant markets or potential markets for our products. We may be required to modify our products or alter our marketing strategies to comply with new regulations, which could delay the release of our products in those countries. In the first quarter of fiscal 2003, we released BMX XXX, a software title which is based on BMX bicycle riding, but which contained adult content, partial nudity and adult humor.

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

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

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

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

In the fourth quarter of fiscal 2000, our securities were delisted from quotation on the Nasdaq National Market. Our common stock is currently trading on the Nasdaq SmallCap Market. No assurance can be given as to our ongoing ability to meet the Nasdaq SmallCap Market maintenance requirements. As of the date of this filing, we currently do not meet the minimum bid nor market capitalization requirements for continued listing on the Nasdaq SmallCap Market.

18

On January 24, 2003 we received a letter from The Nasdaq Stock Market, Inc. stating that, because our common stock had not closed at or above the minimum $1.00 per share bid price requirement for 30 consecutive trading days, we had not met the minimum bid price requirements for continued listing as set forth in Marketplace Rule 4310(c)(4), and we have until July 23, 2003 in which to regain compliance. If at any time prior to July 23, 2003 the closing bid price of our common stock is $1.00 or more for a minimum of 10 consecutive trading days, then we will again be in compliance with such rule. The letter also states that if compliance cannot be demonstrated by July 23, 2003, Nasdaq will determine whether we meet the initial listing standards for The Nasdaq SmallCap Market, and if we do meet that criteria we will be granted an additional 180 day grace period in which to demonstrate compliance. If, after July 23, 2003 compliance cannot be demonstrated and we do not meet the initial listing standards then our securities would be subject to delisting. At that time, we may appeal such determination; however, there can be no assurances that such an appeal would be successful.

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

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

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

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

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

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

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

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

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

19

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

Shares Eligible for Future Sale

As of May 14, 2003, we had 96,620,858 shares of common stock issued and outstanding, of which 13,074,111 are “restricted” securities within the meaning of Rule 144 under the Securities Act. Generally, under Rule 144, a person who has held restricted shares for one year may sell such shares, subject to certain volume limitations and other restrictions, without registration under the Securities Act.

As of May 14, 2003, 57,277,105 shares of common stock are covered by effective registration statements under the Securities Act for resale on a delayed or continuous basis by certain of our security holders.

As of May 14, 2003, a total of 4,351,111 shares of common stock are issuable upon the exercise of warrants to purchase our common stock (not including warrants issued in settlement of litigation).

We have also registered on Form S-8 a total of 24,236,000 shares of common stock (issuable upon the exercise of options) under our 1988 Stock Option Plan and our 1998 Stock Incentive Plan, and a total of 2,448,425 shares of common stock under our 1995 Restricted Stock Plan. As of March 31, 2003, options to purchase a total of 14,977,984 shares of common stock were outstanding under the 1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which 8,384,884 were exercisable.

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

Item 2.    Properties.

Our corporate headquarters is located in a 70,000 square foot office building in Glen Cove, New York, which we purchased in fiscal 1994. We also own a 22,000 square foot office facility and lease a 5,000 square foot facility in the U.K. where our international operations are headquartered. As of March 31, 2003, the owned U.K. facility was held for sale. Currently, we have a mortgage outstanding relating to the U.K. facility. Please see Note 8 (Building Held for Sale), Note 14 (Debt) and Note 15 (Obligations under Capital and Operating Leases) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

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

Item 3.    Legal Proceedings.

As of May 8, 2003, thirteen class action complaints, containing similar allegations, have been filed against us and certain of our officers and/or directors. Each complaint asserts violations of federal securities laws. The actions are entitled as follows: Purvis, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1270); DMS, et al. v. Acclaim Entertainment, Inc., Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division (Civil Action No. CV 03-1322); Nach, et al. v. Acclaim Entertainment, Inc., Rodney Cousens and

20

Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1363); Baron, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1541); Traube, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1487); Hildal, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1640); Hicks, et al. v. Acclaim Entertainment, Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division (Civil Action No. CV 03-1698); Russo, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division (Civil Action No. CV 03-1700); Vicino, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1672); Sypes, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1685); Berman, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1924); Burk, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division (Civil Action No. CV 03-2030); Brake, et al. v. Acclaim Entertainment, Inc., Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-2175).

In Purvis, Baron, Traube, Hildal, Russo, Vicino, Sypes, Berman, and Burk, plaintiffs allege that during the purported class period between January 11, 2002 and September 19, 2002 we reported positive earnings statements and gave favorable earnings guidance, but failed to disclose material adverse facts regarding our business, operations and management, thereby causing plaintiffs and other members of the class to purchase our securities at artificially inflated prices. Plaintiffs claim violations under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. In DMS, Nach, Hicks, and Brake, plaintiffs assert that during the class period between January 22, 2002 and September 19, 2002 we committed certain alleged accounting improprieties, thereby causing plaintiffs and other members of the class to purchase our securities at artificially inflated prices. Plaintiffs claim violations under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5. All the complaints seek unspecified damages. The complaints in the Purvis, DMS, Baron, Russo, Vicino, Sypes and Berman actions have been served. In those actions, the parties have agreed to extend defendants’ time to respond to the complaints until after a consolidated amended complaint is served. We intend to defend these actions.

We and other companies in the entertainment industry were sued in an action entitled James, et al. v. Meow Media, et al. filed in April 1999 in the U.S. District Court for the Western District of Kentucky, Paducah Division, Civil Action No. 5:99 CV96-J. The plaintiffs alleged that the defendants negligently caused injury to the plaintiffs as a result of, in the case of Acclaim, its distribution of unidentified “violent” video games, which induced a minor to harm his high school classmates, thereby causing damages to plaintiffs, the parents of the deceased individuals. The plaintiffs seek damages in the amount of approximately $110.0 million. The U.S. District Court for the Western District of Kentucky dismissed this action and the dismissal was then appealed by the plaintiffs to the U.S. Court of Appeals for the Sixth Circuit. The U.S. Court of Appeals for the Sixth Circuit denied plaintiffs appeal. The plaintiff filed a petition for a Writ of Certiorari with the United States Supreme Court to challenge the Sixth Circuits decision. The United States Supreme Court denied the petition on January 21, 2003. No further appeals are available to the plaintiffs.

We and other companies in the entertainment industry were sued in an action entitled Sanders et al. v. Meow Media, et al., filed in April 2001 in the U.S. District Court for the District of Colorado, Civil Action No. 01-0728.

21

The complaint purports to be a class action brought on behalf of all persons killed or injured by the shootings which occurred at Columbine High School on April 20, 1999. We are a named defendant in the action along with more than ten other publishers of computer and video games. The complaint alleges that the video game defendants negligently caused injury to the plaintiffs as a result of their distribution of unidentified “violent” video games, which induced two minors to kill a teacher related to the plaintiff and to kill or harm their high school classmates, thereby causing damages to plaintiffs. The complaint seeks: compensatory damages in an amount not less than $15,000 for each plaintiff in the class, but up to $20.0 million for some of the members of the class; punitive damages in the amount of $5.0 billion; statutory damages against certain other defendants in the action; and equitable relief to address the marketing and distribution of “violent” video games to children. This case was dismissed on March 4, 2002. Following dismissal, the plaintiffs moved for relief and the U.S. District Court for the District of Colorado denied the relief sought by plaintiff. On April 5, 2002, plaintiffs noted an appeal to the United States Court of Appeals for the Tenth Circuit. On October 3, 2002, the Tenth Circuit took jurisdiction over plaintiffs’ appeal. The plaintiffs subsequently filed a stipulation of dismissal of their appeal with prejudice, and the Tenth Circuit formally dismissed the appeal on December 10, 2002. No further appeals are available to the plaintiffs.

We received a demand for indemnification from the defendant Lazer-Tron Corporation in a matter entitled J. Richard Oltmann v. Steve Simon, No. 98 C1759 and Steve Simon v. J. Richard Oltmann, J Richard Oltmann Enterprises, Inc., d/b/a Haunted Trails Amusement Parks, and RLT Acquisitions, Inc., d/b/a Lazer-Tron, No. A 98CA 426, consolidated as U.S. District Court Northern District of Illinois Case No. 99 C 1055. The Lazer-Tron action involves the assertion by plaintiff Simon that defendants Oltmann, Haunted Trails and Lazer-Tron misappropriated plaintiff’s trade secrets. Plaintiff alleges claims for Lanham Act violations, unfair competition, misappropriation of trade secrets, conspiracy, and fraud against all defendants, and seeks damages in unspecified amounts, including treble damages for Lanham Act claims, and an accounting. Pursuant to an asset purchase agreement made as of March 5, 1997, we sold Lazer-Tron to RLT Acquisitions, Inc. Under the asset purchase agreement, we assumed and excluded specific liabilities, and agreed to indemnify RLT for certain losses, as specified in the asset purchase agreement. In an August 1, 2000 letter, counsel for Lazer-Tron in the Lazer-Tron action asserted that our indemnification obligations in the asset purchase agreement applied to the Lazer-Tron action, and demanded that we indemnify Lazer-Tron for any losses which may be incurred in the Lazer-Tron action. In an August 22, 2000 response, we asserted that any losses which may result from the Lazer-Tron action are not assumed liabilities under the asset purchase agreement for which we must indemnify Lazer-Tron. In a November 20, 2000 letter, Lazer-Tron responded to Acclaim’s August 22 letter and reiterated its position that we must indemnify Lazer-Tron with respect to the Lazer-Tron action. No other action with respect to this matter has been taken to date.

An action entitled David Mirra v. Acclaim Entertainment, Inc., CV-03-575 was filed in the United States District Court for the Eastern District of New York on February 5, 2003. The plaintiff alleged that the defendants did not have authorization to utilize Mirra’s name and likeness in connection with a bicycle video game intended for mature audiences. Specifically, Mirra alleges that we engaged in (1) violations of § 1051 et seq. of the Lanham Act; (2) violations of §43(a) of the Lanham Act; (3) breach of the amendment to the license agreement; (4) unfair competition; (5) tortious interference; (6) injury to business reputation and dilution; (7) deceptive trade practices in violation of General Business Law of New York § 349; (8) false advertising in violation of General Business Law of New York § 350-D; (9) violation of the California Civil Code § 3344; and (10) invasion of privacy—misappropriation of likeness pursuant to California common law; (11) invasion of privacy—false light pursuant to California common law; and (12) accounting. Mirra claims that he has been harmed by $1.0 million per Counts 1-5 and 7-11, for a total of $10.0 million in actual damages. Mirra is also claiming that our actions were willful and is demanding an additional $20.0 million in punitive damages, plus costs and attorneys’ fees. We believe we have meritorious defenses to these allegations and we intend to defend this action vigorously. Neither party has yet to exchange their initial disclosures or to begin formal discovery.

We are also party to various litigations arising in the ordinary course of our business, the resolution of which, we believe, will not have a material adverse effect on our liquidity or results of operations.

22

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

None.

23

PART II

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

Market Price

Our common stock was traded on The Nasdaq National Market until July 31, 2000 when it was delisted and transferred to the Nasdaq Small Cap Market. Our trading symbol remains unchanged as AKLM. As of May 21, 2003, the closing sale price of our common stock was $0.54 per share. As of this date, there were approximately 2,949 holders of record of our common stock.

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

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

Dividend Policy

We have never declared or paid any cash dividends on our common stock and have no present intention to declare or pay cash dividends on our common stock in the foreseeable future. We are subject to various financial covenants with our primary lender that could limit our ability and/or prohibit us to pay dividends in the future. Please see discussion regarding our primary lender under “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and see Note 14 (Debt) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. We intend to retain earnings, if any, which we may realize in the foreseeable future to finance our operations.

Equity Instruments

Summarized below are our equity compensation plans as of March 31, 2003.

Plan Category	Number of securities to be issued upon exercise of outstanding options and warrants(a)	Weighted-average exercise price of outstanding options and warrants(b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))
Equity compensation plans approved by stockholders	14,977,984	$	3.32	3,188,505
Equity compensation plans not approved by stockholders	4,787,132	$	1.44	—
Total	19,765,116	$	2.86	3,188,505

24

Item 6.    Selected Financial Data.

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

	(In thousands, except per share data)
	Seven Months Ended March 31,						Fiscal Years Ended August 31,
	2003			2002			2002			2001			2000			1999			1998
				(Unaudited)
Statements of Operations Data:
Net revenue	$	101,589		$	160,188		$	268,688		$	197,568		$	188,626		$	430,974		$	326,561
Cost of revenue		76,507			62,891			118,386			62,023			105,396			200,980			148,660
Gross profit		25,082			97,297			150,302			135,545			83,230			229,994			177,901
Operating expenses
Marketing and selling		32,295			30,132			57,892			31,631			71,632			72,245			61,691
General and administrative		24,549			25,165			43,374			40,839			56,378			64,322			50,848
Research and development		25,392			23,133			44,139			39,860			57,410			50,452			37,367
Litigation recovery		—			—			—			—			—			(1,753	)		—
Goodwill writedown		—			—			—			—			17,870			—			—
Restructuring charges		4,824			—			—			—			—			—			—
Impairment on building held for sale		2,146			—			—			—			—			—			—
Total operating expenses		89,206			78,430			145,405			112,330			203,290			185,266			149,906
(Loss) earnings from operations		(64,124	)		18,867			4,897			23,215			(120,060	)		44,728			27,995
Other income (expense)
Interest expense, net		(4,073	)		(5,301	)		(7,269	)		(10,522	)		(7,691	)		(6,344	)		(6,832	)
(Loss) gain on early retirement of debt		—			(1,221	)		(1,221	)		2,795			—			—			—
Other income (expense)		201			(843	)		(1,660	)		1,699			(3,902	)		646			291
Total other expense		(3,872	)		(7,365	)		(10,150	)		(6,028	)		(11,593	)		(5,698	)		(6,541	)
(Loss) earnings before income taxes		(67,996	)		11,502			(5,253	)		17,187			(131,653	)		39,030			21,454
Income tax (benefit) provision		(191	)		(944	)		(720	)		(106	)		91			2,972			764
Net (loss) earnings	$	(67,805	)	$	12,446		$	(4,533	)	$	17,293		$	(131,744	)	$	36,058		$	20,690
Net (loss) earnings per share data:
Basic	$	(0.73	)	$	0.15		$	(0.05	)	$	0.29		$	(2.36	)	$	0.66		$	0.40
Diluted	$	(0.73	)	$	0.14		$	(0.05	)	$	0.26		$	(2.36	)	$	0.57		$	0.37
	March 31,						August 31,
	2003			2002			2002			2001			2000			1999			1998
Balance Sheet Data:
Working capital (deficiency)	$	(63,496	)	$	18,830		$	(7,287	)	$	(39,413	)	$	(76,769	)	$	29,391		$	(19,100	)
Total assets		79,937			146,720			182,895			125,630			93,093			271,248			178,868
Short-term debt		35,399			26,700			54,508			54,653			30,108			27,652			20,669
Long-term debt		632			13,961			4,737			14,473			55,847			51,732			53,041
Stockholders’ (deficit) equity		(46,158	)		34,854			19,355			(20,355	)		(93,980	)		31,359			(21,773	)

25

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

In January 2003, our Board of Directors approved a plan to change our fiscal year end from August 31 to March 31. The accompanying consolidated financial statements include our results of operations for the seven month fiscal year ended March 31, 2003. Fiscal year 2004 commenced on April 1, 2003 and will end on March 31, 2004. Our quarterly closing dates will occur on the Sunday closest to the last day of the calendar quarter, which encompasses the following quarter ending dates for fiscal 2004.

Quarter	Quarter End Date
First	June 29, 2003
Second	September 28, 2003
Third	December 28, 2003
Fourth	March 31, 2004

Overview

We develop, publish, market and distribute, under our brand names, interactive entertainment software for a variety of hardware platforms, including Sony’s PlayStation^® 2, Microsoft’s Xbox^™, and Nintendo’s GameCube^™ and Game Boy^™ Advance and, to a lesser extent, personal computer systems. We develop software internally, as well as engaging third parties to develop software on our behalf.

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

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

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

Substantially all of our revenue is derived from one industry segment, the development, publication, marketing and distribution of interactive entertainment software. For information regarding our foreign and domestic operations, see Note 22 (Segment Information) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

26

Approximately 39% of our gross revenue was derived from software developed at our internal studios by our in-house development group for the seven months ended March 31, 2003. The balance of our gross revenue was derived from software development contracted through third-party developers.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make judgments, assumptions and estimates that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. On an ongoing basis, we evaluate the estimates to determine their accuracy and make adjustments when we deem it necessary. Note 1 (Business and Significant Accounting Policies) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, describes the significant accounting policies and methods we use in the preparation of our Consolidated Financial Statements. We use estimates for, but not limited to, accounting for the allowance for price concessions and returns, the valuation of inventory, the recoverability of advance royalty payments and the amortization of capitalized software development costs. We base estimates on our historical experience and on various other assumptions that we believe are relevant under the circumstances, the results from which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Our critical accounting policies include the following:

Revenue Recognition

We apply the provisions of Statement of Position 97-2, “Software Revenue Recognition” in conjunction with the applicable provisions of Staff Accounting Bulletin No. 101, “Revenue Recognition.” Accordingly, we recognize revenue for software when there is (1) persuasive evidence that an arrangement exists, which is generally a customer purchase order, (2) the software is delivered, (3) the selling price is fixed and determinable and (4) collectibility of the customer receivable is deemed probable. We do not customize our software or provide post contract support to our customers.

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

Allowances for Price Concessions and Returns

We are not contractually obligated to accept returns, except for defective product. However, we grant price concessions to our customers who primarily are major retailers that control market access to the consumer when those concessions are necessary to maintain our relationships with the retailers and access to their retail channel customers. If the consumers’ demand for a specific title falls below expectations or significantly declines below previous rates of sell-through, then, we may provide a price concession or credit to spur further sales by the retailer to maintain the customer relationship. We record revenue net of an allowance for estimated price concessions and returns. We must make significant estimates and judgments when determining the appropriate

27

allowance for price concessions and returns in any accounting period. In order to derive and evaluate those estimates, we analyze historical price concessions and returns, current sell-through of product and retailer inventory, current economic trends, changes in consumer demand and acceptance of our products in the marketplace, among other factors.

As the consumer market acceptance of a software title decreases, resulting in lower unit retail sell-through, the potential for price concessions and returns for those titles increases. During the seven months ended March 31, 2003, net revenue decreased by $14.4 million when we increased our August 31, 2002 allowance for price concessions and returns because actual product sell-through in the retail channel during the subsequent 2002 holiday season and through the end of April 2003, particularly for the Turok: Evolution software title released in the fourth quarter of fiscal 2002, demonstrated that additional allowances were required. Please see “Net Revenues.”

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

Prepaid Royalties

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

Capitalized Software Development Costs

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

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

28

Operating Results

Summarized below are our operating results for the seven months ended March 31, 2003 and 2002 and the fiscal years ended August 31, 2002, 2001 and 2000, and the related changes in operating results between those periods. You should read the tables below together with the consolidated financial statements and the related notes, which are included in Item 8 of this Annual Report on Form 10-K.

