10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 28, 2003

OR

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

For the transition period from         to        

Commission File Number 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 ¨

As of November 10, 2003, 113,234,491 shares of common stock of the registrant were issued and outstanding.

ACCLAIM ENTERTAINMENT, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

		Page No.
PART I		1
Item 1.	Consolidated financial statements (Unaudited, except where otherwise noted)	1
	Consolidated Balance Sheets—September 28, 2003 and March 31, 2003 (Audited)	1
	Consolidated Statements of Operations—Three and six months ended September 28, 2003 and August 31, 2002	2
	Consolidated Statements of Stockholders’ Equity (Deficit)—Six months ended September 28, 2003 and Seven months ended March 31, 2003 (Audited)	3
	Consolidated Statements of Cash Flows—Six months ended September 28, 2003 and August 31, 2002	5
	Notes to consolidated financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59
PART II		60
Item 1.	Legal Proceedings	60
Item 6.	Exhibits and Reports on Form 8-K	61

PART I

Item 1. Consolidated financial statements

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 28, 2003			March 31, 2003
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	7,323		$	4,495
Accounts receivable, net		19,917			24,303
Other receivables		598			3,360
Inventories		3,655			7,711
Prepaid expenses and other current assets		5,579			7,076
Capitalized software development costs, net		405			6,944
Building held for sale		5,628			5,424
Total Current Assets		43,105			59,313
Fixed assets, net		17,158			19,731
Other assets		1,085			893
Total Assets	$	61,348		$	79,937
Liabilities and Stockholders’ Deficit
Current Liabilities
Short-term borrowings	$	14,567		$	30,799
Trade accounts payable		29,723			28,477
Accrued expenses		31,435			28,751
Accrued selling expenses		23,001			26,649
Accrued stock-based expenses		4,582			—
Accrued restructuring costs		1,176			2,299
Mortgage payable		4,678			4,600
Income taxes payable		1,152			1,234
Total Current Liabilities		110,314			122,809
Long-Term Liabilities
Obligations under capital leases		454			632
Convertible notes		2,948			—
Other long-term liabilities		2,654			2,654
Total Liabilities		116,370			126,095
Stockholders’ Deficit
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued		—			—
Common stock, $0.02 par value; 200,000 shares authorized; 109,084 and 96,621 shares issued and outstanding …		2,181			1,932
Additional paid-in capital		327,125			313,616
Accumulated deficit		(381,965	)		(359,911	)
Accumulated other comprehensive loss		(2,363	)		(1,795	)
Total Stockholders’ Deficit		(55,022	)		(46,158	)
Total Liabilities and Stockholders’ Deficit	$	61,348		$	79,937

See notes to consolidated financial statements.

1

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	September 28, 2003			August 31, 2002			September 28, 2003			August 31, 2002
Net revenue	$	41,345		$	54,055		$	74,415		$	116,918
Cost of revenue		20,472			33,222			40,377			59,913
Gross profit		20,873			20,833			34,038			57,005
Operating expenses
Marketing and selling		6,094			18,557			12,819			31,625
General and administrative		8,875			11,480			17,416			21,893
Research and development		7,390			15,928			18,715			25,295
Stock-based compensation		80			—			1,250			—
Restructuring		205			—			205			—
Total operating expenses		22,644			45,965			50,405			78,813
Loss from operations		(1,771	)		(25,132	)		(16,367	)		(21,808	)
Other income (expense)
Interest expense, net		(989	)		(1,169	)		(2,035	)		(2,143	)
Non-cash financing expense		(1,828	)		(193	)		(3,788	)		(386	)
Other income (expense)		583			(1,512	)		136			(1,109	)
Total other expense		(2,234	)		(2,874	)		(5,687	)		(3,638	)
Loss before income taxes		(4,005	)		(28,006	)		(22,054	)		(25,446	)
Income tax provision		—			224			—			249
Net loss	$	(4,005	)	$	(28,230	)	$	(22,054	)	$	(25,695	)
Net loss per share data:
Basic	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)
Diluted	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)

See notes to consolidated financial statements.