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

	(in thousands)
							Changes
	Seven Months Ended						2003 Versus 2002
	March 31, 2003			March 31, 2002			$			%
				(Unaudited)
Net revenues	$	101,589		$	160,188		$	(58,599	)	-36.6	%
Cost of revenue		76,507			62,891			13,616		21.7	%
Gross profit		25,082			97,297			(72,215	)	-74.2	%
Operating expenses
Marketing and selling		32,295			30,132			2,163		7.2	%
General and administrative		24,549			25,165			(616	)	-2.4	%
Research and development		25,392			23,133			2,259		9.8	%
Restructuring charges		4,824			—			4,824		0.0	%
Impairment on building held for sale		2,146			—			2,146		0.0	%
Total operating expenses		89,206			78,430			10,776		13.7	%
(Loss) earnings from operations		(64,124	)		18,867			(82,991	)	-439.9	%
Other income (expense)
Interest expense, net		(4,073	)		(5,301	)		1,228		-23.2	%
Loss on early retirement of debt		—			(1,221	)		1,221		-100.0	%
Other income (expense)		201			(843	)		1,044		-123.8	%
Total other expense		(3,872	)		(7,365	)		3,493		-47.4	%
(Loss) earnings before income taxes		(67,996	)		11,502			(79,498	)	-691.2	%
Income tax benefit		(191	)		(944	)		753		-79.8	%
Net (loss) earnings	$	(67,805	)	$	12,446		$	(80,251	)	-644.8	%

Fiscal 2002 Compared to Fiscal 2001

	(in thousands)
							Changes
	Fiscal Years Ended August 31,						2002 Versus 2001
	2002			2001			$			%
Net revenue	$	268,688		$	197,568		$	71,120		36.0	%
Cost of revenue		118,386			62,023			56,363		90.9	%
Gross profit		150,302			135,545			14,757		10.9	%
Operating expenses
Marketing and selling		57,892			31,631			26,261		83.0	%
General and administrative		43,374			40,839			2,535		6.2	%
Research and development		44,139			39,860			4,279		10.7	%
Total operating expenses		145,405			112,330			33,075		29.4	%
Earnings from operations		4,897			23,215			(18,318	)	-78.9	%
Other income (expense)
Interest expense, net		(7,269	)		(10,522	)		3,253		-30.9	%
(Loss) gain on early retirement of debt		(1,221	)		2,795			(4,016	)	-143.7	%
Other (expense) income		(1,660	)		1,699			(3,359	)	-197.7	%
Total other expense		(10,150	)		(6,028	)		(4,122	)	68.4	%
(Loss) earnings before income taxes		(5,253	)		17,187			(22,440	)	-130.6	%
Income tax benefit		(720	)		(106	)		(614	)	579.2	%
Net (loss) earnings	$	(4,533	)	$	17,293		$	(21,826	)	-126.2	%

29

Fiscal 2001 Compared to Fiscal 2000

	Fiscal Years Ended August 31,						Changes
							2001 Versus 2000
	2001			2000			$			%
	(in thousands)
Net revenue	$	197,568		$	188,626		$	8,942		4.7	%
Cost of revenue		62,023			105,396			(43,373	)	-41.2	%
Gross profit		135,545			83,230			52,315		62.9	%
Operating expenses
Marketing and selling		31,631			71,632			(40,001	)	-55.8	%
General and administrative		40,839			56,378			(15,539	)	-27.6	%
Research and development		39,860			57,410			(17,550	)	-30.6	%
Goodwill writedown		—			17,870			(17,870	)	-100.0	%
Total operating expenses		112,330			203,290			(90,960	)	-44.7	%
Earnings (loss) from operations		23,215			(120,060	)		143,275		-119.3	%
Other income (expense)
Interest expense, net		(10,522	)		(7,691	)		(2,831	)	36.8	%
Gain on early retirement of debt		2,795			—			2,795		NA
Other income (expense)		1,699			(3,902	)		5,601		-143.5	%
Total other expense		(6,028	)		(11,593	)		5,565		-48.0	%
Earnings (loss) before income taxes		17,187			(131,653	)		148,840		-113.1	%
Income tax (benefit) provision		(106	)		91			(197	)	-216.5	%
Net earnings (loss)	$	17,293		$	(131,744	)	$	149,037		-113.1	%

Net Revenue

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

Summarized below is information about our gross revenue by game console for the seven months ended March 31, 2003 and 2002 and the fiscal years ended August 31, 2002, 2001 and 2000. Please note that the numbers in the schedule below do not include the effect of provisions for price concessions and returns because we do not track them by game console. Accordingly, the numbers presented may vary materially from those that we would disclose were we able to present the information net of provisions for price concessions and returns.

	Seven Months Ended				Fiscal Years Ended
	March 31, 2003		March 31, 2002,		August 31, 2002		August 31, 2001		August 31, 2000
			(Unaudited)
Cartridge-based software:
Nintendo Game Boy	4	%	8	%	7	%	11	%	9	%
Nintendo 64	—		—		—		2	%	31	%
Subtotal for cartridge-based software	4	%	8	%	7	%	13	%	40	%
Disc-based software:
Sony PlayStation 2: 128-bit	64	%	57	%	52	%	33	%	—
Sony PlayStation 1: 32-bit	3	%	7	%	4	%	41	%	32	%
Microsoft Xbox: 128-bit	15	%	8	%	13	%	—		—
Nintendo GameCube: 128-bit	13	%	19	%	22	%	—		—
Sega Dreamcast: 128-bit	—		—		—		9	%	21	%
Subtotal for disc-based software	95	%	91	%	91	%	83	%	53	%
PC software	1	%	1	%	2	%	4	%	7	%
Total	100	%	100	%	100	%	100	%	100	%

30

Summarized below is information about our software franchises, all released on multiple platforms, that represented 5% or more of gross revenue for the seven months ended March 31, 2003 and 2002 and the fiscal years ended August 31, 2002, 2001 and 2000:

Software Franchise	Seven Months Ended				Fiscal Years Ended
	March 31, 2003		March 31, 2002		August 31, 2002		August 31, 2001		August 31, 2000
			(Unaudited)
Burnout	20	%	12	%	11	%	—		—
Legends of Wrestling	11	%	8	%	8	%	—		—
BMX XXX	9	%	—		—		—		—
All Star Baseball	8	%	15	%	11	%	5	%	3	%
Turok	8	%	—		20	%	—		10	%
ATV	7	%	2	%	2	%	3	%	—
Vexx	5	%	—		—		—		—
Mary-Kate & Ashley	5	%	5	%	3	%	13	%	3	%
Crazy Taxi	4	%	8	%	6	%	10	%	—
BMX	2	%	17	%	11	%	25	%	—
Aggressive Inline	2	%	—		6	%	—		—
18 Wheeler	1	%	5	%	3	%	—		—
Extreme G	1	%	5	%	3	%	4	%	—
Supercross	1	%	5	%	3	%	4	%	7	%
Shadowman	—		4	%	2	%	—		5	%
World Wrestling Federation	—		—		—		—		11	%
Extreme Championship Wrestling	—		—		—		—		10	%
South Park	—		—		—		—		20	%

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

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

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

In addition, in the fourth quarter of fiscal 2002, we released the software titles Turok: Evolution and Aggressive Inline which we anticipated would be significant revenue drivers and valuable additions to our product catalog. The market reception to these products, as evidenced by the retail sell-through rates to consumers in the first quarter of fiscal 2003 and subsequently, fell significantly below our expectations. As a result of the poor retail sell-through, significant quantities of these products remained in the retail channel as of September 30, 2002. Accordingly, we provided our retail customers price concessions for these products more rapidly after the initial release date than was our historical practice and, in the fourth quarter of fiscal 2002, recorded a $17.9 million provision for price concessions and returns on these products that exceeded historical allowance rates and that we believed would have resulted in additional sell-through to our retailers’ customers through the holiday season. During the seven months ended March 31, 2003, while the price concessions we offered our retail customers did increase the retail sell-through rate, the rate of reduction of retail channel

31

inventory did not attain the level we had originally estimated and consequently, we also experienced significantly more returns of these two products from our retail customers than we originally had estimated. Additionally, the market for GameCube products softened after the 2002 holiday season, which required us to provide price concessions on our products for that platform to lower prices than originally estimated and the actual retail sell-through rates of Legends of Wrestling and BMX were less than the projected retail sell-through rates we had used in our previous estimates of allowances, which were based on historical experience, and actual sell-through rates for those products through August 31, 2002. As a result of these events, we needed to provide our retail customers additional price concessions. The resulting $14.4 million increase to the provision for price concessions and returns negatively impacted net revenues for the seven months ended March 31, 2003.

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

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

Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, net revenue of $268.7 million increased by $71.1 million, or 36%, from $197.6 million for fiscal 2001. The increase was driven by a $131.7 million increase in gross revenue from newly released software titles for the three next-generation game systems: PlayStation 2, Xbox, and GameCube, which was partially offset by a $60.6 million increase in the net provision for price concessions and returns. The increase in the net provision for price concessions and returns resulted primarily from an increase in gross revenue for fiscal 2002 over fiscal 2001, an increase in the average number of units per software title shipped into the retail channel, reductions from the fiscal 2001 positive retail sell-through rates of our products as well as a $13.6 million provision recorded in the fourth quarter of fiscal 2002 based on lower than historical retail sell-through rates and a higher than historical provision rate for Turok: Evolution and Aggressive Inline, which products were released in the fourth quarter of fiscal 2002.

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

Increased unit volume contributed $50.3 million to the increase in net revenue for fiscal 2002 as compared to fiscal 2001, while higher average selling prices contributed the remaining $20.8 million. Please see discussion of “Gross Profit.”

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

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, net revenue of $197.6 million increased by $8.9 million, or 5%, from $188.6 million for fiscal 2000. The increase in gross revenue was driven by sales of newly released software titles for the PlayStation, PlayStation 2 and Game Boy game systems.

The decrease in the net provision for price concessions and returns for fiscal 2001 resulted primarily from an improved market reception and increased rates of retail sell-through for a majority of the software titles we released in fiscal 2001, the shift in titles released for the Nintendo-64 platform to the then newly introduced PlayStation 2 platform and less quantities per title shipped into the retail channel, all of which resulted in

32

significantly lower price concessions and returns related to products shipped in fiscal 2001. In addition, the fiscal 2001 provision was favorably impacted by a change in the fiscal 2000 estimate of the provision for price concessions and returns. In fiscal 2000, we expected particularly low rates of retail channel sell-through of 64-bit product because of:

• the continuous decline of the market for 64-bit products during the period,

• the decline of the market for Dreamcast software and Sega’s exit from the hardware market and

• the introduction of the next-generation PlayStation 2 consoles in October 2000.

During fiscal 2001, the accelerated hardware transition that had commenced in fiscal 2000 reversed course and began to slow due to production delays experienced by Sony in the manufacture of its PlayStation 2. Because PlayStation 2 products were not available in the marketplace at the quantities we had expected, our 64-bit product, Dreamcast product and other related and marked down products in the retail channel continued to sell-through at higher rates and with lower price concessions than we had forecasted. Accordingly, in fiscal 2001, we did not need to provide any additional sales allowances for 64-bit products and we reduced our August 31, 2000 accrued price concessions by $11.5 million.

Gross Profit

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

• level of our provision for price concessions and returns which directly affects our net revenue (please see discussion of “Net Revenue”),

• level of capitalized software development costs for specific game titles,

• level of inventory write downs to the lower of cost or market and

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

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

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

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

• $10.5 million increase in amortization of capitalized software development costs due primarily to the releases of Vexx, All Star Baseball 2004 and Legends of Wrestling II,

• $42.5 million increase in the provision for price concessions and returns (please see “Net Revenue”),

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

• $3.9 million write down of excess inventory to its expected net realizable value.

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

33

Gross profit in fiscal 2004 will depend in large part on the rate of growth of the software market for 128-bit game consoles (Sony’s PlayStation 2, Nintendo’s GameCube and Microsoft’s Xbox) and our ability to identify, develop and timely publish, in accordance with our product release schedule, software that sells through at projected levels at retail. See “Factors Affecting Future Performance: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of Our Primary Lender and Vendors, and Our Ability to Achieve Our Projected Revenue Levels and Reduced Operating Expenses.”

Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, gross profit of $150.3 million (56% of net revenue) increased by $14.8 million, or 11%, from $135.5 million (69% of net revenue) for fiscal 2001. The increased gross profit was due to:

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

• higher provision for price concessions and returns, including $13.6 million related to Turok: Evolution and Aggressive Inline (please see discussion of “Net Revenue”) and an

• $8.9 million increase in amortization of capitalized software development costs particularly related to Turok: Evolution and All-Star Baseball 2003.

For fiscal 2002, gross profit as a percentage of net revenue was 56% as compared to 69% for fiscal 2001. The 13 percentage point decrease resulted primarily from:

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

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

• sales of newly released game titles in the rental market.

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

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, gross profit of $135.5 million (69% of net revenue) increased by $52.3 million, or 63%, from $83.2 million (44% of net revenue) for fiscal 2000. The increased gross profit was due to significant PlayStation and PlayStation 2 software sales volume and the decreased dependency on 64-bit cartridge-based products. Please see discussion of “Net Revenue.”

For fiscal 2001, gross profit as a percentage of net revenue was 69% as compared to 44% for fiscal 2000. The 25 percentage point increase resulted primarily from the strategic transformation of our operating business model from cartridge-based to disc-based product. Costs of disc-based product as a percentage of net revenue were lower because with this type of product, we were able to:

• lower inventory levels and increased turnover rates due to a decrease in order lead time to seven from fourteen days for disc-based product and to six from eight weeks for cartridge-based product and

• reduce per unit product manufacturing costs as disc-based product costs approximately $9 per unit on average as compared to $19 per unit on average for cartridge-based product.

For fiscal 2001, disc-based product accounted for 83% of gross revenue as compared to 13% for cartridge-based product. For fiscal 2000, disc-based product accounted for 53% of gross revenue as compared to 40% for cartridge-based product.

34

Operating Expenses

For the seven months ended March 31, 2003, operating expenses of $89.2 million (88% of net revenue) increased by $10.8 million, or 14%, from $78.4 million (49% of net revenue) for the seven months ended March 31, 2002. For fiscal 2002, operating expenses of $145.4 million (54% of net revenue) increased by $ 33.1 million, or 29%, from $112.3 million (57% of net revenue) for fiscal 2001. For fiscal 2001, operating expenses of $112.3 million decreased by $91.0 million, or 45%, from $203.3 million (108% of net revenue) for fiscal 2000.

Marketing and Selling

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

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

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

Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, marketing and selling expenses of $57.9 million (22% of net revenue) increased by $26.3 million, or 83%, from $31.6 million (16% of net revenue) for fiscal 2001. The increase was primarily related to expenses incurred to help generate and support higher net revenue in fiscal 2002. The increased marketing and selling expenditures did not have as positive an effect on fiscal 2002 net revenue as we had expected, which resulted in a 6 percentage point increase in marketing and selling expenses as a percentage of net revenue. Expense increases included:

• $13.1 million in advertising and trade show expenses,

• $11.5 million in licensing costs,

• $5.7 million in cooperative advertising expenses and

• $2.4 million in sales commissions.

These increases were partially offset by a:

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

• $1.1 million recovery of previously expensed licensing fees.

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, marketing and selling expenses of $31.6 million (16% of net revenue) decreased by $40.0 million, or 56%, from $71.6 million (38% of net revenue) for fiscal 2000. The decrease related primarily to reductions in TV advertising and print media expenses related to our plan to refocus and limit these discretionary expenditures. During fiscal 2001, we limited funding of TV and media advertising because our estimate of the installed base of game platforms in North America was not deemed sufficient to allow marketing expenditures to be cost effective.

35

General and Administrative

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

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

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

Administrative employee headcount was approximately 160 as of March 31, 2003 as compared to 230 as of August 31, 2002 reflecting an approximate 30% reduction. The decrease in headcount resulted from the business restructuring we implemented during the seven months ended March 31, 2003 in order to lower our operating expenses and increase our future operating cash flows. Please see “Restructuring Charges,” and “Liquidity and Capital Resources” as well as Note 13 (Accrued Restructuring Charges) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, general and administrative expenses of $43.4 million (16% of net revenue) increased by $2.5 million, or 6%, from $40.8 million (21% of net revenue) for fiscal 2001. The increase was due primarily to an increase in employee-related expenses due to increased headcount. As a percentage of net revenue, general and administrative expenses were 16% for fiscal 2002 as compared to 21% for fiscal 2001. The 5 percentage point improvement in general and administrative expenses as a percentage of net revenue resulted primarily from managed cost containment measures as well as economies of scale achieved due to the increases in net revenue for fiscal 2002 over fiscal 2001.

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, general and administrative expenses of $40.8 million (21% of net revenue) decreased by $15.5 million, or 28%, from $56.4 million (30% of net revenue) for fiscal 2000. The decrease was due primarily to cost reduction efforts initiated in the second half of fiscal 2000, which were accomplished primarily by reducing administrative employee headcount by 187 to 613 as of August 31, 2001 from 800 as of May 31, 2000.

Research and Development

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

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

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

The increase was primarily due to a:

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

36

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

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

The above noted increases were partially offset by a:

• $2.0 million decrease in employee related costs associated with the closing of our Salt Lake City development studio (please see “Restructuring Charges”) and a

• $0.3 million decrease in external development costs.

Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, research and development expenses of $44.1 million (16% of net revenue) increased by $4.3 million, or 11%, from $39.9 million (20% of net revenue) for fiscal 2001. The increase was primarily due to a:

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

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

These expense increases were partially offset by a

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

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, research and development expenses of $39.9 million (20% of net revenue) decreased by $17.6 million, or 31%, from $57.4 million (30% of net revenue) for fiscal 2000. The decrease was primarily due to a reduction in the number of titles under development. Additionally, we curtailed developing 64-bit and Dreamcast products and concentrated on developing game software for next-generation game consoles.

Goodwill Writedown

In the fourth quarter of fiscal 2000, we wrote off the remaining $17.9 million of goodwill related to our subsidiary, Acclaim Comics, because its value was impaired. We based our decision to write off the remaining goodwill of Acclaim Comics on the operating losses incurred by Acclaim Comics, the deterioration of Acclaim Comics’ core businesses, the state of the comic book industry and our projections for Acclaim Comics’ operations.

Restructuring Charges

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

In December 2002 and January 2003, we restructured our operations in order to lower our operating expenses and improve our operating cash flows. Under the plan, we closed our software development studio

37

located in Salt Lake City, Utah, and reduced global administrative headcount. The studio closing was designed to achieve financial efficiencies through consolidation of all our domestic internal product development into our Austin, Texas studio. The closure of the development studio and reduction of global administrative headcount reduced our overall headcount by approximately 100 employees and resulted in restructuring charges of $4.8 million during the seven months ended March 31, 2003. The restructuring charges include accruals for employee termination costs, the write-off of certain fixed assets and leasehold improvements and the development studio lease commitment, which is net of estimated sub-lease rental income. The development studio lease commitment expires in May 2007 and the severance agreements expire at various times through April 2004.

No restructuring charges were incurred for the seven months ended March 31, 2002.

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

	(in thousands)
Beginning balance as of August 31, 2002	$	—
Severance and other employee termination benefits		3,783
Lease commitment, net of estimated sub-lease rental income		567
Asset write-offs		436
Other costs		38
Restructuring charges incurred and expensed		4,824
Less: costs paid		(2,525	)
Ending balance as of March 31, 2003	$	2,299

Impairment on Building Held for Sale

In February 2003, we recorded an impairment charge of $2.1 million for a building which is being held for sale in the United Kingdom, to adjust its net carrying value to its fair value of $5.4 million, net of expected selling costs. We expect the building to be sold within a year.

Other Income and Expense

Interest Expense, Net

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

For the seven months ended March 31, 2003, interest expense, net, of $4.1 million (4% of net revenue) decreased by $1.2 million, or 23%, from $5.3 million (3% of net revenue) for the seven months ended March 31, 2002. The decrease was primarily due to reduced interest expense relating to our 10% convertible subordinated notes, which were repaid in March 2002.

Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, interest expense, net of $7.3 million (3% of net revenue) decreased by $3.3 million, or 31%, from $10.5 million (5% of net revenue) for fiscal 2001. The decrease was primarily due to reduced interest expense relating to our 10% convertible subordinated notes, which were repaid in March 2002. Please see discussion under “Liquidity and Capital Resources.”

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, interest expense, net of $10.5 million (5% of net revenue) increased by $2.8 million, or 37%, from $7.7 million (4% of net revenue) for fiscal 2000. The increase was primarily due to reduced interest income from lower average cash balances in fiscal 2001.

38

(Loss) Gain on Early Retirement of Debt

During the second quarter of fiscal 2002 we recorded a loss of $1.2 million relating to the early retirement of $12.7 million in principal amount of our 10% convertible subordinated notes and the repayment of $0.6 million in accrued interest when we issued a total of 4,209,420 shares of our common stock with a fair value of $14.5 million.

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

Other Income (Expense)

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

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

Fiscal 2002 Compared to Fiscal 2001

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

• $0.1 million of net foreign currency transaction losses associated with our international operations and

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

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, other income (expense) amounted to income of $1.7 million (0.9% of net revenue) as compared to expense of $3.9 million (2% of net revenue) for fiscal 2000. The $5.6 million change is principally due to a:

• $1.9 million decrease in net foreign currency transaction losses associated primarily with our international operations and a

• $2.8 million expense in fiscal 2000 resulting from the write off of certain notes receivable and accrued interest, which were deemed uncollectible.

Please see “Related Party Transactions” below and Note 21B (Related Party Transactions) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Income Taxes

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

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

39

As of March 31, 2003, we had a U.S. tax net operating loss carryforward of approximately $237.0 million, which expires in fiscal years 2011 through 2023.

Fiscal 2002 Compared to Fiscal 2001

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

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, the income tax (benefit) provision was a benefit of $0.1 million as compared to a provision of $0.1 million for fiscal 2000.

Net (Loss) Earnings

For the seven months ended March 31, 2003, we reported a net loss of $67.8 million, or $0.73 per diluted share (based on weighted average diluted shares outstanding of 92,568,000), as compared to net income of $12.4 million, or $0.14 per diluted share (based on weighted average diluted shares outstanding of 86,011,000) for the seven months ended March 31, 2002.

For fiscal 2002, we reported a net loss of $4.5 million, or $0.05 per diluted share (based on weighted average diluted shares outstanding of 85,732,000), as compared to net earnings of $17.3 million, or $0.26 per diluted share (based on weighted average diluted shares outstanding of 66,634,000) for fiscal 2001.

For fiscal 2001, we reported net earnings of $17.3 million, or $0.26 per diluted share as compared to a net loss of $131.7 million, or $2.36 per diluted share (based on weighted average diluted shares outstanding of 55,882,000) for fiscal 2000.

Seasonality

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

Liquidity and Capital Resources

As of March 31, 2003, cash and cash equivalents were $4.5 million. During the seven months ended March 31, 2003, cash and cash equivalents decreased by $46.5 million compared to a net decrease of $8.7 million for the seven months ended March 31, 2002. The primary contributor to the increased use of cash in the seven months ended March 31, 2003 as compared to the same period in the prior year were changes in cash flows used in and provided by financing activities. During the seven months ended March 31, 2003, we repaid a net $23.4 million of short-term bank loans compared to the seven months ended March 31, 2002 when we received net proceeds of $1.8 million from short-term bank loans. Also during the seven months ended March 31, 2002, we repaid $12.2 million in convertible notes and received $21.5 million in proceeds from the issuance of common stock.

As of March 31, 2003, the working capital deficit of $63.5 million increased by $56.2 million over the $7.3 million working capital deficit as of August 31, 2002. The $56.2 million increase in the working capital deficit during the seven months ended March 31, 2003 resulted primarily from the $67.8 million net loss in the period.

40

Please see “Factors Affecting Future Performance: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary Lender and Vendors, and Our Ability to Achieve Our Projected Revenue Levels and Reduce Operating Expenses.”

Short-Term Liquidity

Our accompanying financial statements and financial statement schedules have been prepared assuming that we will continue as a going concern. Our working capital and stockholders’ deficits as of March 31, 2003 and the recurring use of cash in operating activities raise substantial doubt about our ability to continue as a going concern. For the seven months ended March 31, 2003 we had a net loss of $67.8 million and used $20.7 million of cash in operating activities. As of March 31, 2003, we had a stockholders’ deficit of $46.2 million, a working capital deficit of $63.5 million and $4.5 million of cash and cash equivalents. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with our primary lender. To enhance our short-term liquidity, during the seven months ended March 31, 2003 we implemented targeted expense reductions through a business restructuring under which we reduced fixed and variable expenses, closed our Salt Lake City software development studio, redeployed various assets, eliminated certain marginal titles under development, reduced staff and staff related expenses and lowered marketing expenditures. Additionally, on March 31, 2003, our primary lender advanced us a supplemental discretionary loan of up to $11.0 million through May 31, 2003, which thereafter is reduced to $5.0 million through September 29, 2003. In May 2003, two of our executive officers, referred to as the Affiliates, each committed to our Board of Directors to prepay a portion of their outstanding loans due to us, in the amount of $2.0 million each. Please see “Related Party Transactions” and Note 21B (Related Party Transactions) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Based on our cash resources, including the $11.0 million supplemental discretionary loan provided by our primary lender and assuming that our primary lender consents, based upon our existing collateral, to provide us supplemental financing during the second half of fiscal 2004, although we can provide no assurance to our investors that we will be able to receive such consent, and the $4.0 million cash commitment from the Affiliates, and assuming we achieve our sales forecast by successfully meeting our product release schedule as provided in our business operating plan, and giving effect to the continued realization of savings from our implemented expense reductions, and provided we continue to enjoy the support of our primary lender and vendors, we expect to have sufficient cash resources to meet our projected cash and operating requirements through the next twelve months. The Company continues to pursue financing and investment arrangements with outside investors.

In the event that we do not achieve the product release schedule, sales assumptions or continue to derive expense savings from our implemented expense reductions, or our primary lender does not consent, based upon our existing collateral, to provide us supplemental financing during the second half of fiscal 2004, we cannot assure investors that our future operating cash flows will be sufficient to meet our operating requirements, our debt service requirements or repay our indebtedness at maturity, including without limitation, repayment of the supplemental discretionary loan. In any such event, our operations and liquidity will be materially and adversely affected and we could be forced to cease operations.

During the seven months ended March 31, 2003, we repaid net advances of $23.4 million under short-term bank loans.

In order to meet our debt service obligations, at various times we may depend on obtaining dividends, advances and transfers of funds from our subsidiaries. State and foreign laws regulate the payment of dividends by these subsidiaries, which is also subject to the terms of our North American credit agreement. A significant portion of our assets, operations, trade payables and indebtedness is located among our foreign subsidiaries. The creditors of the subsidiaries would generally recover from these assets on the obligations owed to them by the subsidiaries before any recovery by our creditors and before any assets are distributed to our stockholders.

41

Long-Term Liquidity

Our long-term liquidity will be significantly dependent on our ability to (1) timely develop and market new software products that achieve widespread market acceptance for use with the hardware platforms that dominate the market, (2) realize long-term benefits from our implemented expense reductions, as well as (3) continue to enjoy the support of our primary lender and vendors. Please see Note 14 (Debt) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

If we do not substantially achieve the overall projected revenue levels and realize any additional benefits from the expense reductions we implemented over the next 12 months as reflected in our business operating plan, or obtain supplemental discretionary financing from our primary lender to fund operations, we will either need to make further significant expense reductions, including, without limitation, the sale of certain assets or the consolidation or closing of certain operations, staff reductions, and/or the delay, cancellation or reduction of certain product development and marketing programs. Additionally, some of these measures may require third party consents or approvals from our primary lender and there can be no assurance that such consents or approvals can be obtained.

In the event that we do not achieve the product release schedule, sales assumptions or continue to derive expense savings from our implemented expense reductions, or our primary lender does not consent, based upon our existing collateral, to provide us supplemental financing during the second half of fiscal 2004, we cannot assure investors that our future operating cash flows will be sufficient to meet our operating requirements, our debt service requirements or repay our indebtedness at maturity, including without limitation, repayment of the supplemental discretionary loan. In any such event, our operations and liquidity will be materially and adversely affected and we could be forced to cease operations.

Please see discussion regarding our North American credit agreement below as well as in Note 14 (Debt) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Please also see “Factors Affecting Future Performance: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary Lender and Vendors, and Our Ability to Achieve Our Projected Revenue Levels and Reduce Operating Expenses.”

Credit Agreements

We established a relationship with our primary lender in 1989 when we entered into our North American credit agreement. The North American credit agreement expires on August 31, 2003. This agreement automatically renews for additional one-year periods, unless our primary lender or we terminate the agreement with 90 days’ prior notice. We and our primary lender are also parties to a factoring agreement that expires on August 31, 2003. The factoring agreement also provides for automatic renewals for additional one-year periods, unless terminated by either party upon 90 days’ prior notice.

While we anticipate that we will be able to renew the North American credit and factoring agreements with our primary lender (please see “Factoring Agreement” and “North American Credit Agreement” below) as we have in the past, we cannot provide any assurance of this. If we are unable to renew the North American credit and factoring agreements, we will need to secure financing with another institution. We cannot assure investors that we would be able to secure such an arrangement in a timely and cost effective manner, if at all. If we failed to secure financing with another financial institution, we could become insolvent, liquidated or reorganized, after payment of the outstanding balances due first to our primary lender and then to our other creditors, leaving insufficient assets remaining for distribution to stockholders.

Pursuant to the terms of the North American credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other financial covenants. As of March 31, 2003, we were not in compliance with those financial covenants. We received waivers from our primary lender regarding our non-

42

compliance. While we anticipate that we will not be in compliance with all of the financial covenants contained in the North American credit agreement in the near term, and we anticipate being able to obtain necessary waivers as we have in the past, we may not be able to obtain waivers of any future covenant violations. If we become insolvent, are liquidated or reorganized, after payment to our creditors, there are likely to be insufficient assets remaining for distribution to stockholders.

Factoring Agreement

Under the factoring agreement, we assign to our primary lender and our primary lender purchases from us, our U.S. accounts receivable. Our primary lender remits payments to us for the assigned U.S. accounts receivable that are within the financial parameters set forth in our factoring agreement. Those financial parameters include requirements that invoice amounts meet approved credit limits and that the customer does not dispute the invoices. The purchase price of our accounts receivable that we assign to our factor equals the invoiced amount, which is adjusted for any returns, discounts and other customer credits or allowances. Please see Note 4 (Accounts Receivable) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Before our primary lender purchases our U.S. accounts receivable and remits payment to us for the purchase price, it may, in its discretion, provide us cash advances under our North American credit agreement (please see discussion below) taking into account the assigned receivables due from our customers which it expects to purchase, among other things. As of March 31, 2003, our primary lender was advancing us 60% of the eligible receivables due from our customers. As of March 31, 2003, the factoring charge was 0.25% of assigned accounts receivable with invoice payment terms of up to 60 days and an additional 0.125% for each additional 30 days or portion thereof. Additionally, our factor, utilizing an asset based borrowing formula, advances us cash equal to 50% of our inventory that is not in excess of 60 days old.

North American Credit Agreement

Advances to us under the North American credit agreement bear interest at 1.50% per annum above our primary lender’s prime rate (5.75% as of March 31, 2003).

Borrowings that our primary lender may provide us in excess of an availability formula bear interest at 2.00% above our primary lender’s prime rate. Under our North American credit agreement, we may not borrow more than $30.0 million or the amount calculated using the availability formula, whichever is less. Our primary lender has secured all of our obligations under the North American credit agreement with substantially all of our assets.

On March 31, 2003, our primary lender and we amended our North American credit agreement to allow for supplemental discretionary loans of up to $11.0 million through May 31, 2003, which thereafter is reduced to $5.0 million through September 29, 2003 above the standard formula for short-term funding. On September 30, 2003, we are required to repay any amounts owed above the standard formula. As a condition for the amendment, the Affiliates pledged an aggregate cash deposit of $2.0 million with our primary lender in order to provide a limited guarantee of our obligations. Our primary lender will return the cash deposit provided by the Affiliates within five days following our timely repayment of the supplemental discretionary loans. As consideration to the Affiliates for making the deposit, and based upon the advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit Committee approved and the Board of Directors authorized the issuance to each Affiliate 2,000,000 shares of our common stock with an aggregate market value of $1.6 million and a warrant to purchase 500,000 shares of our common stock at an exercise price of $0.50 per share with an aggregate fair value of $0.3 million. We are expensing the fair value of the consideration provided to the Affiliates as a non-cash financing expense over the period between the date the supplemental loans were advanced and the date by which they are required to be fully repaid. During the seven months ended March 31, 2003, we expensed $0.3 million of the consideration, which is included in interest expense. We have entered into

43

an agreement with each of the Affiliates which stipulates that in the event the deposit is applied by our primary lender to our outstanding supplemental loan obligations and not returned to the Affiliates, we will either repay such amount to the Affiliates or offset such amount, to the extent permitted by applicable law, against the balance of any net amounts due to us by the Affiliates. Please see Note 14 (Debt) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

As additional security for discretionary supplemental loans we received in fiscal 2002 and 2001, the Affiliates personally pledged as collateral an aggregate of 1,568,000 shares of our common stock. If the market value of the pledged stock (based on a ten trading day average reviewed by our primary lender monthly) decreases below $5.0 million while we have a supplemental discretionary loan outstanding and the Affiliates do not deliver additional shares of our common stock to cover the shortfall, then our primary lender is entitled to reduce the outstanding supplemental loan by an amount equal to the shortfall. Our primary lender will release the 1,568,000 shares of pledged common stock to the Affiliates following a 30-day period in which we are not in an overformula position exceeding $1.0 million and are in compliance with the financial covenant requirements in the North American credit agreement.

If we do not substantially achieve the overall projected revenue levels, and realize any additional benefits from the expense reductions we plan to implement over the next twelve months as reflected in our business operating plan, or obtain sufficient additional financing to fund operations, our cash and projected cash flow from operations in fiscal 2004 would be insufficient to repay the supplemental discretionary loan when due and we would be required to restructure our indebtedness. We cannot guarantee that we would be able to restructure or refinance our debt on satisfactory terms, if at all, or obtain permission to do so under the terms of our existing indebtedness as some of these measures may require third party consents or approvals from our primary lender. Our failure to meet those obligations could result in defaults being declared by our primary lender, and our primary lender seeking its remedies, including immediate repayment of the debt and/or foreclosure on collateral, which could force us to become insolvent or cease operations.

Advances outstanding under the North American credit agreement within the standard borrowing formula amounted to $4.2 million as of March 31, 2003 and $42.3 million as of August 31, 2002. Discretionary supplemental loans outstanding amounted to $11.0 million as of March 31, 2003 and $10.0 million as of August 31, 2001. No discretionary supplemental loans were outstanding as of August 31, 2002. We repaid net advances of $23.4 million in the seven months ended March 31, 2003, and received net proceeds of $1.8 million in the seven months ended March 31, 2002 under the North American credit agreement.

International Credit Facility and Factoring Agreement

We, through Acclaim Entertainment, Ltd., our U.K. subsidiary, and GMAC Commercial Credit Limited, our U.K. bank and an Affiliate of our primary lender, are parties to a seven-year term secured credit facility we entered into in March 2000, related to our purchase of a building in the U. K. Our borrowings under that international facility, which may not exceed $5.8 million (£3.8 million), bear interest at LIBOR plus 2.00%. Our U.K. bank has secured all obligations under this facility with substantially all of our subsidiaries’ assets including the building. We and several of our foreign subsidiaries have guaranteed the obligations of Acclaim Entertainment, Ltd. under this facility and the related agreements. As of March 31, 2003, the building with which the credit facility was secured was being held for sale and, accordingly, we reclassified the building as held for sale and the associated mortgage payable of $4.6 million (£2.9 million) under the international facility as a separate component of current liabilities. Please see Note 8 (Building Held for Sale) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Several of our international subsidiaries are parties to international receivable factoring facilities with our U.K. bank. Under the facilities, our international subsidiaries assign the majority of their accounts receivable to the U.K. bank, on a full recourse basis. Under the facilities, upon receipt by the U.K. bank of confirmation that

44

our subsidiary has delivered product to our customers and remitted the appropriate documentation to the U.K. bank, the U.K. bank remits payments to our subsidiary, net of discounts and administrative charges.

Under the international receivable facilities, we can obtain financing of up to the lesser of approximately $18.0 million or 60% of the aggregate amount of eligible receivables from our international operations. The amounts we borrow under the international facility bear interest at 2.00% per annum above LIBOR (5.17% as of March 31, 2003). This international facility has a term of three years, which automatically renews for additional one-year periods thereafter unless either our U.K. bank or we terminate it upon 90 days’ prior notice. Our U.K bank has secured the international facility with the accounts receivable and assets of our international subsidiaries that participate in the facility. We had an outstanding balance under the international facility of $4.1 million as of March 31, 2003 and $0.8 million as of August 31, 2002.

Commitments

We generally purchase our inventory of Nintendo software by opening letters of credit when placing the purchase order. As of March 31, 2003, we had $0.8 million outstanding under letters of credit. Approximately $0.4 million as of March 31, 2003 of our trade accounts payable balances were collateralized under outstanding letters of credit. Other than such letters of credit and operating lease commitments, as of March 31, 2003, we did not have any significant operating or capital expenditure commitments.

As of March 31, 2003, our future contractual cash obligations were as follows:

	Payments Due Within
Contractual Obligations	Total		1 year		2-3 years		4-5 years
	(In thousands)
Debt	$	34,663	$	34,663	$	—	$	—
Capital lease obligations		1,489		804		674		11
Operating leases		8,950		3,188		4,832		930
Total contractual cash obligations	$	45,102	$	38,655	$	5,506		941

New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB or the “Board”) issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This statement supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. We implemented the provisions of SFAS No. 146 during the seven months ended March 31, 2003 in connection with our restructuring activities. Please see Note 13 (Accrued Restructuring Charges) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for, and disclosure of the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual reports that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are

45

issued or modified after December 31, 2002, irrespective of the guarantor’s year-end. Implementation of this standard during the seven months ended March 31, 2003 had no effect on our statement of financial position or results of operations.

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, (SFAS 148), “Accounting for Stock-Based Compensation—Transition and Disclosure”, amending FASB Statement No. 123 (SFAS 123), “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002. We adopted the disclosure portion of this statement for the current fiscal year ended March 31, 2003. The application of the disclosure portion of this standard will have no impact on our consolidated financial position or results of operations. The FASB recently indicated that they will require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. We will continue to monitor their progress on the issuances of this standard as well as evaluate our position with respect to current guidelines.

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. The Interpretation requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. We do not currently have any variable interest entities and, therefore, the adoption of FIN 46 will not affect our financial statements.

Related Party Transactions

Fees For Services

We pay sales commissions to a firm, which is owned and controlled by an Affiliate, who is also a director and a principal stockholder. The firm earns these sales commissions based on the amount of our software sales the firm generates. Commissions earned by the firm amounted to $279,000 for the seven months ended March 31, 2003 and $315,000 for the seven months ended March 31, 2002. We owed the firm $498,000 as of March 31, 2003, $385,000 as of August 31, 2002 and $18,000 as of August 31, 2001.

During previous fiscal years, we received legal services from two law firms of which two members of our Board of Directors are partners. We incurred fees from one of those firms of $528,000 for the seven months ended March 31, 2003. We incurred fees from both firms of $318,000 for the seven months ended March 31, 2002, $644,000 for fiscal 2002, $665,000 for fiscal 2001 and $987,000 for fiscal 2000. We owed fees of $353,000 as of March 31, 2003 and $200,000 as of August 31, 2002 to one of the firms and total fees of $154,000 as of August 31, 2001 to both firms.

We incurred investment-banking fees totaling $284,000 for fiscal 2001 from a broker-dealer of which an individual on our Board of Directors is a member. We owed the broker-dealer $104,000 as of August 31, 2001 which we paid during fiscal 2002.

Notes Receivable

In October 2002, we loaned a senior executive $300,000 under a promissory note for the purpose of purchasing a new residence. Our Compensation Committee approved the terms and provisions of the loan in April of 2002. The promissory note bears interest at a rate of 6.00% per annum. Security for the repayment of the promissory note is a mortgage on the executive’s principal residence. The maturity date of the note is November

46

1, 2005. The loan shall be forgiven by us 50% in May 2003 and 25% in each of October 2004 and October 2005 so long as the executive remains employed with Acclaim. If the executive voluntarily leaves the employment of Acclaim or is terminated for cause, at any time prior to the maturity date of the note, the executive must repay a pro-rata portion of the unpaid principal balance of the loan plus accrued and unpaid interest thereon. We are recording compensation expense for the unpaid principal balance of the loan over the periods that each portion will be forgiven. Accordingly, during the seven months ended March 31, 2003, we expensed $133,000 of the unpaid principal balance. As of March 31, 2003, the unpaid principal balance under the loan was $167,000, which was included in other receivables.

In February 2002, relating to an officer’s employment agreement, we loaned one of our executive officers $300,000 under a promissory note for the purpose of purchasing a new residence. The promissory note bore interest at a rate of 6.00% per annum, which was due by December 31st of each year the promissory note remained outstanding. In January 2003, in connection with terminating the officer’s employment and in accordance with the officer’s employment agreement, we forgave and expensed as compensation the unpaid principal balance and related accrued interest of $302,000. As of August 31, 2002, the unpaid principal balance, included in other assets, was $300,000, and the related accrued interest, included in other receivables, was $8,000.

In October 2001, we issued a total of 1,125,000 shares of our common stock to the Affiliates when they exercised their warrants with an exercise price of $3.00 per share. For the shares we issued, we received cash of $23,000 for their par value and two promissory notes totaling $3,352,000 for the unpaid portion of the exercise price of the warrants. The principal amount and accrued interest are due and payable on the earlier of (i) August 31, 2003 and (ii) to the extent of the proceeds of any warrant share sale, the third business day following the date upon which the respective executive sells any or all of the warrant shares. The terms and provisions of the notes will not be materially modified or amended, nor will the term be extended or renewed. The notes provide us full recourse against the officers’ assets. The notes bear interest at our primary lender’s prime rate plus 1.50% per annum. Other receivable includes accrued interest receivable on the notes of $324,000 as of March 31, 2003 and $202,000 as of August 31, 2002. The notes receivable have been classified as a contra-equity balance in additional paid-in capital. The Affiliates have agreed to prepay $2.0 million each of their outstanding loans due to us.