2

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

	Preferred Stock Issued		Common Stock Issued					Additional Paid-In Capital			Notes Receivable
			Shares		Amount
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	)
Net loss		—	—			—			—			—
Issuance of common stock under employee stock purchase plan		—	80			1			56			—
Issuance of common stock in private placement, net		—	16,383			328			7,986			—
Reclassification of common stock issuance to accrued stock-based expenses		—	(4,000	)		(80	)		(1,480	)		—
Payment of notes receivable due from executive officers		—	—			—			—			6,947
Foreign currency translation loss		—	—			—			—			—
Balance at September 28, 2003*	$	—	109,084		$	2,181		$	327,125		$	—

* Amounts as of and for the six months ended September 28, 2003 are unaudited.

See notes to consolidated financial statements.

3

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

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

(In thousands)

	Accumulated Deficit			Accumulated Other Comprehensive Loss			Total			Comprehensive Income (loss)
Balance at August 31, 2002	$	(292,106	)	$	(1,846	)	$	19,355
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	)
Net loss		(22,054	)		—			(22,054	)		(22,054	)
Issuance of common stock under employee stock purchase plan		—			—			57
Issuance of common stock in private placement, net		—			—			8,314
Reclassification of common stock issuance to accrued stock-based expenses		—			—			(1,560	)
Payment of notes receivable due from executive officers		—			—			6,947
Foreign currency translation loss		—			(568	)		(568	)		(568	)
Balance at September 28, 2003*	$	(381,965	)	$	(2,363	)	$	(55,022	)	$	(22,622	)

* Amounts as of and for the six months ended September 28, 2003 are unaudited.

See notes to consolidated financial statements.

4

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended
	September 28, 2003			August 31, 2002
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(22,054	)	$	(25,695	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		2,987			4,384
Non-cash financing expense		3,788			386
Provision for price concessions and returns, net		13,611			55,139
Amortization of capitalized software development costs		7,084			4,862
Write-off of capitalized software development costs		304			2,478
Non-cash compensation expense		1,250			—
Gain from recovery of paid royalties		(531	)		—
Gain on fixed assets disposals		(52	)		—
Other non-cash items		30			489
Change in operating assets and liabilities:
Accounts receivable		(6,380	)		(57,042	)
Other receivables		3,178			3,263
Other assets		100			75
Inventories		4,189			(663	)
Prepaid expenses		(1,723	)		(93	)
Capitalized software development costs		(836	)		(14,136	)
Accounts payable		804			10,947
Accrued expenses		(6,751	)		15,905
Income taxes payable		(131	)		646
Other long-term liabilities		—			(141	)
Net cash (used in) provided by operating activities		(1,133	)		804
Cash flows from investing activities:
Acquisition of fixed assets		(226	)		(3,352	)
Proceeds from disposal of fixed assets		83			2
Other assets		18			2
Net cash used in investing activities		(125	)		(3,348	)
Cash flows from financing activities:
Proceeds from issuance of convertible notes		5,500			—
Repayment of promissory notes		(268	)		—
Payment of mortgages		(89	)		(486	)
Proceeds from payment of notes receivable		6,947			—
(Payment of) proceeds from short-term bank loans, net		(16,024	)		9,718
Proceeds from exercises of stock options and warrants		—			1,537
Payment of obligations under capital leases		(520	)		(351	)
Payment of private placement fees		—			(2,025	)
Net proceeds from issuances of common stock		8,314			—
Proceeds from issuance of common stock under employee stock purchase plan		57			294
Net cash provided by financing activities		3,917			8,687
Effect of exchange rate changes on cash		169			766
Net increase in cash and cash equivalents		2,828			6,909
Cash and cash equivalents: beginning of period		4,495			44,095
Cash and cash equivalents: end of period	$	7,323		$	51,004
Supplemental schedule of non-cash financing activities:
Acquisition of equipment under capital leases	$	166		$	947
Cash paid during the period for:
Interest	$	2,144		$	3,200
Income taxes	$	123		$	—

See notes to consolidated financial statements.

5

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation

The accompanying consolidated financial statements include the accounts of Acclaim Entertainment, Inc. and its wholly owned subsidiaries (collectively, “We” or “Acclaim”). These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included in the accompanying consolidated financial statements. All intercompany transactions and balances have been eliminated in consolidation. For further information, refer to the consolidated financial statements and notes thereto, which are included in our Annual Report on Form 10-KT as of and for the seven months ended March 31, 2003 (Fiscal 2003), and other filings with the Securities and Exchange Commission.

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. Our new fiscal year 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

The accompanying consolidated financial statements include our results of operations for the three and six month periods ended September 28, 2003, and the most comparable reported periods of the prior year, the three and six month periods ended August 31, 2002. We have presented the three and six month periods ended August 31, 2002 as prior year comparatives to the current year periods because the seasonal factors affecting both periods are similar, the data is comparable and recasting our prior year results of operations and related supporting schedules would not have been practicable nor cost justified.

C. Business and Liquidity

We develop, publish, distribute and market video and computer game software for interactive entertainment consoles and, to a lesser extent, personal computers. 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 those areas and in 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.

6

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. As of March 31, 2003, our independent auditors’ report, as prepared by KPMG LLP and dated May 20, 2003, included an explanatory paragraph relating to the substantial doubt as to our ability 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. For the six months ended September 28, 2003 we had a net loss of $22,054 and used $1,133 of cash in operating activities. As of September 28, 2003, we had a stockholders’ deficit of $55,022, a working capital deficit of $67,209 and cash and cash equivalents of $7,323. These factors have continued to raise substantial doubt as to 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 and, based on management’s plans described below, have been prepared on a going concern basis.

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 fiscal 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 had advanced to us a supplemental discretionary loan of $11,000 through May 31, 2003. In accordance with the terms of the amendment to our credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6,000 of the supplemental discretionary loan and as of September 26, 2003, we repaid the remaining $5,000. During the six months ended September 28, 2003, our Co-chairmen fully repaid a total of $6,947 of their outstanding loans and related accrued interest of $873. Additionally, in June 2003, we completed a private placement of 16,383 shares of our common stock to a limited group of private investors, resulting in net proceeds to us of $8,314. In September and October 2003, we completed the sale of our 10% convertible subordinated notes, resulting in gross proceeds of $11,863 of which $5,500 was received as of September 28, 2003.

Our future liquidity will significantly depend in whole or in part on our ability to (1) timely develop and market new software products that meet or exceed our operating plans, (2) realize long-term benefits from our implemented expense reductions, and (3) continue to enjoy the support of our primary lender and vendors. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, continue to realize additional benefits from the expense reductions we have implemented, and timely close on the new domestic loan facility with our primary lender, 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, additional 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 others, and there can be no assurance those consents or approvals will be obtained.

In the event that we do not achieve our business operating plan, continue to derive significant expense savings from our implemented expense reductions and timely close on the new domestic loan facility with our primary lender, we cannot assure our stockholders that our future operating cash flows will be sufficient to meet our operating requirements and debt service requirements. If any of the preceding events were to occur, our operations and liquidity would be materially and adversely affected and we could be forced to cease operations.

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

7

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Marketplace Rule 4310(c)(4), and we had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in accordance with Marketplace Rule 4310(c)(8)(D) we were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the minimum bid requirement. If at any time prior to January 20, 2004 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 January 20, 2004, 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 90 day grace period in which to demonstrate compliance. If, after January 20, 2004 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.