In July 2001, we issued a total of 1,500,000 shares of our common stock to the Affiliates when they exercised their warrants with an exercise price of $2.42 per share. For the shares issued, we received cash of $30,000 for their par value and two promissory notes totaling $3,595,000 for the unpaid portion of the exercise price of the warrants. The principal amount and accrued interest are due and payable on the earlier of (i) August 31, 2003 and (ii) to the extent of the proceeds of any warrant share sale, the third business day following the date upon which the respective executive sells any or all of the warrant shares. The terms and provisions of the notes will not be materially modified or amended, nor will the term be extended or renewed. The notes provide us full recourse against the officers’ assets. The notes bear interest at our primary lender’s prime rate plus 1.50% per annum. Other receivables includes accrued interest receivable on the notes of $426,000 as of March 31, 2003 and $294,000 as of August 31, 2002. The notes receivable have been classified as a contra-equity balance in additional paid-in capital.

In August 2000, relating to an officer’s employment agreement, we loaned one of our officers $200,000 under a promissory note. The note bears no interest and must be repaid on the earlier to occur of the sale of the officer’s personal residence or August 24, 2004. Based on the officer’s employment agreement, we were to forgive the loan at a rate of $25,000 for each year the officer remained employed with us up to a maximum of $100,000. Accordingly, in fiscal 2001, we expensed $25,000 and reduced the officer’s outstanding loan balance. In May 2002, relating to a separation agreement with the officer, we forgave and expensed another $75,000. The balance outstanding under the loan was $100,000 as of March 31, 2003 and August 31, 2002 and $175,000 as of August 31, 2001, and was included in other assets.

47

In August 1998, relating to an officer’s employment agreement, we loaned one of our officers $500,000 under a promissory note. We reduced the note balance by $50,000 in August 1999, relating to the officer’s employment agreement, and by $200,000 in January 2000 relating to the employee’s termination. The note bears no interest and must be repaid on the earlier to occur of the sale or transfer of the former officer’s personal residence or August 11, 2003. The balance outstanding under the loan was $250,000 as of March 31, 2003, August 31, 2002 and August 31, 2001 and was included in other receivables.

In April 1998, relating to an officer’s employment agreement, we loaned one of our executive officers $200,000 under a promissory note. The note bears interest at our primary lender’s prime rate plus 1.00% per annum. The balance outstanding under the loan, included in other receivables, was $302,000 as of March 31, 2003 (including accrued interest of $102,000) and $262,000 as of August 31, 2002 (including accrued interest of $62,000) and was repaid in April 2003.

In August 2000, we wrote off notes receivable and related accrued interest of $2.8 million due from an entity, as the notes were deemed uncollectible. Two of our directors served as directors of the entity, one of which served as our nominee at the request of our Board of Directors.

Warrant Grants and Other Equity Transactions

In October 2001, we issued to the Affiliates warrants to purchase a total of 1,250,000 shares of our common stock at an exercise price of $2.88 per share, the fair market value of our common stock on the grant date. We issued the warrants to the Affiliates in consideration for their services and personal pledge of 1,250,000 shares of our common stock to our primary lender, as additional security for our supplemental discretionary loans.

In March 2001, relating to a loan participation between our primary lender and junior participants, we issued investors in the junior participation five-year warrants to purchase an aggregate of 2,375,000 shares of our common stock exercisable at a price of $1.25 per share, which included a total of 1,375,000 warrants we issued to some of our executive officers and to one of the directors of our Board. For information regarding the junior participation, please see Note 14 (Debt) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The fair value of the warrants of $1,751,000, based on the Black-Scholes option pricing model, was recorded as a deferred financing cost. We are amortizing the balance as a non-cash financing expense evenly over two and one-half years through August 31, 2003, the date on which the North American credit agreement terminates. In fiscal 2002, we issued 750,000 shares of our common stock to unrelated investors and 105,000 shares of our common stock to one of our director’s relating to the exercise of these warrants. In fiscal 2001, we issued 250,000 shares of our common stock to unrelated investors relating to the exercise of these warrants.

48

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

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

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

We had a cumulative foreign currency translation loss of $1.8 million as of March 31, 2003 and August 31, 2002 and 2001, which is included in accumulated other comprehensive loss in our statements of stockholders’ (deficit) equity. We recorded net foreign currency transaction gains of $0.1 million for the seven months ended March 31, 2003 and foreign currency transaction losses of $0.1 million in the seven months ended March 31, 2002, $0.3 million in fiscal 2002, $0.2 million in fiscal 2001 and $2.2 million in fiscal 2000. Please see Note 1 (Business and Significant Accounting Policies: Foreign Currency) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

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

49

Item 8.    Financial Statements and Supplementary Data.

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

Acclaim Entertainment, Inc.

We have audited the accompanying consolidated balance sheets of Acclaim Entertainment, Inc. and Subsidiaries as of March 31, 2003, August 31, 2002 and August 31, 2001, and the related consolidated statements of operations, stockholders’ (deficit) equity and cash flows for the seven months ended March 31, 2003 and each of the years in the three-year period ended August 31, 2002. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for the seven months ended March 31, 2003 and each of the years in the three-year period ended August 31, 2002. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Acclaim Entertainment, Inc. and Subsidiaries as of March 31, 2003, August 31, 2002 and August 31, 2001, and the results of their operations and their cash flows for the seven months ended March 31, 2003 and each of the years in the three-year period ended August 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1A to the consolidated financial statements, the Company’s working capital and stockholders’ deficits as of March 31, 2003 and recurring use of cash in operating activities raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

New York, New York May 20, 2003 KPMG LLP

50

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	March 31, 2003			August 31, 2002			August 31, 2001
ASSETS
Current Assets
Cash and cash equivalents	$	4,495		$	51,004		$	26,797
Accounts receivable, net		24,303			65,660			46,704
Other receivables		3,360			2,685			2,195
Inventories		7,711			9,634			4,043
Prepaid expenses and other current assets		7,076			6,420			4,816
Capitalized software development costs, net		6,944			13,257			3,875
Building held for sale		5,424			—			—
Total Current Assets		59,313			148,660			88,430
Fixed assets, net		19,731			30,760			32,645
Capitalized software development costs		—			1,813			1,733
Other assets		893			1,662			2,822
Total Assets	$	79,937		$	182,895		$	125,630
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current Liabilities
Convertible notes	$	—		$	—		$	29,225
Short-term borrowings		30,799			54,508			25,428
Trade accounts payable		28,477			40,151			33,630
Accrued expenses		28,751			44,828			31,582
Accrued selling expenses		26,649			14,945			7,284
Accrued restructuring charges		2,299			—			—
Mortgage payable		4,600			—			—
Income taxes payable		1,234			1,515			694
Total Current Liabilities		122,809			155,947			127,843
Long-Term Liabilities
Long-term debt		632			4,737			4,973
Bank participation advance		—			—			9,500
Other long-term liabilities		2,654			2,856			3,669
Total Liabilities		126,095			163,540			145,985
Stockholders’ (Deficit) Equity
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued		—			—			—
Common stock, $0.02 par value; 200,000 shares authorized; 96,621, 92,471 and 77,279 shares issued and outstanding		1,932			1,849			1,546
Additional paid-in capital		313,616			311,458			267,436
Accumulated deficit		(359,911	)		(292,106	)		(287,573	)
Accumulated other comprehensive loss		(1,795	)		(1,846	)		(1,764	)
Total Stockholders’ (Deficit) Equity		(46,158	)		19,355			(20,355	)
Total Liabilities and Stockholders’ (Deficit) Equity	$	79,937		$	182,895		$	125,630

See notes to consolidated financial statements.

51

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Seven Months Ended March 31,						Fiscal Years Ended August 31,
	2003			2002			2002			2001			2000
				(Unaudited)
Net revenue	$	101,589		$	160,188		$	268,688		$	197,568		$	188,626
Cost of revenue		76,507			62,891			118,386			62,023			105,396
Gross profit		25,082			97,297			150,302			135,545			83,230
Operating expenses
Marketing and selling		32,295			30,132			57,892			31,631			71,632
General and administrative		24,549			25,165			43,374			40,839			56,378
Research and development		25,392			23,133			44,139			39,860			57,410
Goodwill writedown		—			—			—			—			17,870
Restructuring charges		4,824			—			—			—			—
Impairment on building held for sale		2,146			—			—			—			—
Total operating expenses		89,206			78,430			145,405			112,330			203,290
(Loss) earnings from operations		(64,124	)		18,867			4,897			23,215			(120,060	)
Other income (expense)
Interest expense, net		(4,073	)		(5,301	)		(7,269	)		(10,522	)		(7,691	)
(Loss) gain on early retirement of debt		—			(1,221	)		(1,221	)		2,795			—
Other income (expense)		201			(843	)		(1,660	)		1,699			(3,902	)
Total other expense		(3,872	)		(7,365	)		(10,150	)		(6,028	)		(11,593	)
(Loss) earnings before income taxes		(67,996	)		11,502			(5,253	)		17,187			(131,653	)
Income tax (benefit) provision		(191	)		(944	)		(720	)		(106	)		91
Net (loss) earnings	$	(67,805	)	$	12,446		$	(4,533	)	$	17,293		$	(131,744	)
Net (loss) earnings per share data:
Basic	$	(0.73	)	$	0.15		$	(0.05	)	$	0.29		$	(2.36	)
Diluted	$	(0.73	)	$	0.14		$	(0.05	)	$	0.26		$	(2.36	)

See notes to consolidated financial statements.

52

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(In thousands)

	Preferred Stock Issued		Common Stock Issued					Additional Paid-In Capital			Notes Receivable			Deferred Compensation
			Shares		Amount
Balance at August 31, 1999	$	—	56,033		$	1,121		$	209,926		$	—		$	(2,653	)
Net loss		—	—			—			—			—			—
Issuances of common stock		—	14			—			100			—			—
Escrowed shares received		—	(72	)		(1	)		(628	)		—			—
Cancellations of options		—	—			—			(66	)		—			66
Deferred compensation expense		—	—			—			—			—			2,274
Issuance of warrants for litigation settlements		—	—			—			2,550			—			—
Exercise of stock options and warrants		—	427			9			1,553			—			—
Issuance of common stock under employee stock purchase plan		—	223			4			818			—			—
Foreign currency translation loss		—	—			—			—			—			—
Balance at August 31, 2000		—	56,625			1,133			214,253			—			(313	)
Net earnings		—	—			—			—			—			—
Issuances of common stock in private placement		—	9,335			187			28,009			—			—
Issuances of common stock to executive officers		—	720			14			886			—			—
Issuances of common stock for payment of services		—	914			18			2,857			—			—
Issuances of common stock in connection with note retirements		—	6,169			123			15,737			—			—
Escrowed shares received		—	(72	)		(1	)		1			—			—
Deferred compensation expense		—	—			—			—			—			313
Issuance of common stock for litigation settlements		—	204			4			544			—			—
Exercise of stock options and warrants		—	3,151			63			6,777			(3,595	)		—
Warrants issued in connection with bank participation advance		—	—			—			1,751			—			—
Issuance of common stock under employee stock purchase plan		—	233			5			216			—			—
Foreign currency translation loss		—	—			—			—			—			—
Balance at August 31, 2001		—	77,279			1,546			271,031			(3,595	)		—
Net loss		—	—			—			—			—			—
Issuances of common stock in private placement		—	7,167			143			19,642			—			—
Issuances of common stock for exercises of warrants by executive officers		—	1,125			23			3,352			(3,352	)		—
Issuances of common stock in connection with note retirements and conversions		—	5,039			101			18,729			—			—
Exercise of stock options and warrants		—	2,071			41			4,662			—			—
Cancellations of common stock		—	(551	)		(11	)		11			—			—
Warrants issued and other non-cash charges in connection with supplemental bank loan		—	—			—			732			—			—
Expenses incurred in connection with issuances of common stock		—	—			—			(287	)		—			—
Issuance of common stock under employee stock purchase plan		—	341			6			533			—			—
Foreign currency translation loss		—	—			—			—			—			—
Balance at August 31, 2002		—	92,471			1,849			318,405			(6,947	)		—
Net loss		—	—			—			—			—			—
Exercise of stock options and warrants		—	10			—			11			—			—
Issuance of common stock under employee stock purchase plan		—	140			3			118			—			—
Issuance of common stock to executive officers for providing collateral for credit agreement		—	4,000			80			1,480			—			—
Warrants issued to executive officers for providing collateral for credit agreement		—	—			—			305			—			—
Warrant modification charges in connection with common stock issuance to executive officers		—	—			—			165			—			—
Stock option compensation		—	—			—			79			—			—
Foreign currency translation gain		—	—			—			—			—			—
Balance at March 31, 2003	$	—	96,621		$	1,932		$	320,563		$	(6,947	)	$	—

See notes to consolidated financial statements.

53

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

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

(In thousands)

	Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total			Comprehensive Income (loss)
Balance at August 31, 1999	$	(173,122	)	$	(3,262	)	$	(651	)	$	31,359		$	—
Net loss		(131,744	)		—			—			(131,744	)		(131,744	)
Issuances of common stock		—			—			—			100			—
Escrowed shares received		—			(76	)		—			(705	)		—
Cancellations of options		—			—			—			—			—
Deferred compensation expense		—			—			—			2,274			—
Issuance of warrants for litigation settlements		—			—			—			2,550			—
Exercise of stock options and warrants		—			—			—			1,562			—
Issuance of common stock under employee stock purchase plan		—			—			—			822			—
Foreign currency translation loss		—			—			(198	)		(198	)		(198	)
Balance at August 31, 2000		(304,866	)		(3,338	)		(849	)		(93,980	)		(131,942	)
Net earnings		17,293			—			—			17,293			17,293
Issuances of common stock in private placement		—			3,338			—			31,534			—
Issuances of common stock to executive officers		—			—			—			900			—
Issuances of common stock for payment of services		—			—			—			2,875			—
Issuances of common stock in connection with note retirements		—			—			—			15,860			—
Escrowed shares received		—			—			—			—			—
Deferred compensation expense		—			—			—			313			—
Issuance of common stock for litigation settlements		—			—			—			548			—
Exercise of stock options and warrants		—			—			—			3,245			—
Warrants issued in connection with bank participation advance		—			—			—			1,751			—
Issuance of common stock under employee stock purchase plan		—			—			—			221			—
Foreign currency translation loss		—			—			(915	)		(915	)		(915	)
Balance at August 31, 2001		(287,573	)		—			(1,764	)		(20,355	)		16,378
Net loss		(4,533	)		—			—			(4,533	)		(4,533	)
Issuances of common stock in private placement		—			—			—			19,785			—
Issuances of common stock for exercises of warrants by executive officers		—			—			—			23			—
Issuances of common stock in connection with note retirements and conversions		—			—			—			18,830			—
Exercise of stock options and warrants		—			—			—			4,703			—
Cancellations of common stock		—			—			—			—			—
Warrants issued and other non-cash charges in connection with supplemental bank loan		—			—			—			732			—
Expenses incurred in connection with issuances of common stock		—			—			—			(287	)		—
Issuance of common stock under employee stock purchase plan		—			—			—			539			—
Foreign currency translation loss		—			—			(82	)		(82	)		(82	)
Balance at August 31, 2002		(292,106	)		—			(1,846	)		19,355			(4,615	)
Net loss		(67,805	)		—			—			(67,805	)		(67,805	)
Exercise of stock options and warrants		—			—			—			11			—
Issuance of common stock under employee stock purchase plan		—			—			—			121			—
Issuance of common stock to executive officers for providing collateral for credit agreement		—			—			—			1,560			—
Warrants issued to executive officers for providing collateral for credit agreement		—			—			—			305			—
Warrant modification charges in connection with common stock issuance to executive officers		—			—			—			165			—
Stock option compensation		—			—			—			79			—
Foreign currency translation gain		—			—			51			51			51
Balance at March 31, 2003	$	(359,911	)	$	—		$	(1,795	)	$	(46,158	)	$	(67,754	)

See notes to consolidated financial statements.

54

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Seven Months Ended March 31,						Fiscal Years Ended August 31,
	2003			2002			2002			2001			2000
				(Unaudited)
Cash flows from operating activities:
Net (loss) earnings	$	(67,805	)	$	12,446		$	(4,533	)	$	17,293		$	(131,744	)
Adjustments to reconcile net (loss) earnings to net cash used in operating activities:
Depreciation and amortization		4,124			4,868			8,467			8,862			13,202
Goodwill writedown		—			—			—			—			17,870
Non-cash financing expense		756			895			1,504			386			—
Loss (gain) on early retirement of debt		—			1,221			1,221			(2,795	)		—
Provision for price concessions and returns, net		55,938			21,138			67,024			6,399			90,248
Deferred compensation expense		—			—			—			313			2,274
Non-cash royalty charges		—			—			—			1,168			6,077
Amortization of capitalized software development costs		17,063			6,597			10,725			1,796			—
Write-off of capitalized software development costs		2,045			—			2,478			—			—
Impairment charge on building held for sale		2,146			—			—			—			—
Non-cash compensation expense		79			—			—			—			300
Loss on fixed asset disposals		231			—			—			—			—
Other non-cash items		14			(63	)		142			381			80
Change in operating assets and liabilities:
Accounts receivable		8,125			(32,526	)		(92,461	)		(21,811	)		(11,908	)
Other receivables		(1,532	)		(2,262	)		446			745			984
Other assets		300			(300	)		(225	)		25			(200	)
Inventories		2,367			(4,514	)		(5,843	)		660			10,587
Prepaid expenses		891			(1,612	)		(1,199	)		2,065			6,696
Capitalized software development costs		(10,872	)		(11,054	)		(22,608	)		(7,410	)		—
Accounts payable		(11,382	)		(7,869	)		6,040			2,554			(14,987	)
Accrued expenses		(22,635	)		(6,128	)		27,257			(28,583	)		(41,703	)
Income taxes payable		(345	)		217			891			1,419			(7,151	)
Other long-term liabilities		(202	)		(705	)		(845	)		(48	)		1,865
Net cash used in operating activities		(20,694	)		(19,651	)		(1,519	)		(16,581	)		(57,510	)
Cash flows from investing activities:
Acquisition of fixed assets		(733	)		(2,122	)		(5,082	)		(1,033	)		(20,916	)
Disposal of fixed assets		79			7			7			1,237			644
Other assets		31			(184	)		(184	)		(289	)		500
Net cash used in investing activities		(623	)		(2,299	)		(5,259	)		(85	)		(19,772	)

See notes to consolidated financial statements.

55

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands)

	Seven Months Ended March 31,						Fiscal Years Ended August 31,
	2003			2002			2002			2001			2000
				(Unaudited)
Cash flows from financing activities:
Proceeds from bank participation advance		—			—			—			9,500			—
Repayment of convertible notes		—			(12,190	)		(12,190	)		(5,997	)		—
Proceeds from mortgages		—			—			—			—			6,233
Payment of mortgages		(483	)		(884	)		(1,027	)		(1,176	)		(945	)
(Payment of) proceeds from short-term bank loans, net		(23,401	)		1,757			19,368			(4,451	)		1,663
Proceeds from exercises of stock options and warrants		11			3,278			4,726			3,245			1,562
Payment of obligations under capital leases		(662	)		(263	)		(564	)		(222	)		(667	)
Proceeds from issuances of common stock, net		—			21,523			19,498			36,368			—
Proceeds from issuance of common stock under employee stock purchase plan		121			245			539			221			622
Escrowed shares received		—			—			—			—			(77	)
Net cash (used in) provided by financing activities		(24,414	)		13,466			30,350			37,488			8,391
Effect of exchange rate changes on cash		(778	)		(205	)		635			(763	)		1,208
Net (decrease) increase in cash and cash equivalents		(46,509	)		(8,689	)		24,207			20,059			(67,683	)
Cash and cash equivalents: beginning of period		51,004			26,797			26,797			6,738			74,421
Cash and cash equivalents: end of period	$	4,495		$	18,108		$	51,004		$	26,797		$	6,738
Supplemental schedule of non cash investing and financing activities:
Issuance of common stock for payment of accrued royalties payable	$	—		$	—		$	—		$	2,719		$	—
Issuance of common stock for payment of convertible notes and related accrued interest	$	—		$	13,309		$	13,309		$	7,597		$	—
Issuance of common stock for bank loan collateral	$	1,560		$	—		$	—		$	—		$	—
Issuance of stock warrants for bank loan collateral	$	305		$	—		$	—		$	—		$	—
Acquisition of equipment under capital leases	$	262		$	280		$	1,252		$	—		$	851
Conversion of notes to common stock	$	—		$	4,300		$	4,300		$	—		$	—
Cash paid during the period for:
Interest	$	3,727		$	7,163		$	9,814		$	10,993		$	11,449
Income taxes	$	77		$	609		$	—		$	410		$	2,714

See notes to consolidated financial statements.