On November 12, 2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaq’s opinion, the structure of our September/October 2003 private offering of the Notes (please see note 13A) was not in compliance with NASD Marketplace Rule 4350(i)(1)(d). The Note offering was structured in a manner we believe complied with Nasdaq’s published rules. Based upon our continuing discussions with Nasdaq and the holders of the Notes, while there can be no assurance, we believe we will be successful in resolving this matter; however, the ultimate resolution of this matter is not determinable at this time and, if the terms of the securities are modified, it could have a material impact on the financial statements of the Company. In the event that we and Nasdaq cannot resolve this matter, then our securities would be subject to delisting. If a delisting proceeding is commenced, we have the right to appeal such determination; however, there can be no assurance that such an appeal would be successful.

D. 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 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

8

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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.

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:

	September 28, 2003		March 31, 2003
Gross accounts receivable (please see note 2)	$	35,884	$	50,980
Allowances:
Accounts receivable allowance (please see note 2)	$	15,967	$	26,677
Accrued price concessions (please see note 10)		16,213		19,623
Accrued rebates (please see note 10) …		3,251		2,010
Total allowances	$	35,431	$	48,310

E. Interest Expense, Net

Interest expense, net is comprised of:

	Three Months Ended						Six Months Ended
	September 28, 2003			August 31, 2002			September 28, 2003			August 31, 2002
Interest income	$	54		$	792		$	148		$	1,018
Interest expense		(1,043	)		(1,961	)		(2,183	)		(3,161	)
	$	(989	)	$	(1,169	)	$	(2,035	)	$	(2,143	)

F. 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 $969 for the three months ended September 28, 2003, $1,482 for the three months ended August 31, 2002, $2,028 for the six months ended September 28, 2003 and $2,632 for the six months ended August 31, 2002.

G. 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

9

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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.

H. Stock-Based Compensation

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 fiscal year ended March 31, 2003. The application of the disclosure portion of this standard had 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 calendar 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.

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:

	Three Months Ended		Six Months Ended
	September 28, 2003	August 31, 2002	September 28, 2003	August 31, 2002
Expected dividend yield	0%	0%	0%	0%
Risk free interest rate	2.2%	3.0%	2.0%	3.5%
Expected stock volatility	128%	52%	128%	52%
Expected option life	3 yrs	3 yrs	3 yrs	3 yrs

10

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(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 market value of our common stock on the dates of grant. Had we applied the fair value method under SFAS No. 123, our net loss and net loss per share on a pro forma basis would have been the following:

	Three Months Ended						Six Months Ended
	September 28, 2003			August 31, 2002			September 28, 2003			August 31, 2002
Net loss:
As reported	$	(4,005	)	$	(28,230	)	$	(22,054	)	$	(25,695	)
Add: Stock-based compensation expense included in net loss (please see note 11)		80			—			1,250			—
Deduct: Total stock-based employee compensation expense using fair value method		(878	)		(1,168	)		(2,881	)		(2,308	)
Pro forma	$	(4,803	)	$	(29,398	)	$	(23,685	)	$	(28,003	)
Diluted net loss per share:
As reported	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)
Pro forma	$	(0.04	)	$	(0.32	)	$	(0.23	)	$	(0.30	)

Stock-based compensation of $80 for the three months ended September 28, 2003 and $1,250 for the six months ended September 28, 2003 was excluded from general and administrative expenses and classified separately on the statements of operations.

I. New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” The objective of FIN 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 May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability, or as an asset in some circumstances. This Statement applies to three types of freestanding financial instruments, other than outstanding shares. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or assets; a second type includes put options and forward purchase contracts that require or may require the issuer to buy back some of its shares in exchange for cash or other assets; the third type is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares. SFAS No. 150 does not apply to features embedded in a financial instrument that are not a derivative in their entirety.

11

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 with one exception, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement during the second quarter of fiscal 2004 did not have an impact on our financial statements.

J. Comprehensive Loss

Comprehensive loss for the six months ended September 28, 2003 is presented in the accompanying Consolidated Statement of Stockholders’ Equity (Deficit) and was $4,399 for the three months ended September 28, 2003, $28,155 for the three months ended August 31, 2002 and $25,891 for the six months ended August 31, 2002.

K. Reclassifications

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

2. ACCOUNTS RECEIVABLE

Accounts receivable are comprised of:

	September 28, 2003			March 31, 2003
Assigned receivables due from factor	$	30,158		$	42,704
Unfactored accounts receivable		5,726			8,276
		35,884			50,980
Allowance for price concessions and returns		(15,967	)		(26,677	)
	$	19,917		$	24,303

We and our primary lender are parties to a factoring agreement that expires on August 31, 2004. 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 13B) taking into account the assigned receivables due from our customers, among other factors. As of September 28, 2003, our primary lender was advancing us 60% of the eligible receivables due from our retail customers. The factoring charge of 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, is recorded in interest expense. 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.

12

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

3. OTHER RECEIVABLES

Other receivables are comprised of:

	September 28, 2003		March 31, 2003
Foreign value added tax	$	164	$	—
Notes receivable and accrued interest due from officers (please see note 16)		298		1,469
Licensing fee recovery		—		1,415
Other		136		476
	$	598	$	3,360

4. INVENTORIES

Inventories are comprised of:

	September 28, 2003		March 31, 2003
Raw material and work-in-process	$	124	$	131
Finished goods		3,531		7,580
	$	3,655	$	7,711

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are comprised of:

	September 28, 2003		March 31, 2003
Prepaid advertising	$	291	$	414
Prepaid product		2,122		28
Prepaid insurance		1,566		3,122
Prepaid taxes		242		326
Royalty advances		541		754
Financing costs (please see note 13)		—		1,724
Other prepaid expenses		817		708
	$	5,579	$	7,076

6. BUILDING HELD FOR SALE AND MORTGAGE PAYABLE

In March 2003, we committed ourselves to a plan to sell our building located in the United Kingdom. Since then the building has not been in use. As of September 28, 2003, the net carrying value of the building of $5,628 (£3,448) which was equal to its fair value as determined by an independent appraisal in fiscal 2003, was classified as a current asset and its associated mortgage payable of $4,678 was classified as a current liability, as we expect to sell the building within a year. We are required to make quarterly principal payments of $229 (£137.5) toward repayment of the mortgage pursuant to the associated U.K. secured credit facility. The U.K. bank charges us interest at 2.00% above LIBOR (5.67% as of September 28, 2003; 5.94% as of March 31, 2003).

13

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

7. FIXED ASSETS

Fixed assets are comprised of:

	September 28, 2003			March 31, 2003
Buildings and improvements	$	20,163		$	20,155
Furniture, fixtures and equipment		40,459			43,405
Automotive equipment		396			394
		61,018			63,954
Accumulated depreciation		(43,860	)		(44,223	)
	$	17,158		$	19,731

8. OTHER ASSETS

Other assets are comprised of:

	September 28, 2003		March 31, 2003
Deferred financing costs	$	654	$	320
Deposits		431		473
Notes receivable due from officers (please see note 16)		—		100
	$	1,085	$	893

9. ACCRUED EXPENSES

Accrued expenses are comprised of:

	September 28, 2003		March 31, 2003
Accrued advertising and marketing	$	389	$	300
Accrued consulting and professional fees		2,308		1,201
Accrued excise and other taxes		1,955		1,197
Accrued liabilities for derivatives (Please see Note 13A)		2,552		—
Accrued convertible note placement agent fees		120		—
Accrued duty and freight		990		887
Accrued litigation		1,378		1,535
Accrued payroll		3,613		4,002
Accrued purchases		6,467		4,893
Accrued royalties payable and licensing obligations		8,446		12,188
Other accrued expenses		3,217		2,548
	$	31,435	$	28,751

14

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

10. ACCRUED SELLING EXPENSES

Accrued selling expenses are comprised of:

	September 28, 2003		March 31, 2003
Accrued cooperative advertising	$	1,661	$	3,187
Accrued price concessions		16,213		19,623
Accrued sales commissions		1,876		1,829
Accrued rebates		3,251		2,010
	$	23,001	$	26,649