56

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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

1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

A.  Business and Liquidity

We develop, publish, distribute and market video and computer game software on a worldwide basis under our brand name for popular interactive entertainment consoles, such as Sony’s PlayStation 2, Nintendo’s Game Boy Advance and GameCube, and Microsoft’s Xbox, and, to a lesser extent, personal computers. We develop our own software in five software development studios located in the U.S. and the U.K, including a recording studio in the U.S. We also contract with independent software developers to create software for us. We distribute our software directly through our subsidiaries in North America, the U.K., Germany, France, Spain and Australia. We also utilize regional distributors outside those geographic areas. We also distribute software developed and published by third parties, develop and publish strategy guides relating to our software and issue “special edition” comic magazines at various times to support certain of our brands.

For the seven months ended March 31, 2003 we had a net loss of $67,805 and used $20,694 of cash in operating activities. As of March 31, 2003, we have a stockholders’ deficit of $46,158, a working capital deficit of $63,496 and $4,495 of cash and cash equivalents. Our accompanying financial statements and financial statement schedule have been prepared assuming that we will continue as a going concern. Our working capital and stockholders’ deficits as of March 31, 2003 and the recurring use of cash in operating activities raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with our primary lender. (Please see note 14.) To enhance liquidity, during the seven months ended March 31, 2003 we implemented targeted expense reductions through a business restructuring under which we reduced fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various assets, eliminated certain marginal titles under development, reduced staff and staff related expenses and lowered marketing expenditures. Additionally, on March 31, 2003, our primary lender advanced to us a supplemental discretionary loan of up to $11,000 through May 31, 2003, which thereafter is reduced to $5,000 through September 29, 2003. (Please see note 14.) In May 2003, two of our executive officers, referred to as the Affiliates, each committed to our Board of Directors to prepay $2,000 of their outstanding loans due to us. Based upon our cash resources, including the $11,000 supplemental discretionary loan being provided by our primary lender and assuming our primary lender consents, based upon our existing collateral, to provide us supplemental financing during the second half of fiscal 2004, although we can provide no assurance to our investors that we will be able to receive such consent, and the $4,000 cash commitment from the Affiliates and assuming we achieve our sales forecast by successfully meeting our product release schedule as provided in our business operating plan, and giving effect to the continued realization of savings from our implemented expense reductions, and providing we continue to enjoy the support of our primary lender and vendors, we expect to have sufficient cash resources to meet our projected cash and operating requirements through the next twelve months. The Company continues to pursue financing and investing arrangements with outside investors. Our long-term liquidity will significantly depend on our ability to timely develop and market new software products that achieve widespread market acceptance for use with the hardware platforms that dominate the market and derive a long-term benefit from the expense reductions. In the event that we do not achieve the product release schedule, sales assumptions or continue to derive expense savings from our implemented expense reductions, or our primary lender does not consent, based upon our existing collateral, to provide us supplemental financing during the second half of fiscal 2004, we cannot assure investors that our future operating cash flows will be sufficient to meet our operating requirements, our debt service requirements or repay our indebtedness at maturity,

57

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

including without limitation, repayment of the supplemental discretionary loan. In any such event, our operations and liquidity will be materially and adversely affected and we could be forced to cease operations.

B.  Change in Fiscal Year

In January 2003, our Board of Directors approved a plan to change our fiscal year end from August 31 to March 31. The accompanying consolidated financial statements include our results of operations for the seven month fiscal year ended March 31, 2003 and our unaudited results of operations for the seven months ended March 31, 2002. Fiscal year 2004 commenced on April 1, 2003 and will end on March 31, 2004. Our quarterly closing dates will occur on the Sunday closest to the last day of the calendar quarter, which encompasses the following quarter ending dates for fiscal 2004.

Quarter	Quarter End Date
First	June 29, 2003
Second	September 28, 2003
Third	December 28, 2003
Fourth	March 31, 2004

C.  Principles of Consolidation

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

D.  Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents, consisting of taxable municipal securities and money market funds, amounted to $28,606 as of August 31, 2002. We had no cash equivalents as of March 31, 2003 and August 31, 2001.

E.  Financial Instruments

The March 31, 2003, August 31, 2002 and August 31, 2001 values of receivables, trade accounts payable and accrued expenses approximated their fair values due to their short maturities. The March 31, 2003, August 31, 2002 and August 31, 2001 carrying values of bank borrowings and mortgage notes payable approximated their fair values because these instruments bear interest at rates that are adjusted for market rate fluctuations. Please see note 14.

F.  Net Revenue

We apply the provisions of Statement of Position 97-2, “Software Revenue Recognition,” in conjunction with the applicable provisions of Staff Accounting Bulletin No. 101, “Revenue Recognition.” Accordingly, we recognize revenue for software when there is (1) persuasive evidence that an arrangement exists, which is generally a customer purchase order, (2) the software is delivered, (3) the selling price is fixed and determinable and (4) collectibility of the customer receivable is deemed probable. We do not customize our software or provide postcontract support to our customers.

The timing of when we recognize revenue generally differs for our retail customers and distributor customers. For retail customers, we recognize software product revenue when the products are shipped to the

58

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

We are not contractually obligated to accept returns, except for defective product. However, we grant price concessions to our customers who primarily are major retailers that control the market access to the consumer when those concessions are necessary to maintain our relationship with the retailers and access to their retail channel customers. If the consumers’ demand for a specific title falls below expectations or significantly declines below previous rates of sell-through, then, we may provide a price concession or credit to spur further sales by the retailer to maintain the customer relationship. We record revenue net of an allowance for estimated price concessions and returns. We must make significant estimates and judgments when determining the appropriate allowance for price concessions and returns in any accounting period. In order to derive and evaluate those estimates, we analyze historical price concessions and returns, current sell-through of product and retailer inventory, current economic trends, changes in consumer demand and acceptance of our products in the marketplace, among other factors. Please see note 1S.

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

	March 31, 2003		August 31, 2002		August 31, 2001
Gross accounts receivable (please see note 4)	$	50,980	$	95,877	$	63,551
Allowances:
Accounts receivable allowance (please see note 4)	$	26,677	$	30,217	$	16,847
Accrued price concessions (please see note 12)		19,623		10,001		5,887
Accrued rebates (please see note 12)		2,010		1,957		—
Total allowances	$	48,310	$	42,175	$	22,734

G.  Inventories

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

H.  Prepaid Royalties

We pay non-refundable royalty advances to licensors of intellectual properties and classify those payments as prepaid royalties. All royalty advance payments are recoupable against future royalties due for software or intellectual properties we licensed under the terms of our license agreements. We expense prepaid royalties at contractual royalty rates based on actual product sales. We also charge to expense the portion of prepaid royalties that we expect will not be recovered through future product sales. Material differences between actual future

59

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

sales and those we projected may result in the amount and timing of royalty expense to vary. We classify royalty advances as current or noncurrent assets based on the portion of estimated future net product sales that we expect will occur within the next fiscal year.

I.  Software Development Costs

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

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

J.  Long-Lived Assets

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

K.  Fixed Assets

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

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

L.  Goodwill

Our policy is to evaluate and recognize an impairment of goodwill if it is probable that the recorded amounts are in excess of projected undiscounted future cash flows. In the fourth quarter of fiscal 2000, we wrote

60

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

off the remaining $17.9 million of goodwill related to our subsidiary, Acclaim Comics, because its value was impaired. We based our decision to write off the remaining goodwill of Acclaim Comics on the operating losses incurred by Acclaim Comics, the deterioration of Acclaim Comics’ core businesses, the state of the comic book industry and our projections for Acclaim Comics’ operations. We decided that we would continue to publish special edition comic book magazines only occasionally to support our software products, revised our forecasts of unit sales downward and the life of our software using properties licensed or created by Acclaim Comics and eliminated the projected development of some new titles using Acclaim Comics’ properties.

M.  Interest Expense, Net

Interest expense, net is comprised of:

	Seven Months Ended						Fiscal Years Ended
	March 31, 2003			March 31, 2002			August 31, 2002		August 31, 2001		August 31, 2000
				(Unaudited)
Interest income	$	465		$	480		1,455		471		3,758
Interest expense		(4,538	)		(5,781	)	(8,724	)	(10,993	)	(11,449	)
	$	(4,073	)	$	(5,301	)	(7,269	)	(10,522	)	(7,691	)

N.  Income Taxes

We recognize deferred tax assets and liabilities related to the future tax consequences attributable to temporary differences between the financial statement and tax basis carrying amounts of existing assets and liabilities. We calculate the value of our deferred tax assets and liabilities by multiplying the value of temporary differences by the future enacted tax rates we expect will apply to taxable income in the years in which we expect those temporary differences will reverse. If our expectation of future tax rates changes, we recognize the effect on deferred tax assets and liabilities in income in the period that includes the enactment date. We have not recorded a deferred tax asset as of March 31, 2003, August 31, 2002 and August 31, 2001 due to the uncertainty of our ability to recover its value in future periods.

O.  Foreign Currency

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

Generally, we realize foreign currency transaction gains and losses in connection with sales to our customer’s in foreign countries, which we effect through our foreign subsidiaries, as well as in connection with intercompany transactions with our foreign subsidiaries. We classify realized foreign currency transaction gains (losses) in other income (expense), which amounted to $75 for the seven months ended March 31, 2003, $(127) for the seven months ended March 31, 2002, $(337) for fiscal 2002, $(249) for fiscal 2001 and $(2,152) for fiscal 2000.

We have never entered into any material foreign currency hedging transactions.

61

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

P.  Shipping and Handling Costs

We record shipping and handling costs as a component of general and administrative expenses. We do not invoice our customers for and have no revenue related to shipping and handling costs. These costs amounted to $2,755 for the seven months ended March 31, 2003, $2,680 for the seven months ended March 31, 2002, $5,057 for fiscal 2002, $3,994 for fiscal 2001 and $6,332 for fiscal 2000.

Q.  Comprehensive Income (Loss)

We present comprehensive income (loss) within our consolidated statements of stockholders’ (deficit) equity. Comprehensive income (loss) reflects net earnings (loss) adjusted for foreign currency translation gains (losses). Comprehensive income was $12,606 for the seven months ended March 31, 2002.

R.  Earnings (Loss) Per Share

We calculate basic earnings (loss) per share by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding. We calculate diluted earnings (loss) per share by dividing net earnings (loss) by the total of (1) the weighted average number of shares of common stock outstanding (2) the equivalent weighted average number of shares of our common stock that dilutive common stock options and warrants outstanding represent and (3) the equivalent weighted average number of shares of our common stock that dilutive convertible notes outstanding represent. Please see note 17.

S.  Estimates

To prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, management must make estimates and assumptions that affect the amounts of reported assets and liabilities, the disclosures for contingent assets and liabilities on the date of the financial statements and the amounts of revenue and expenses during the reporting period. Actual results could differ from our estimates. Among the more significant estimates we included in these financial statements is our allowance for price concessions and returns, valuation allowances for inventory and valuation allowances for the recoverability of prepaid royalties. During the seven months ended March 31, 2003, net revenue decreased by $14,438 when we increased our August 31, 2002 allowance for price concessions and returns because actual product sell-through in the retail channel during the subsequent 2002 holiday season and through the end of March 2003, particularly for the Turok: Evolution software title released in the fourth quarter of fiscal 2002, demonstrated that additional allowances were required.

T.  New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB or the “Board”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. We implemented the provisions of SFAS No. 146 during the three months ended March 31, 2003 in connection with our restructuring activities. Please see note 13.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an

62

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for, and disclosure of the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual reports that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of the guarantor’s year-end. Implementation of this standard during the three months ended March 31, 2003 had no effect on our statement of financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. The Interpretation requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. We do not currently have any variable interest entities and, therefore, the adoption of FIN 46 will not affect our financial statements.

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, (SFAS 148), “Accounting for Stock-Based Compensation—Transition and Disclosure”, amending FASB Statement No. 123 (SFAS 123), “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002. We adopted the disclosure portion of this statement for the seven months ended March 31, 2003. The application of the disclosure portion of this standard will have no impact on our consolidated financial position or results of operations. The FASB recently indicated that they will require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. We will continue to monitor their progress on the issuance of this standard as well as evaluate our position with respect to current guidelines.

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

	Seven Months Ended March 31,		Fiscal Years Ended August 31,
	2003	2002	2002	2001	2000
		(Unaudited)
Expected dividend yield	0%	0%	0%	0%	0%
Risk free interest rate	2.2%	3.5%	3.5%	3.1%	5.9%
Expected stock volatility	125%	52%	52%	142%	103%
Expected option life	3 yrs	3 yrs	3 yrs	3 yrs	3 yrs

63

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

	Seven Months Ended March 31,						Fiscal Years Ended August 31,
	2003			2002			2002			2001			2000
				(Unaudited)
Net (loss) earnings:
As reported	$	(67,805	)	$	12,446		$	(4,533	)	$	17,293		$	(131,744	)
Add: Stock-based compensation expense included in net (loss) earnings		79			—			—			—			—
Deduct: Total stock-based employee compensation expense using fair value method		(3,425	)		(5,436	)		(5,058	)		(1,405	)		(3,584	)
Pro forma	$	(71,151	)	$	7,010		$	(9,591	)	$	15,888		$	(135,328	)
Diluted net (loss) earnings per share:
As reported	$	(0.73	)	$	0.14		$	(0.05	)	$	0.26		$	(2.36	)
Pro forma	$	(0.77	)	$	0.08		$	(0.14	)	$	0.24		$	(2.42	)

U.  Reclassifications

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

2. LICENSE AGREEMENTS

We and various Sony computer entertainment companies (collectively, “Sony”) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the “Sony” name and its proprietary information and technology in order to develop and distribute software for PlayStation and PlayStation 2 in various territories throughout the world, including North America, Australia, Europe and Asia. We pay Sony a royalty fee, plus the manufacturing cost, for each unit Sony manufactures for us. This payment is made upon the manufacture of the units. In March 2003, our agreements with Sony for PlayStation platforms renewed automatically and expire in March 2004.

We and various Nintendo entertainment companies (collectively, “Nintendo”) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the “Nintendo” name and its proprietary information and technology in order to develop and distribute software for GameCube in North America and for Game Boy Advance in Australia, Europe, New Zealand and North America, Game Boy and Game Boy Color in various territories, including North America, Australia, Europe and New Zealand. We pay Nintendo a fixed amount per unit, based in part, on memory capacity and chip configuration. This amount includes the cost of manufacturing, printing and packaging of the unit, as well as a royalty for the use of Nintendo’s name, proprietary information and technology. These fees and charges are subject to adjustment by Nintendo in its discretion. Our agreements with Nintendo expire at various times through 2004.

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

64

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

We do not have the right to directly manufacture any CDs or DVDs or cartridges that contain our software for Sony’s PlayStation or PlayStation 2, or Nintendo’s GameCube, Game Boy Color or Game Boy Advance systems. We do have the right to manufacture CDs or DVDs for the Xbox system through subcontractors pre-approved by Microsoft. Please see note 21A. The cost of manufacturing our software products, and the royalties due Nintendo, Sony and Microsoft, are included in cost of revenue.

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

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

3.    ACQUISITION

On November 12, 1998, we acquired substantially all of the assets and liabilities of a distributor in Australia. We accounted for the acquisition using the purchase method of accounting. The total cost of the acquisition was $3,851 ($1,244 was related to identified net tangible assets, primarily accounts receivable, and $2,607 was related to goodwill). In fiscal 2000, the seller returned 72 shares of our common stock, which had a fair value of $629 at the acquisition date and forgave $62 of the cash consideration we had not yet paid because the Australian distributor did not attain the financial targets established under the purchase agreement. As a result of this, we reduced the goodwill we had originally recorded by $691. The operating results of the distributor are insignificant when compared with our consolidated operating results.

4. ACCOUNTS RECEIVABLE

Accounts receivable are comprised of:

	March 31, 2003			August 31, 2002			August 31, 2001
Assigned receivables due from factor	$	42,704		$	82,044		$	42,845
Unfactored accounts receivable		8,276			13,833			20,706
		50,980			95,877			63,551
Allowance for price concessions and returns		(26,677	)		(30,217	)		(16,847	)
	$	24,303		$	65,660		$	46,704

65

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

We and our primary lender are parties to a factoring agreement that expires on August 31, 2003. The factoring agreement provides for automatic renewals for additional one-year periods, unless terminated by either party upon 90 days’ prior notice. Under the factoring agreement, we assign to our primary lender and our primary lender purchases from us, our U.S. accounts receivable on the approximate dates that our accounts receivable are due from our customers. Our primary lender remits payments to us for the assigned U.S. accounts receivable that are within the financial parameters set forth in the factoring agreement. Those financial parameters include requirements that invoice amounts meet approved credit limits and that the customer does not dispute the invoices. The purchase price of our accounts receivable that we assign to the factor equals the invoiced amount, which is adjusted for any returns, discounts and other customer credits or allowances.

Before our primary lender purchases our U.S. accounts receivable and remits payment to us for the purchase price, it may, in its discretion, provide us cash advances under our North American credit agreement (please see note 14) taking into account the assigned receivables due from our customers, among other things. As of March 31, 2003, our primary lender was advancing us 60% of the eligible receivables due from our retail customers. As of March 31, 2003, the factoring charge, recorded in interest expense, was 0.25% of assigned accounts receivable with invoice payment terms of up to 60 days and an additional 0.125% for each additional 30 days or portion thereof.

5. OTHER RECEIVABLES

Other receivables are comprised of:

	March 31, 2003		August 31, 2002		August 31, 2001
Foreign value added tax	$	—	$	37	$	1,204
Notes receivable and accrued interest due from officers (please see note 21B)		1,469		1,016		598
Licensing fee recovery		1,415		1,415		—
Other		476		217		393
	$	3,360	$	2,685	$	2,195

6. INVENTORIES

	March 31, 2003		August 31, 2002		August 31, 2001
Raw material and work-in-process	$	131	$	1,073	$	486
Finished goods		7,580		8,561		3,557
	$	7,711	$	9,634	$	4,043

7.    PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are comprised of:

	March 31, 2003		August 31, 2002		August 31, 2001
Prepaid advertising costs	$	414	$	2,105	$	574
Prepaid insurance		3,122		1,196		951
Prepaid taxes		326		240		695
Royalty advances		754		1,779		1,553
Financing costs (please see notes 14C and 19C)		1,724		—		—
Other prepaid expenses		736		1,100		1,043
	$	7,076	$	6,420	$	4,816

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

66

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

8.    BUILDING HELD FOR SALE

Management committed itself to a plan to sell our building located in the United Kingdom. The building is not currently in use. In connection with the plan, we recorded an impairment charge of $2,146 to adjust the building’s net carrying value to its fair value of $5,424, which is based on an independent appraisal, net of expected selling costs. As of March 31, 2003, the carrying value of the building was reclassified from fixed assets to current assets and its associated mortgage payable was reclassified from long-term debt to current liabilities as we expect to sell the building within a year.

9.    FIXED ASSETS

Fixed assets are comprised of:

	March 31, 2003			August 31, 2002			August 31, 2001
Buildings and improvements	$	20,155		$	29,650		$	28,881
Furniture, fixtures and equipment		43,405			47,064			42,410
Automotive equipment		394			636			488
		63,954			77,350			71,779
Accumulated depreciation		(44,223	)		(46,590	)		(39,134	)
	$	19,731		$	30,760		$	32,645

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

10.    OTHER ASSETS

Other assets are comprised of:

	March 31, 2003		August 31, 2002		August 31, 2001
Deferred financing costs	$	320	$	772	$	1,545
Deposits		473		490		302
Income tax receivable		—		—		800
Notes receivable due from officers (please see note 21B)		100		400		175
	$	893	$	1,662	$	2,822

11.    ACCRUED EXPENSES

Accrued expenses are comprised of:

	March 31, 2003		August 31, 2002		August 31, 2001
Accrued advertising and marketing	$	300	$	2,797	$	1,244
Accrued consulting and professional fees		1,201		1,219		2,622
Accrued excise and other taxes		1,197		4,024		2,445
Accrued interest		104		7		1,496
Accrued duty and freight		887		1,221		39
Accrued litigation		1,535		76		585
Accrued payroll		4,002		7,494		4,272
Accrued purchases		4,893		15,103		2,024
Accrued royalties payable and licensing obligations		12,188		10,087		15,057
Other accrued expenses		2,444		2,800		1,798
	$	28,751	$	44,828	$	31,582

67

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

12.    ACCRUED SELLING EXPENSES

Accrued selling expenses are comprised of:

	March 31, 2003		August 31, 2002		August 31, 2001
Accrued cooperative advertising	$	3,187	$	1,229	$	646
Accrued price concessions		19,623		10,001		5,887
Accrued sales commissions		1,829		1,758		751
Accrued rebates		2,010		1,957		—
	$	26,649	$	14,945	$	7,284

13.    ACCRUED RESTRUCTURING CHARGES

In December 2002 and January 2003, we restructured our operations in order to lower our operating expenses and improve our operating cash flows. Under the plan, we closed our software development studio located in Salt Lake City, Utah, and reduced global administrative headcount. The studio closing was designed to achieve financial efficiencies through consolidation of all our domestic internal product development into one location. The closure of the development studio and reduction of global administrative headcount reduced our overall headcount by approximately 100 employees and resulted in restructuring charges of $4,500 during the month of December 2002 and another $324 during the three months ended March 31, 2003. The restructuring charges include accruals for employee termination costs, the write-off of certain fixed assets and leasehold improvements and the development studio lease commitment, which is net of estimated sub-lease rental income. The development studio lease commitment expires in May 2007 and the severance agreements expire over various periods through April 2004.

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

Beginning balance as of August 31, 2002	$	—
Severance and other employee termination benefits		3,783
Lease commitment, net of estimated sub-lease rental income		567
Asset write-offs		436
Other costs		38
Restructuring charges incurred and expensed		4,824
Less: costs paid		(2,525	)
Ending balance as of March 31, 2003	$	2,299

68

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

14.    DEBT

Debt is comprised of:

	March 31, 2003		August 31, 2002		August 31, 2001
Short term debt:
10% convertible subordinated notes (A)	$	—	$	—	$	29,225
Mortgage notes (B)		—		837		1,270
Obligations under capital leases		736		1,065		536
Supplemental bank loan (C)		11,000		—		10,000
Advances from International factor (D)		4,110		757		6,273
Advances from North American factor (please see note 4)		4,154		42,349		7,349
Bank participation advance (E)		9,500		9,500		—
Promissory notes (F)		737		—		—
Bank overdraft		562		—		—
		30,799		54,508		54,653
Long term debt:
Mortgage notes (B)		—		4,079		4,396
Obligations under capital leases		632		658		577
Bank participation advance (E)		—		—		9,500
		632		4,737		14,473
	$	31,431	$	59,245	$	69,126

A.  10% Convertible Subordinated Notes

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

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

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

In March and April 2001, we retired a total of $13,875 in principal amount of the notes for an aggregate purchase price of $6,751. Of the $6,751 purchase price, $3,934 was raised through a concurrent sale of 3,147 shares of our common stock to the same note holders, based on a purchase price of $1.25 per share. The purchase price of $1.25 per share was approximately $0.24 below the fair value of our common stock on the date the shares were issued, which equated to a total discount of $754. The $6,751 purchase price we paid for the notes included cash of $5,997 and the discount of $754. As a result of the note retirement, we recorded a

69

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

gain on early retirement of debt of $7,124 in the third quarter of fiscal 2001. In the fourth quarter of fiscal 2001, we reduced the gain by $2,798 in connection with the delayed effectiveness of our registration statement filed with the SEC covering the resale of the common stock purchased by the former note holders. The charge equates to the fair value of 750 shares of our common stock we issued to the note holders due to the delayed effectiveness. On December 12, 2001, the SEC declared our registration statement effective.

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

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

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

B.  Mortgage Notes

As of August 31, 2001, we had a mortgage note that was secured by our corporate headquarters building in the U.S. At that time, we had a $471 balance outstanding under the mortgage note. On March 6, 2002, we repaid the principal balance outstanding on the mortgage note. During the fourth quarter of fiscal 2001, we granted our primary lender a second mortgage on our headquarters building as additional security for our supplemental loans (as described under C. below).

In March 2000, we entered into a seven-year term secured credit facility with our U.K. bank to finance the purchase of a building in the U.K. and concurrently granted our U.K. bank a mortgage on the building. We are required to make quarterly principal payments of $215 (£137.5) pursuant to the secured credit facility. The U.K. bank charges us interest at 2.00% above LIBOR (5.94% as of March 31, 2003; 5.97% as of August 31, 2002; 7.22% as of August 31, 2001). We had a principal balance outstanding under this credit facility of $4,916 (£3,230) as of August 31, 2002 and $5,195 (£3,574) as of August 31, 2001. As of March 31, 2003, the building was held for sale (please see note 8) and, accordingly, we reclassified the building as a separate component in current assets and the associated mortgage payable of $4,600 (£2,924) as a separate component of current liabilities.

C.  North American Credit Agreement

Our primary lender and we are parties to a North American credit agreement, which expires on August 31, 2003. This agreement automatically renews for additional one-year periods, unless our primary lender or we terminate the agreement with 90 days’ prior notice. Under the agreement, our primary lender generally advances cash to us based on a borrowing formula that primarily takes into account the balance of our eligible U.S. receivables that the primary lender expects to purchase in the future, and to a lesser extent our finished goods inventory balances. Advances to us under the North American credit agreement bear interest at 1.50% per annum

70

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

above our primary lender’s prime rate (5.75% as of March 31, 2003; 6.25% as of August 31, 2002; 8.25% as of August 31, 2001). Borrowings that our primary lender may provide us in excess of an availability formula bear interest at 2.00% above our primary lender’s prime rate. Under the North American credit agreement, we may not borrow more than $30,000 or the amount calculated using the availability formula, whichever is less, unless our primary lender approves a supplemental discretionary loan. Our primary lender has secured all of our obligations under the North American credit agreement with substantially all of our assets. Under the terms of the North American credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other financial covenants. As of March 31, 2003, August 31, 2002 and August 31, 2001, we were not in compliance with respect to some of the financial covenants contained in the agreement and received waivers from our primary lender.

On March 31, 2003, our primary lender and we amended our North American credit agreement to allow for supplemental discretionary loans of up to $11,000 through May 31, 2003, which thereafter is reduced to $5,000 through September 29, 2003 above the standard formula for short-term funding. As a condition for the amendment, two of our executive officers, otherwise referred to as the Affiliates, pledged an aggregate cash deposit of $2,000 with our primary lender in order to provide a limited guarantee of our obligations. Our primary lender will return the cash deposit to the Affiliates within five days following our timely repayment of the supplemental discretionary loans which are due to be fully repaid on September 30, 2003. As consideration to the Affiliates for making the deposit, and based upon the advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit Committee approved and the Board of Directors authorized the issuance to each Affiliate 2,000 shares of our common stock with an aggregate market value of $1,560 and a warrant to purchase 500 shares of our common stock at an exercise price of $0.50 per share with an aggregate fair value of $305. We are expensing the fair value of the consideration provided to the Affiliates as a non-cash financing expense over the period between the date the initial supplemental loans were advanced, February 2003, and the date they are required to be fully repaid in September 2003. During the seven months ended March 31, 2003, we expensed $306, which is included in interest expense. We have entered into an agreement with the Affiliates which stipulates that in the event the deposit is applied by our primary lender to the repayment of the outstanding supplemental loan obligations and not returned to the Affiliates, we will either repay such amount to the Affiliates or apply the amount as an offset, to the extent permitted by applicable law, against the balance of any net amounts due to us by the Affiliates (please see note 21B).

Advances outstanding under the North American credit agreement within the standard borrowing formula amounted to $4,154 as of March 31, 2003, $42,349 as of August 31, 2002 and $7,349 as of August 31, 2001. The supplemental discretionary loan outstanding amounted to $11,000 as of March 31, 2003 and $10,000 as of August 31, 2001. No supplemental discretionary loan was outstanding as of August 31, 2002.

During August 2000, our primary lender advanced us a discretionary supplemental loan of $15,000 above the standard formula for short-term funding under our North American credit agreement, which we repaid in November 2000.

In each of April 2001 and June 2001, our primary lender advanced us another discretionary supplemental loan of $5,000 above the standard formula for short-term funding under the North American credit agreement, which amount we repaid prior to August 31, 2001.

71

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

In July 2001, our primary lender advanced us another discretionary supplemental loan of $10,000 above the standard formula for short-term funding under our North American credit agreement, which we repaid on January 7, 2002.

On January 14, 2002, our primary lender advanced us another discretionary supplemental loan of $5,000 above the standard formula for short-term funding under our North American credit agreement, which we repaid on March 6, 2002.

In March and June of 2002, our primary lender advanced us another supplemental discretionary loan of $5,000 above the standard borrowing formula, which we repaid on August 30, 2002.

As additional security for the supplemental loans, two of our executive officers personally pledged as collateral an aggregate of 1,568 shares of our common stock. If the market value of the pledged stock (based on a ten trading day average reviewed by our primary lender monthly) decreases below $5,000 while we have a supplemental discretionary loan outstanding and our officers do not deliver additional shares of our common stock to cover the shortfall, then our primary lender would be entitled to reduce the outstanding supplemental loan by an amount equal to the shortfall. Our primary lender will release the 1,568 shares of common stock the Affiliates pledged following a 30-day period in which we have not borrowed more than $1,000 in excess of the amount determined under our availability formula and are not otherwise in default under the North American credit agreement.

We estimate that the fair value of our officers providing the collateral relating to the supplemental loan amounted to approximately $200. We amortized this amount as a non-cash financing expense over the term of the original supplemental loan, which ended on January 7, 2002.

In connection with the original supplemental loan, on October 31, 2001, we issued to our primary lender a five-year warrant to purchase 100 shares of our common stock at an exercise price of $4.70 per share, the market price per share of our common stock on the date we issued the warrant. In February 2002, we reduced the exercise price to $3.00 per share and increased the number of common shares issuable under the warrant to 136 relating to a private placement of our common stock and the anti-dilution provisions of the warrant. On March 31, 2003, we further reduced the exercise price to $0.39 per share and increased the number of common shares issuable under the warrant to 255 relating to the issuance of common shares to Affiliates and the anti-dilution provisions of the warrant. Please see note 19C. We amortized the $419 fair value of the warrant as a non-cash financing expense over the term of the original supplemental loan, which ended on January 7, 2002.

D.  Advances from International Factor

In fiscal 2001, several of our international subsidiaries entered into a receivables facility with our U.K. bank. Under the international facility, we can obtain financing of up to the lesser of approximately $18,000 or 60% of the aggregate amount of eligible receivables from our international operations. The amounts we borrow under the international facility bear interest at 2.00% per annum above LIBOR (5.17% as of March 31, 2003; 6.00% as of August 31, 2002; and 6.25% as of August 31, 2001). This international facility has a term of three years, which automatically renews for additional one-year periods thereafter unless either our U.K. bank or we terminate it upon 90 days’ prior notice. Our U.K bank has secured the international facility with the accounts receivable and assets of our international subsidiaries that participate in the facility. We had an outstanding balance under the international facility of $4,110 as of March 31, 2003, $757 as of August 31, 2002 and $6,273 as of August 31, 2001.

E.  Bank Participation Advance

In March 2001, our primary lender entered into junior participation agreements with some investors. As a result of the participation agreements, our primary lender advanced us $9,500 for working capital purposes. We

72

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

are required to repay the $9,500 bank participation advance to our primary lender upon the earlier to occur of the termination of the North American credit agreement, currently August 31, 2003, or March 12, 2005. Our primary lender is required to purchase the participation agreements from the investors on the earlier to occur of March 12, 2005, or the date we repay all amounts outstanding under the North American credit agreement and the agreement is terminated. If we were not able to repay the bank participation advance, the junior participants would have subordinated rights assigned to them under the North American credit agreement for the unpaid balance.

F.  Promissory Note

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

G.  Our debt matures as follows:

Fiscal years ending March 31,
2004	$	30,799
2005		441
2006		180
2007		11
	$	31,431

15.    OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES

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

Fiscal years ending March 31,
2004	$	804
2005		483
2006		191
2007		11
Total minimum lease payments		1,489
Amount representing interest		(121	)
Present value of net minimum lease payments		1,368
Less: current portion		(736	)
	$	632

We have entered into operating leases for rental space and equipment that expire on various dates through 2007. Some of the leases contain payment escalation clauses. Future minimum rental payments under the operating leases are as follows:

Fiscal years ending March 31,
2004	$	3,188
2005		2,865
2006		1,967
2007		878
2008		52
Total minimum operating lease payments	$	8,950

73

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

Rent expense under operating leases was $1,663 for the seven months ended March 31, 2003, $1,662 for the seven months ended March 31, 2002, $2,973 for fiscal 2002, $2,543 for fiscal 2001 and $3,483 for fiscal 2000.

16.    PROVISION FOR INCOME TAXES

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

	Seven Months Ended March 31,			Fiscal Years Ended August 31,
	2003			2002			2001			2000
Federal	$	(125	)	$	(1,193	)	$	(798	)	$	(839	)
Foreign		(191	)		332			594			832
State		125			141			98			98
Total income tax provision (benefit)	$	(191	)	$	(720	)	$	(106	)	$	91

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

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

	Seven Months Ended March 31,		Fiscal Years Ended August 31,
	2003		2002		2001		2000
Statutory tax rate	(35.0	)%	(35.0	)%	35.0	%	(35.0	)%
State income taxes, net of Federal income tax benefit	0.1	%	1.8	%	0.4	%	—
Increase in valuation allowance	34.5	%	18.3	%	—		29.7	%
Utilization of net operating loss carryforward	—		—		(36.3	)%	—
Nondeductible expenses	0.1	%	1.2	%	0.2	%	5.4	%
Effective income tax rate	(0.3	)%	(13.7	)%	(0.7	)%	0.1	%

As of March 31, 2003, we had a U.S. tax net operating loss carryforward of approximately $237,000 which expires in fiscal years 2011 through 2023. Our net operating loss carryforwards and other temporary differences between the financial statement and tax basis carrying amounts of existing assets and liabilities generated net deferred tax assets of $108,108 as of March 31, 2003, $90,321 as of August 31, 2002 and $87,695 as of August 31, 2001. We have provided a valuation allowance against our net deferred tax assets as of March 31, 2003, August 31, 2002 and August 31, 2001 because of the uncertainty of whether we will be able to realize the deferred tax assets in the future. If we realized all of the March 31, 2003 net deferred tax assets, we would allocate $5,384 to paid-in capital and use the remainder to reduce our income tax expense.

74

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

The tax effects of temporary differences that produced our net deferred tax assets as of March 31, 2003, August 31, 2002 and August 31, 2001 are as follows:

	March 31, 2003			August 31,
				2002			2001
Asset reserves and allowances	$	17,232		$	13,600		$	10,390
Accrued expenses		170			135			363
Federal net operating loss carryforwards		83,147			71,365			70,350
Foreign net operating loss carryforwards		6,454			5,594			5,848
Other		1,105			(373	)		744
		108,108			90,321			87,695
Valuation allowance		(108,108	)		(90,321	)		(87,695	)
	$	—		$	—		$	—

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

17.    EARNINGS (LOSS) PER SHARE

	Seven Months Ended					Fiscal Years Ended
	March 31, 2003			March 31, 2002		August 31, 2002			August 31, 2001		August 31, 2000
				(Unaudited)
Basic EPS Computation:
Net (loss) earnings	$	(67,805	)	$	12,446	$	(4,533	)	$	17,293	$	(131,744	)
Weighted average common shares outstanding		92,568			81,113		85,732			60,143		55,882
Basic net (loss) earnings per share	$	(0.73	)	$	0.15	$	(0.05	)	$	0.29	$	(2.36	)
Diluted EPS Computation:
Net (loss) earnings	$	(67,805	)	$	12,446	$	(4,533	)	$	17,293	$	(131,744	)
Weighted average common shares outstanding		92,568			81,113		85,732			60,143		55,882
Dilutive potential common shares:
Stock options and warrants		—			4,898		—			6,491		—
Diluted common shares outstanding		92,568			86,011		85,732			66,634		55,882
Diluted net (loss) earnings per share	$	(0.73	)	$	0.14	$	(0.05	)	$	0.26	$	(2.36	)

We have excluded the effect of stock options and warrants in our calculation of diluted earnings per share for the seven months ended March 31, 2003 and fiscal years 2002 and 2000 because their impact would have been antidilutive. Common stock equivalents excluded from earnings (loss) per share were 14,978 options and 4,787 warrants as of March 31, 2003; 12,930 options and 3,945 warrants as of August 31, 2002 and 11,790 options and 3,994 warrants as of August 31, 2000.

75

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

18.    STOCK OPTION AND PURCHASE PLANS

A.  Stock Option Plan

Our 1988 stock option plan provided for the grant of up to 25,000 shares of our common stock to employees, directors and consultants. That plan expired in May 1998. On October 1, 1998, our stockholders authorized the adoption of the 1998 stock incentive plan. Based on our stockholders’ authorization on January 17, 2002, under the 1998 stock option plan we are permitted to grant up to 15,442 shares of our common stock to our employees, directors and consultants through the grant of incentive stock options, non-incentive stock options, stock appreciation rights and other stock awards.

For the incentive stock options we granted to employees under the plans, the exercise price per share was equal to the market price of our common stock on the dates of grant, or 110% of the market price for certain employees. For non-incentive stock options granted to employees under the plans, the exercise price per share was not less than 85% of the market price of our common stock on the dates of grant. Generally, outstanding options become exercisable equally over a three-year period starting on the date of grant (although this may be accelerated due to retirement, disability or death). Normally, employees, directors and consultants must exercise their outstanding options within ten years from the date they were granted. Some employees who were granted incentive options must exercise their outstanding options within five years from the date they were granted. As of March 31, 2003, option holders were able to purchase approximately 8,385 shares of our common stock from exercisable options at a weighted-average exercise price of $3.86 per share and we had available for future grant 3,188 options to purchase shares of our common stock. Other than 100 shares of our common stock we issued to an employee, through March 31, 2003, we have not issued any stock appreciation rights or shares of common stock under our 1998 stock incentive plan.

Option transactions under the 1988 and 1998 stock option plans for the seven months ended March 31, 2003, fiscal 2002, 2001 and 2000 are summarized below:

	Shares Under Option		Weighted Average Exercise Price
Outstanding, August 31, 1999	11,023		$	4.60
Granted	2,516		$	2.85
Exercised	(404	)	$	3.66
Canceled	(1,518	)	$	4.27
Outstanding, August 31, 2000	11,617		$	4.30
Granted	2,528		$	1.76
Exercised	(1,347	)	$	2.01
Canceled	(2,597	)	$	4.17
Outstanding, August 31, 2001	10,201		$	4.01
Granted	5,373		$	4.08
Exercised	(1,112	)	$	2.94
Canceled	(1,532	)	$	3.96
Outstanding, August 31, 2002	12,930		$	4.14
Granted	4,348		$	0.92
Exercised	(10	)	$	1.03
Canceled	(2,290	)	$	3.35
Outstanding, March 31, 2003	14,978		$	3.32

76

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

Included in the options granted for the seven months ended March 31, 2003, were 1,375 options granted at a weighted average exercise price of $0.43 per share, a price 15% below the market price of our common stock on the grant date. The weighted average fair value of each option is $0.37.

During fiscal 2002, we issued 63 shares of our common stock when holders of options we granted outside the 1988 and 1998 stock option plans exercised their options with an exercise price of $3.375. Additionally, during fiscal 2002, the balance of 110 unexercised options that were granted outside the 1988 and 1998 stock option plans expired. During fiscal 2000, we issued 12 shares of our common stock when holders of options granted outside the 1988 and 1998 stock option plans exercised their options with an exercise price of $3.375.

Options outstanding under the 1988 and 1998 stock option plans as of March 31, 2003 are summarized in ranges as follows:

Range of Exercise Price	Weighted Average Exercise Price		Number of Options Outstanding	Weighted Average Remaining Life
$  0.39  -  $ 0.54	$	0.43	1,500	10.0 years
0.66  -     0.91		0.75	278	9.7 years
1.03  -     1.59		1.22	3,251	9.1 years
1.63  -     2.38		2.10	1,141	8.4 years
2.50  -     3.73		3.37	1,843	6.1 years
3.79  -     5.58		4.29	5,878	7.0 years
5.75  -     7.94		7.32	736	4.4 years
8.69  -   12.13		10.55	145	3.3 years
16.38  -   24.00		20.50	206	1.4 years
			14,978

B.  Employee Stock Purchase Plan

Effective May 4, 1998, we adopted an employee stock purchase plan to provide employees who meet eligibility requirements an opportunity to purchase shares of our common stock through payroll deductions of up to 10% of eligible compensation. Bi-annually, we use participant account balances to purchase shares of our common stock at a per share price of 85% of the lesser of the fair market value per share on the exercise date or the price on the offering date. The plan will remain in effect for a term of 20 years, unless terminated sooner by our Board of Directors. A total of 3,000 shares of our common stock are available for employees to purchase under the plan. Employees purchased 140 shares of our common stock in the seven months ended March 31, 2003, 341 shares of our common stock in fiscal 2002, 233 of our common stock in fiscal 2001 and 223 shares of our common stock in fiscal 2000 under the plan.

19.    EQUITY

A.  Private Placements

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

77

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

In February 2002, we issued 7,167 shares of our common stock in a private placement of our common stock at a purchase price of $3.00 per share, and raised net proceeds of $19,785. The purchase price per share represented a 10% discount from the then-recent public trading price of our common stock. We filed a registration statement with the SEC covering the resale of all the shares issued to investors in the private placement, which registration statement became effective in May 2002.

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

In March and April 2001, we issued a total of 3,147 shares of our common stock with a fair value of $4,688 to some former note holders for $3,934 relating to the early retirement of $13,875 in principal amount of the 10% convertible subordinated notes. In June through August 2001, we issued 3,022 shares of our common stock with an aggregate fair value of $11,172 relating to the early retirement of our notes.

In February 2002, we retired a total of $12,735 in principal amount of the 10% convertible subordinated notes and paid the related accrued interest of $574 by issuing 4,209 shares of common stock with a fair value of $14,530.

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

Please see note 14A.

C.  Warrants

In fiscal 1999, we issued warrants to purchase 770 shares of our common stock with exercise prices ranging from $3.50 to $7.56 that expired at various times through April 2002 relating to litigation settlements. In fiscal 2001, we issued 1 shares of our common stock related to these warrants.

In fiscal 2000, we issued warrants to purchase 688 shares of our common stock with an exercise price of $3.61 per share that expired in March 2003 relating to a litigation settlement. We expensed the $2,550 fair value of the warrants in fiscal 1997 and included it in accrued litigation settlements until the warrants were issued. We issued 41 shares of our common stock in fiscal 2002 and 53 shares of our common stock in fiscal 2001 related to the exercise of these warrants.

In March 2001, we issued to investors in the junior participation (please see note 14E) five-year warrants to purchase an aggregate of 2,375 shares of our common stock exercisable at a price of $1.25 per share, which included a total of 1,375 warrants we issued to some of our executive officers and to one of the directors of our Board, who joined in the junior participation. The fair value of the warrants of $1,751, based on the Black-Scholes option pricing model, was recorded as a deferred financing cost. We are amortizing the balance as a non-

78

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

cash financing expense evenly over two and one-half years through August 31, 2003, the date on which the related North American credit agreement terminates. In fiscal 2002, we issued 750 shares of our common stock to unrelated investors and 105 shares of our common stock to one of our director’s relating to the exercise of these warrants. In fiscal 2001, we issued 250 shares of our common stock to unrelated investors relating to the exercise of these warrants.

In October 2001, we issued to two of our executive officers warrants to purchase a total of 1,250 shares of our common stock at an exercise price of $2.88 per share, the fair market value of our common stock on the grant date. We issued the warrants to the officers in consideration for their services and personal pledge of 1,250 shares of our common stock to our primary lender, as additional security for our supplemental discretionary loans (please see note 14C).

In February 2002, as a result of the private placement and the anti-dilution provisions included in some of our outstanding warrants on the date we consummated the private placement, we modified the terms of two warrants we had previously issued. For one warrant that we originally issued to our primary lender in October 2001, we increased the number of common shares purchasable under the warrant from 100 to 136 and decreased the exercise price from $4.70 per common share to $3.00 per common share. For the second warrant that we originally issued in August 2001, we decreased the exercise price from $3.60 per share to $3.56 per share. Due to these modifications, we recorded an additional non-cash financing charge of $113, which we included in interest expense for fiscal 2002.

On March 31, 2003, as a result of the 4,000 common shares authorized to be issued to the Affiliates in connection with the amendment to the North American credit agreement with our primary lender (please see note 14C) and the anti-dilution provisions originally included in certain of our outstanding warrants on the date of our authorization to issue the shares, the number of shares issuable under the warrants increased and the exercise price decreased to $0.39 per share. We will amortize the $165 excess of the fair value of the total modified warrants over the fair value of the original warrants, as calculated using the Black-Scholes option pricing model, as a non-cash financing expense on a straight-line basis over the period between March 31, 2003 and September 30, 2003, the date on which the discretionary supplemental loan is due to be repaid. The following table summarizes the warrant modifications:

	Modified			Original			Expiration Date
Issuance Purpose	Number	Exercise Price		Number	Exercise Price
1997 financing	569	$	0.39	337	$	1.25	February, 2006
2000 financing	210		0.39	125		1.25	July, 2005
2002 financing	255		0.39	136		3.00	October, 2006
	1,034		0.39	598		1.65

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

79

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

As of March 31, 2003, August 31, 2002 and August 31, 2001, we had common shares reserved for issuance for the following warrants:

	March 31,			August 31,			August 31,
	2003			2002			2001
Issuance Purpose	Number	Exercise Price		Number	Exercise Price		Number	Exercise Price		Expiration Date
Junior participation	1,270	$	1.25	1,270	$	1.25	2,125	$	1.25	March, 2006
Litigation settlement	—		—	594		3.61	635		3.61	March, 2003
Litigation settlement	—		—	—		—	218		7.56	April, 2002
1991 officer	—		—	—		—	1,125		3.00	October, 2001
2002 officer	1,250		2.88	1,250		2.88	—		—	April, 2012
2003 officer	1,000		0.50	—		—	—		—	March, 2008
1997 financing	569		0.39	337		1.25	337		1.25	February, 2006
2000 financing	210		0.39	125		1.25	125		1.25	July, 2005
2002 financing	255		0.39	136		3.00	—		—	October, 2006
2001 private placement	233		3.46	233		3.56	233		3.56	July, 2004
	4,787		1.44	3,945		2.32	4,798		2.37

D.  Other Equity Transactions

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

In fiscal 2000, we issued 14 shares of our common stock to a non-employee for services provided to us and recorded the $100 fair value of the common stock as an expense.

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

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

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

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

20. STOCKHOLDERS’ RIGHTS

In the fourth quarter of fiscal 2000, our Board of Directors declared a dividend distribution of one right for each outstanding share of our common stock to stockholders of record at the close of business on June 21, 2000. Each right entitles the registered holder to purchase from us a unit consisting of one one-thousandth of a share of

80

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

Series B junior participating preferred stock, $0.01 par value, at a purchase price of $30 per unit, subject to adjustment. The description and terms of the rights are set forth in a rights agreement, dated as of June 5, 2000, between us and Computershare Trust Co., as Rights Agent.

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

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

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

• a merger or other business combination transaction involving us.

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

21. MAJOR SUPPLIERS AND CUSTOMERS AND RELATED PARTY TRANSACTIONS

A.  Major Suppliers and Customers

We are substantially dependent on Nintendo, Sony and Microsoft as they are the sole manufacturers of the software we develop for their game consoles and they are the owners of the proprietary information and technology we need to develop software for their game consoles. Please see note 22 in which we present a table, which indicates the percentages of our gross revenue we derived from software titles we developed for each of the game consoles.

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

	Seven Months Ended March 31,				Fiscal Years Ended August 31,
	2003		2002		2002		2001		2000
			(Unaudited)
Customer 1	6	%	9	%	10	%	12	%	15	%
Customer 2	8	%	9	%	9	%	11	%	10	%

B.  Related Party Transactions

Fees for services

We pay sales commissions to a firm, which is owned and controlled by one of our executive officers, who is also a director and a principal stockholder. The firm earns these sales commissions based on the amount of our software sales the firm generates. Commissions earned by the firm amounted to $279 for the seven months ended March 31, 2003, $315 for the seven months ended March 31, 2002, $535 for fiscal 2002, $330 for fiscal 2001 and $341 for fiscal 2000. We owed the firm $498 as of March 31, 2003, $385 as of August 31, 2002 and $18 as of August 31, 2001.

During previous fiscal years, we received legal services from two law firms of which two members of our Board of Directors are partners. We incurred fees from one of those firms of $528 for the seven months ended

81

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

March 31, 2003. We incurred fees from both firms of $318 for the seven months ended March 31, 2002, $644 for fiscal 2002, $665 for fiscal 2001 and $987 for fiscal 2000. We owed fees of $353 as of March 31, 2003 and $200 as of August 31, 2002 to one of the firms and total fees of $154 as of August 31, 2001 to both firms.

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

Notes receivable

In October 2002, we loaned a senior executive $300 under a promissory note for the purpose of purchasing a new residence. Our Compensation Committee approved the terms and provisions of the loan in April of 2002. The promissory note bears interest at a rate of 6.00% per annum. Security for the repayment of the promissory note is a mortgage on the executive’s principal residence. The maturity date of the note is November 1, 2005. The loan shall be forgiven by us 50% in May 2003 and 25% in each of October 2004 and October 2005 so long as the executive remains employed with Acclaim. If the executive voluntarily leaves the employment of Acclaim or is terminated for cause, at any time prior to the maturity date of the note, the executive must repay a pro-rata portion of the unpaid principal balance of the loan plus accrued and unpaid interest thereon. We are recording compensation expense for the principal balance of the loan over the periods that each portion will be forgiven. Accordingly, during the seven months ended March 31, 2003, we expensed $133 of the unpaid principal balance. As of March 31, 2003, the unpaid principal balance under the loan was $167, which was included in other receivables.

In February 2002, relating to an officer’s employment agreement, we loaned one of our executive officers $300 under a promissory note for the purpose of purchasing a new residence. The promissory note bore interest at a rate of 6.00% per annum, which was due by December 31st of each year the promissory note remained outstanding. In January 2003, in connection with terminating the officer’s employment and in accordance with the officer’s employment agreement, we forgave and expensed as compensation the unpaid principal balance and related accrued interest of $302. As of August 31, 2002, the principal balance outstanding under the loan was $300, which was included in other assets, and the accrued interest was $8.

In October 2001, we issued a total of 1,125 shares of our common stock to two of our executive officers when they exercised their warrants with an exercise price of $3.00 per share. For the shares we issued, we received cash of $23 for their par value and two promissory notes totaling $3,352 for the unpaid portion of the exercise price of the warrants. The principal amount and accrued interest are due and payable on the earlier of (i) August 31, 2003 and (ii) to the extent of the proceeds of any warrant share sale, the third business day following the date upon which the respective executive sells any or all of the warrant shares. The terms and provisions of the notes will not be materially modified or amended, nor will the term be extended or renewed. The notes provide us full recourse against the officers’ assets. The notes bear interest at our primary lender’s prime rate plus 1.50% per annum. Other receivables includes accrued interest receivable on the notes of $324 as of March 31, 2003, and $202 as of August 31, 2002 . The notes receivable have been classified as a contra-equity balance in additional paid-in capital.

In July 2001, we issued a total of 1,500 shares of our common stock to two of our executive officers when they exercised their warrants with an exercise price of $2.42 per share. For the shares issued, we received cash of $30 for their par value and two promissory notes totaling $3,595 for the unpaid portion of the exercise price of

82

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

the warrants. The principal amount and accrued interest are due and payable on the earlier of (i) August 31, 2003 and (ii) to the extent of the proceeds of any warrant share sale, the third business day following the date upon which the respective executive sells any or all of the warrant shares. The terms and provisions of the notes will not be materially modified or amended, nor will the term be extended or renewed. The notes provide us full recourse against the officers’ assets. The notes bear interest at our primary lender’s prime rate plus 1.50% per annum. Other receivables includes accrued interest receivable on the notes of $426 as of March 31, 2003 and $294 as of August 31, 2002. The notes receivable have been classified as a contra-equity balance in additional paid-in capital.

In August 2000, relating to an officer’s employment agreement, we loaned one of our officers $200 under a promissory note. The note bears no interest and must be repaid on the earlier to occur of the sale of the officer’s personal residence or August 24, 2004. Based on the officer’s employment agreement, we were to forgive the loan at a rate of $25 for each year the officer remained employed with us up to a maximum of $100. Accordingly, in fiscal 2001, we expensed $25 and reduced the officer’s outstanding loan balance. In May 2002, relating to a separation agreement with the officer, we forgave and expensed another $75. The balance outstanding under the loan was $100 as of March 31, 2003 and August 31, 2002 and $175 as of August 31, 2001, and was included in other assets.

In August 1998, relating to an officer’s employment agreement, we loaned one of our officers $500 under a promissory note. We reduced the note balance by $50 in August 1999, relating to the officer’s employment agreement, and by $200 in January 2000 relating to the employee’s termination. The note bears no interest and must be repaid on the earlier to occur of the sale or transfer of the former officer’s personal residence or August 11, 2003. The balance outstanding under the loan was $250 as of March 31, 2003, August 31, 2002 and August 31, 2001 and was included in other receivables.

In April 1998, relating to an officer’s employment agreement, we loaned one of our executive officers $200 under a promissory note. The note bears interest at our primary lender’s prime rate plus 1.00% per annum. The balance outstanding under the loan, included in other receivables, was $302 as of March 31, 2003 (including accrued interest of $102), $262 as of August 31, 2002 (including accrued interest of $62) and $248 as of August 31, 2001 (including accrued interest of $48) and was repaid in April 2003.

In August 2000, we wrote off notes receivable and related accrued interest of $2,843 due from an entity, as the notes were deemed uncollectible. Two of our directors served as directors of the entity, one of which served as our nominee at the request of our Board of Directors.

Warrants

In October 2001, we issued to two of our executive officers warrants to purchase a total of 1,250 shares of our common stock at an exercise price of $2.88 per share, the fair market value of our common stock on the grant date. We issued the warrants to the officers in consideration for their services and personal pledge of 1,250 shares of our common stock to our primary lender, as additional security for our supplemental discretionary loans (please see note 14).

Please also see notes 14 and 19.

83

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

22. SEGMENT INFORMATION

Our chief operating decision-maker is our Chief Executive Officer. We have two reportable segments, North America and Europe and Pacific Rim, which we organize, manage and analyze geographically and which operate in one industry segment: the development, marketing and distribution of entertainment software. We have presented information about our operations for the seven months ended March 31, 2003, and 2002, and the fiscal years ended August 31, 2002, 2001 and 2000 below:

	North America			Europe and Pacific Rim			Eliminations			Total
Seven Months Ended March 31, 2003
Net revenue from external customers	$	43,347		$	58,242		$	—		$	101,589
Intersegment sales		17			7,875			(7,892	)		—
Total net revenue	$	43,364		$	66,117		$	(7,892	)	$	101,589
Interest income	$	415		$	50		$	—		$	465
Interest expense		3,821			717			—			4,538
Depreciation and amortization		3,329			795			—			4,124
Operating loss		(61,059	)		(3,065	)		—			(64,124	)
Identifiable assets as of March 31, 2003		49,474			30,463			—			79,937
Seven Months Ended March 31, 2002 (Unaudited)
Net revenue from external customers	$	116,827		$	43,361		$	—		$	160,188
Intersegment sales		39			5,632			(5,671	)		—
Total net revenue	$	116,866		$	48,993		$	(5,671	)	$	160,188
Interest income	$	386		$	94		$	—		$	480
Interest expense		5,250			531			—			5,781
Depreciation and amortization		4,073			795			—			4,868
Operating profit		16,723			2,144			—			18,867
Identifiable assets as of March 31, 2002		112,573			34,147			—			146,720
Fiscal 2002
Net revenue from external customers	$	184,478		$	84,210		$	—		$	268,688
Intersegment sales		99			11,603			(11,702	)		—
Total net revenue	$	184,577		$	95,813		$	(11,702	)	$	268,688
Interest income	$	1,331		$	124		$	—		$	1,455
Interest expense		7,795			929			—			8,724
Depreciation and amortization		6,960			1,507			—			8,467
Operating profit		3,461			1,436			—			4,897
Identifiable assets as of August 31, 2002		139,543			43,352			—			182,895
Fiscal 2001
Net revenue from external customers	$	146,185		$	51,383		$	—		$	197,568
Intersegment sales		317			8,588			(8,905	)		—
Total net revenue	$	146,502		$	59,971		$	(8,905	)	$	197,568
Interest income	$	377		$	94		$	—		$	471
Interest expense		9,743			1,250			—			10,993
Depreciation and amortization		7,104			1,758			—			8,862
Operating profit		20,055			3,160			—			23,215
Identifiable assets as of August 31, 2001		96,508			29,122			—			125,630
Fiscal 2000
Net revenue from external customers	$	119,869		$	68,757		$	—		$	188,626
Intersegment sales		165			15,888			(16,053	)		—
Total net revenue	$	120,034		$	84,645		$	(16,053	)	$	188,626
Goodwill writedown	$	17,870		$	—		$	—		$	17,870
Interest income		3,298			460			—			3,758
Interest expense		11,176			273			—			11,449
Depreciation and amortization		9,671			3,531			—			13,202
Operating loss		(100,655	)		(19,405	)		—			(120,060	)
Identifiable assets as of August 31, 2000		88,669			4,424			—			93,093

84

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

Our gross revenue was derived from the following product categories:

	Seven Months Ended				Fiscal Years Ended
	March 31, 2003		March 31, 2002		August 31, 2002		August 31, 2001		August 31, 2000
			(Unaudited)
Cartridge-based software:
Nintendo Game Boy	4	%	8	%	7	%	11	%	9	%
Nintendo 64	—		—		—		2	%	31	%
Subtotal for cartridge-based software	4	%	8	%	7	%	13	%	40	%
Disc-based software:
Sony PlayStation 2: 128-bit	64	%	57	%	52	%	33	%	—
Sony PlayStation 1: 32-bit	3	%	7	%	4	%	41	%	32	%
Microsoft Xbox: 128-bit	15	%	8	%	13	%	—		—
Nintendo GameCube: 128-bit	13	%	19	%	22	%	—		—
Sega Dreamcast: 128-bit	—		—		—		9	%(1)	21	%
Subtotal for disc-based software	95	%	91	%	91	%	83	%	53	%
PC software	1	%	1	%	2	%	4	%	7	%
Total	100	%	100	%	100	%	100	%	100	%

(1) Sales occurred primarily during the first quarter of fiscal 2001.

23.    COMMITMENTS AND CONTINGENCIES

A.  Legal Proceedings

Various claims and actions have been asserted or threatened against us in the ordinary course of business. Management expects that the outcome of these asserted or threatened claims or actions would not have a materially adverse effect on our consolidated financial position, results of operations, and cash flows, taken as a whole.

In fiscal 1998, we settled some of our then outstanding litigation and claims by agreeing to issue our common stock and warrants. Our statements of stockholders’ (deficit) equity include:

• the issuance of 204 shares of our common stock and 150 shares of our common stock from escrow with a total fair value of $548 in fiscal 2001,

• the issuance of 688 warrants with a fair value of $2,550 in fiscal 2000 and

• the issuance of 770 warrants with a fair value of $1,700 in fiscal 1999

to satisfy these previously accrued litigation settlement liabilities. We based the fair value of the shares of common stock issued in settlement on the quoted market value of our common stock on the issuance dates. The fair value of the warrants issued was based on the amounts calculated using the Black-Scholes option pricing model.

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

85

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

As of May 8, 2003, thirteen class action complaints, containing similar allegations, have been filed against us and certain of our officers and/or directors. Each complaint asserts violations of federal securities laws. The actions are entitled: Purvis, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; DMS, et al. v. Acclaim Entertainment, Inc., Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division; Nach, et al. v. Acclaim Entertainment, Inc., Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Baron, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Traube, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Hildal, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Hicks, et al. v. Acclaim Entertainment, Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division; Russo, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division; Vicino, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Sypes, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Berman, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Burk, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division; Brake, et al. v. Acclaim Entertainment, Inc., Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division.

In Purvis, Baron, Traube, Hildal, Russo, Vicino, Sypes, Berman, and Burk, plaintiffs allege that during the purported class period between January 11, 2002 and September 19, 2002 we reported positive earnings statements and gave favorable earnings guidance, but failed to disclose material adverse facts regarding our business, operations and management, thereby causing plaintiffs and other members of the class to purchase our securities at artificially inflated prices. Plaintiffs claim violations under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. In DMS, Nach, Hicks, and Brake, plaintiffs assert that during the class period between January 22, 2002 and September 19, 2002 we committed certain alleged accounting improprieties, thereby causing plaintiffs and other members of the class to purchase our securities at artificially inflated prices. Plaintiffs claim violations under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5. All the complaints seek unspecified damages. The complaints in the Purvis, DMS, Baron, Russo, Vicino, Sypes and Berman actions have been served. In those actions, the parties have agreed to extend defendants’ time to respond to the complaints until after a consolidated amended complaint is served. We intend to defend these actions.

We and other companies in the entertainment industry were sued in an action entitled James, et al. v. Meow Media, et al. filed in April 1999 in the U.S. District Court for the Western District of Kentucky, Paducah Division. The plaintiffs alleged that the defendants negligently caused injury to the plaintiffs as a result of, in the case of Acclaim, its distribution of unidentified “violent” video games, which induced a minor to harm his high school classmates, thereby causing damages to plaintiffs, the parents of the deceased individuals. The plaintiffs seek damages in the amount of approximately $110 million. The U.S. District Court for the Western District of

86

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

Kentucky dismissed this action and the dismissal was then appealed by the plaintiffs to the U.S. Court of Appeals for the Sixth Circuit. The U.S. Court of Appeals for the Sixth Circuit denied plaintiffs appeal. The plaintiff filed a petition for a Writ of Certiorari with the United States Supreme Court to challenge the Sixth Circuits decision. The United States Supreme Court denied the petition on January 21, 2003. No further appeals are available to the plaintiffs.

We and other companies in the entertainment industry were sued in an action entitled Sanders et al. v. Meow Media, et al., filed in April 2001 in the U.S. District Court for the District of Colorado. The complaint purports to be a class action brought on behalf of all persons killed or injured by the shootings which occurred at Columbine High School on April 20, 1999. We are a named defendant in the action along with more than ten other publishers of computer and video games. The complaint alleges that the video game defendants negligently caused injury to the plaintiffs as a result of their distribution of unidentified “violent” video games, which induced two minors to kill a teacher related to the plaintiff and to kill or harm their high school classmates, thereby causing damages to plaintiffs. The complaint seeks: compensatory damages in an amount not less than $15 for each plaintiff in the class, but up to $20 million for some of the members of the class; punitive damages in the amount of $5 billion; statutory damages against certain other defendants in the action; and equitable relief to address the marketing and distribution of “violent” video games to children. This case was dismissed on March 4, 2002. Following dismissal, the plaintiffs moved for relief and the U.S. District Court for the District of Colorado denied the relief sought by plaintiff. On April 5, 2002, plaintiffs noted an appeal to the United States Court of Appeals for the Tenth Circuit. On October 3, 2002, the Tenth Circuit took jurisdiction over plaintiffs’ appeal. The plaintiffs subsequently filed a stipulation of dismissal of their appeal with prejudice, and the Tenth Circuit formally dismissed the appeal on December 10, 2002. No further appeals are available to the plaintiffs.

We received a demand for indemnification from the defendant Lazer-Tron Corporation in a matter entitled J. Richard Oltmann v. Steve Simon, No. 98 C1759 and Steve Simon v. J. Richard Oltmann, J Richard Oltmann Enterprises, Inc., d/b/a Haunted Trails Amusement Parks, and RLT Acquisitions, Inc., d/b/a Lazer-Tron, No. A 98CA 426, consolidated as U.S. District Court Northern District of Illinois. The Lazer-Tron action involves the assertion by plaintiff Simon that defendants Oltmann, Haunted Trails and Lazer-Tron misappropriated plaintiff’s trade secrets. Plaintiff alleges claims for Lanham Act violations, unfair competition, misappropriation of trade secrets, conspiracy, and fraud against all defendants, and seeks damages in unspecified amounts, including treble damages for Lanham Act claims, and an accounting. Pursuant to an asset purchase agreement made as of March 5, 1997, we sold Lazer-Tron to RLT Acquisitions, Inc. Under the asset purchase agreement, we assumed and excluded specific liabilities, and agreed to indemnify RLT for certain losses, as specified in the asset purchase agreement. In an August 1, 2000 letter, counsel for Lazer-Tron in the Lazer-Tron action asserted that our indemnification obligations in the asset purchase agreement applied to the Lazer-Tron action, and demanded that we indemnify Lazer-Tron for any losses which may be incurred in the Lazer-Tron action. In an August 22, 2000 response, we asserted that any losses which may result from the Lazer-Tron action are not assumed liabilities under the asset purchase agreement for which we must indemnify Lazer-Tron. In a November 20, 2000 letter, Lazer-Tron responded to Acclaim’s August 22 letter and reiterated its position that we must indemnify Lazer-Tron with respect to the Lazer-Tron action. No other action with respect to this matter has been taken to date.

An action entitled David Mirra v. Acclaim Entertainment, Inc., was filed in the United States District Court for the Eastern District of New York on February 5, 2003. The plaintiff alleged that the defendants did not have authorization to utilize Mirra’s name and likeness in connection with a bicycle video game intended for mature audiences. Specifically, Mirra alleges that we engaged in (1) violations of § 1051 et seq. of the Lanham Act; (2) violations of §43(a) of the Lanham Act; (3) breach of the amendment to the license agreement; (4) unfair competition; (5) tortious interference; (6) injury to business reputation and dilution; (7) deceptive trade practices

87

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

in violation of General Business Law of New York § 349; (8) false advertising in violation of General Business Law of New York § 350-D; (9) violation of the California Civil Code § 3344; and (10) invasion of privacy— misappropriation of likeness pursuant to California common law; (11) invasion of privacy—false light pursuant to California common law; and (12) and accounting. Mirra claims that he has been harmed by $1,000 per Counts 1-5 and 7-11, for a total of $10,000 in actual damages. Mirra is also claiming that our actions were willful and is demanding an additional $20,000 in punitive damages, plus costs and attorneys’ fees. We believe we have meritorious defenses to these allegations and we intend to defend this action vigorously. Neither party has yet to exchange their initial disclosures or to begin formal discovery.

B.  Letters of Credit

At March 31, 2003, we had outstanding letters of credit aggregating $813 for the purchase of merchandise. Approximately $396 as of March 31, 2003, $1,083 as of August 31, 2002 and $1,032 as of August 31, 2001 of our trade accounts payable balance was collateralized under outstanding letters of credit.

C.  Employee Benefits

Effective January 1, 1995, we established an Employee Savings Plan, which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The plan is available to all U.S. employees who meet the eligibility requirements. Under the plan, participating employees may elect to defer a portion of their pretax earnings, up to the maximum allowed by the Internal Revenue Service (up to the lesser of 15% of compensation or $12 for calendar year 2003). All contributed amounts vest immediately. Generally, we will distribute the plan assets in a participant’s account to a participant or his or her beneficiaries upon termination of employment, retirement, disability or death. We pay all plan administrative fees.

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

88

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

24. PRO FORMA QUARTERLY FINANCIAL DATA (UNAUDITED)

The following financial information is presented for each of the quarters in the twelve months ended March 31, 2003 and 2002.

Twelve Months Ended March 31, 2003

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

Twelve Months Ended March 31, 2002

	Quarters Ended
	Jul. 1, 2001		Sep. 30, 2001			Dec. 30, 2001		Mar. 31, 2002		Total
Net revenue	$	34,608	$	50,339		$	85,131	$	66,820	$	236,898
Cost of revenue		8,385		15,607			30,879		28,896		83,767
Net earnings (loss)		4,916		(802	)		13,814		4,370		22,298
Diluted net earnings (loss) per share		0.08		(0.01	)		0.16		0.05		0.26

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

89

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

None.

PART III

Item 10.    Directors and Executive Officers of the Registrant.

Information called for by Item 10 of Form 10-K is set forth under the heading “Election of Directors” in the Company’s Proxy Statement for its annual meeting of Stockholders relating to fiscal 2002 (the “Proxy Statement”), which is incorporated herein by reference, and under the heading “Executive Officers of the Company” in the Business section included herein.

Item 11.    Executive Compensation.

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

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

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

Item 13.    Certain Relationships and Related Transactions.

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

Item 14.    Controls and Procedures.

Within 90 days of the filing of this report, under the supervision and with the participation of the Company’s management, the Chief Executive Officer and Chief Financial Officer of the Company, have evaluated the disclosure controls and procedures of the Company as defined in Exchange Act Rule 13(a)-14(c) and have determined that such controls and procedures are adequate and effective. Since the date of the evaluations, there have been no significant changes in the Company’s internal controls or other factors that could significantly affect these controls.

PART IV

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

1. FINANCIAL STATEMENTS

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

Independent Auditors’ Report.

Consolidated Balance Sheets—March 31, 2003, August 31, 2002 and August 31, 2001.

Consolidated Statements of Operations—Seven Months Ended March 31, 2003 and 2002 (unaudited) and Fiscal Years Ended August 31, 2002, 2001 and 2000.

Consolidated Statements of Stockholders’ (Deficit) Equity—Seven Months Ended March 31, 2003 and Fiscal Years Ended August 31, 2002, 2001 and 2000.

Consolidated Statements of Cash Flows—Seven Months Ended March 31, 2003 and 2002 (unaudited) and Fiscal Years Ended August 31, 2002, 2001 and 2000.

Notes to Consolidated Financial Statements.

90

2. FINANCIAL STATEMENT SCHEDULE:

(a)    Financial statements:

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

Schedule II—Allowance for Price Concessions and Returns

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

(b)    Current Reports on Form 8-K:

1: Current Report on Form 8-K filed on December 6, 2002;

2. Two Current Reports on Form 8-K filed on January 17, 2003;

3. Current Report on Form 8-K filed on April 10, 2003.

(c)    Exhibits:

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

Exhibit No.	Description
3.1	Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, filed on April 21, 1989, as amended (Commission File No. 33-28274))
3.2	Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, filed on April 21, 1989, as amended (Commission File No. 33-28274))
3.3	Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4(d) to the Company’s Registration Statement on Form S-8, filed on May 19, 1995 (Commission File No. 33-59483))
3.4	Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 3, 2002)
3.5	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K, filed on June 12, 2000)
4.1	Specimen form of the Company’s common stock certificate (incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the year ended August 31, 1989, as amended)
4.2	Rights Agreement dated as of June 5, 2000, between the Company and American Securities Transfer & Trust, Inc. (incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K, filed on June 12, 2000)
4.3	Form of Warrant Agreement between the Company and American Securities Transfer & Trust, Inc. as warrant agent, relating to Class D Warrants (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3, filed on August 23, 1999 (Commission File No. 333-72503))
4.4	Form of Warrant Certificate relating to Class D Warrants (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3, filed on August 23, 1999 (Commission File No. 333-72503))

91

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

92

Exhibit No.	Description
10.12	Restated and Amended Factoring Agreement dated as of February 28, 1995 between the Company and GMAC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1995), as further amended and modified by the Amendment to Factoring Agreements dated February 24, 1997 between the Company and GMAC (incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 8-K filed on March 14, 1997)
10.13	Amendment to Revolving Credit and Security Agreement and Restated and Amended Factoring Agreement, dated March 14, 2002 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 3, 2002).
10.14	Form of Participation Agreement between GMAC and certain junior participants (incorporated by reference to Exhibit 1 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1998)
10.15	Note and Common Stock Purchase Agreement dated March 30, 2001 between the Company and Triton Capital Management, Ltd. (incorporated by reference to exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))
10.16	Note and Common Stock Purchase Agreement dated March 31, 2001 between the Company and JMG Convertible Investments, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))
10.17	Note and Common Stock Purchase Agreement dated April 10, 2001 between the Company and Alexandra Global Investment Fund I, Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))
10.18	Note Purchase Agreement dated June 14, 2001 between the Company and Alexandra Global Investment Fund, Ltd. (incorporated by reference to Exhibit 10.4 to Amendment No. 2 to the Company’s Registration Statement on Form S-3 filed on August 8, 2001 (Commission File No. 333-59048))
10.19	Form of Share Purchase Agreement between the Company and certain purchasers relating to the 2001 Private Placement (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 filed on September 26, 2001 (Commission File No. 333-70226))
10.20	Form of Registration Rights Agreement between the Company and certain purchasers relating to the 2001 Private Placement (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 filed on September 26, 2001 (Commission File No. 333-70226))
*10.21	License Agreement dated as of December 14, 1994 between the Company and Sony Computer Entertainment of America (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed on December 17, 1996)
*10.22	Licensed Publisher Agreement dated as of April 1, 2000 between the Company and Sony Computer Entertainment America (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 14, 2001)
*10.23	Licensed Publisher Agreement dated as of November 14, 2000 by and between the Company and Sony Computer Entertainment (Europe) Limited (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on November 28, 2001)
*10.24	Confidential License Agreement for Nintendo’s N64 Video Game System (Western Hemisphere) between Nintendo of America Inc. and the Company, effective as of February 20, 1997 (incorporated by reference to Exhibit 1 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1998)

93

Exhibit No.	Description
*10.25	Confidential License Agreement for Game Boy Advance (Western Hemisphere) between Nintendo of America Inc. and the Company, effective July 11, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2001).
*10.26	Xbox Publisher License Agreement dated as of October 10, 2000 between the Company and Microsoft Corporation (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2001).
*10.27	Confidential License Agreement for Nintendo GameCube by and between the Company and Nintendo of America Inc., dated as of the 15th day of November, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 4, 2001)
10.28	Form of Share Purchase Agreement between the Company and certain purchasers relating to the February 2002 Private Placement (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 filed on March 15, 2002 (Commission File No. 333-84368))
10.29	Form of Registration Rights Agreement between the Company and certain purchasers relating to the February 2002 Private Placement (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3 filed on March 15, 2002 (Commission File No. 333-84368))
10.30	Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated July 2, 2001 (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
10.31	Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated July 2, 2001 (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
10.32	Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated October 1, 2001 (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
10.33	Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated October 1, 2001 (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
10.34	Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc. (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
10.35	Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc. (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
10.36	Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc. (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
10.37	Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc. (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).

94

Exhibit No.		Description
	10.38	Promissory Note executed by Simon Hosken in favor of Acclaim Entertainment, Inc., dated October 31, 2002 (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2002).
	10.39	Amendment and Modification to Revolving Credit and Security Agreement dated March 31, 2003 (incorporated by reference to Exhibit 10.39 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	10.40	Amended and Restated Cash Deposit Agreement between Gregory E. Fischbach and GMAC Commercial Finance, LLC, dated March 31, 2003 (incorporated by reference to Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	10.41	Amended and Restated Cash Deposit Agreement between James Scoroposki and GMAC Commercial Finance, LLC, dated March 31, 2003 (incorporated by reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	10.42	Amended and Restated Limited Guaranty by Gregory E. Fischbach in favor of GMAC Commercial Finance, LLC, dated March 31, 2003 (incorporated by reference to Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	10.43	Amended and Restated Limited Guaranty by James Scoroposki in favor of GMAC Commercial Finance, LLC, dated March 31, 2003 (incorporated by reference to Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	10.44	Letter Agreement, dated March 31, 2003, between the Company’s Audit Committee and Gregory E. Fischbach and James Scoroposki (incorporated by reference to Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	10.45	Form of Warrant Agreement between the Company and Gregory E. Fischbach, dated as of March 31, 2003 (incorporated by reference to Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	10.46	Form of Warrant Agreement between the Company and James Scoroposki, dated as of March 31, 2003 (incorporated by reference to Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
†	23.1	Consent of KPMG LLP.
†	99.1	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†	99.2	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Confidential treatment has been granted with respect to certain portions of this exhibit, which have been omitted therefrom and have been separately filed with the Commission.

+ Management contract or compensatory plan or arrangement.

† Filed herewith.

95

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ACCLAIM ENTERTAINMENT, INC.
By:	/s/    GREGORY E. FISCHBACH
	Gregory E. Fischbach Co-Chairman of the Board and Chief Executive Officer

May 23, 2003

By:	/s/    GERARD F. AGOGLIA
	Gerard F. Agoglia Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

May 23, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/    GREGORY E. FISCHBACH Gregory E. Fischbach	Co-Chairman of the Board; Chief Executive Officer; and Director	May 23, 2003
/s/    JAMES SCOROPOSKI James Scoroposki	Co-Chairman of the Board; Senior Executive Vice President; Treasurer; Secretary; and Director	May 23, 2003
/s/    BERNARD J. FISCHBACH Bernard J. Fischbach	Director	May 23, 2003
Michael Tannen	Director
/s/    ROBERT GROMAN Robert Groman	Director	May 23, 2003
/s/    JAMES SCIBELLI James Scibelli	Director	May 23, 2003
/s/    KENNETH L. COLEMAN Kenneth L. Coleman	Director	May 23, 2003

96

CERTIFICATIONS

I, Gregory E. Fischbach, certify that:

1. I have reviewed this annual report on Form 10-K of Acclaim Entertainment, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures 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 annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/    GREGORY E. FISCHBACH        

Gregory E. Fischbach
Chief Executive Officer

Date:  May 23, 2003

97

CERTIFICATIONS

I, Gerard F. Agoglia, certify that:

1. I have reviewed this annual report on Form 10-K of Acclaim Entertainment, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures 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 annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/    GERARD F. AGOGLIA        

Gerard F. Agoglia
Chief Financial Officer

Date:  May 23, 2003

98

SCHEDULE II

ACCLAIM ENTERTAINMENT, INC.

AND SUBSIDIARIES

ALLOWANCE FOR PRICE CONCESSIONS AND RETURNS

(In thousands of dollars)

Period	Balance at Beginning of Period		Provisions for Price Concessions and Returns		Price Concessions and Returns		Balance at End of Period
Seven months ended March 31, 2003	$	42,175	$	55,938	$	49,803	$	48,310	*
Year ended August 31, 2002		22,734		67,024		47,583		42,175	*
Year ended August 31, 2001		67,317		6,399		50,982		22,734	*
Year ended August 31, 2000		62,654		90,248		85,585		67,317	*

* Includes accrued price concessions of $19,623 as of March 31, 2003, $10,001 as of August 31, 2002, $5,887 as of August 31, 2001, and $28,234 as of August 31, 2000 and accrued rebates of $2,010 as of March 31, 2003 and $1,957 as of August 31, 2002.

99

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors

Acclaim Entertainment, Inc.

We consent to the incorporation by reference in the registration statements (numbers 333-68667, 333-40025, 333-51967 and 333-82088) filed on Form S-8 and in the registration statements (numbers 033-59819, 333-45071, 333-72503, 333-71211, 333-69367, 333-84368, 333-70266, 333-59048 and 033-65051) filed on Form S-3 of Acclaim Entertainment, Inc. of our report dated May 20, 2003 relating to the consolidated balance sheets of Acclaim Entertainment, Inc. and Subsidiaries as of March 31, 2003 and August 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ (deficit) equity and cash flows and the related financial statement schedule for the seven months ended March 31, 2003 and each of the years in the three-year period ended August 31, 2002, which report appears in the March 31, 2003 Annual Report on Form 10-K of Acclaim Entertainment, Inc.

Our report dated May 20, 2003, contains an explanatory paragraph that states that the Company has working capital and stockholders’ deficits at March 31, 2003 and a recurring use of cash in operating activities that raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

/s/  KPMG LLP

New York, New York

May 23, 2003

EX-99.1

Exhibit 99.1

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 Annual Report of Acclaim Entertainment, Inc. (the “Company”) on Form 10-K for the year ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory E. Fischbach, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

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

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

/s/    GREGORY E. FISCHBACH

Gregory E. Fischbach

Chief Executive Officer

May 23, 2003

EX-99.2

Exhibit 99.2

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 Annual Report of Acclaim Entertainment, Inc. (the “Company”) on Form 10-K for the year ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gerard F. Agoglia, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

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

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

/s/    GERARD F. AGOGLIA

Gerard F. Agoglia

Chief Financial Officer

May 23, 2003