11. ACCRUED STOCK-BASED EXPENSES

Accrued stock-based expenses is comprised of liabilities that are expected to be settled through the issuance of 5,500 shares of our common stock (4,000 shares to two executive officers and 1,500 shares to our newly appointed CEO), but which require stockholder approval prior to such issuances under NASD Rules. The fair value of the shares which are reflected as accrued stock-based expenses as of September 28, 2003 are $3,332 and $1,250, respectively. The Compensation Committee and the Board of Directors have approved the issuance of 1,500 common shares to an executive officer for his promotion to CEO in May 2003 and 4,000 common shares to two other executive officers in March 2003 (please see note 13B), respectively, but stockholder ratification of those issuances is required. Until our Annual Meeting of Stockholders, where our stockholders will vote on whether to approve these stock issuances, the liabilities associated with these issuances will fluctuate with the market value of the related common stock, which was $.83 per share on September 28, 2003. The $1,250 market value, as of September 28, 2003, of the 1,500 common shares for our newly appointed CEO was recorded as stock-based compensation expense during the six months ended September 28, 2003.

12. ACCRUED RESTRUCTURING COSTS

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. The closure of the development studio and reduction of our global administrative headcount reduced our overall headcount by approximately 100 employees and resulted in initial restructuring charges of $4,824 during fiscal 2003. The restructuring charges included accruals for employee termination costs, the write-off of certain fixed assets and leasehold improvements and the accrual of the development studio lease commitment, which is net of estimated sub-lease rental income. An adjustment to our forecast of sub-lease rental income and additional lease costs resulted in an increase to the restructuring charge of $205 during the three months ended September 28, 2003. The development studio lease commitment expires in May 2007 and the employee severance agreements expire over various periods through April 2004. No restructuring charges were incurred for the three and six months ended June 29, 2003 or August 31, 2002, respectively.

15

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

The following table presents the components of the change in the balance of accrued restructuring charges for the three and six months ended September 28, 2003:

	Three Months Ended September 28, 2003			Six Months Ended September 28, 2003
Accrued restructuring costs, beginning of period	$	1,383		$	2,299
Adjustments to lease costs and estimated sub-lease rental income		205			205
Less: costs paid		(412	)		(1,328	)
Ending balance as of September 28, 2003	$	1,176		$	1,176

13. DEBT

Debt is comprised of:

	September 28, 2003		March 31, 2003
Short term debt:
Obligations under capital leases	$	567	$	736
Supplemental bank loan (B)		—		11,000
Advances from International factors (C)		2,617		4,110
Advances from North American factor (B) (please see note 2)		891		4,154
Bank participation advance (D)		9,500		9,500
Promissory note (E)		469		737
Bank overdraft		523		562
		14,567		30,799
Long term debt:
10% convertible subordinated notes (A)		2,948		—
Obligations under capital leases		454		632
		3,402		632
	$	17,969	$	31,431

A. 10% Convertible Subordinated Notes

During September and October 2003, we raised gross proceeds of $11,863 in connection with the sale, to a limited group of private investors, of our 10% convertible subordinated notes (the “Notes”), due in 2010. The Notes are initially convertible into 16,385 shares of our common stock, based upon a conversion price of $0.724 per share. The conversion price is based upon the 10 day trailing average closing price of our common stock ending on September 23, 2003. In the event we obtain the authorization from our stockholders, the conversion price for the Notes will be adjusted to $0.57 per share, a 21% discount from the $0.724 conversion price. Accordingly, the Notes would then be convertible into 20,812 shares of our common stock. Interest on the Notes is due semi-annually on each April 15 and October 15, commencing April 15, 2004. The purchasers of the Notes have also received warrants to purchase approximately 4,096 shares of our common stock, at an exercise price of $0.724 per share, which exercise price will also adjust to $0.57 if stockholder approval is obtained. If we do not receive stockholder approval, then additional warrants will be issued to the purchasers of the Notes, to purchase an additional 4,096 shares at the market price of our common stock at the time of issuance.

16

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Subject to the consent of the holders of any senior indebtedness and our common stock price closing at an average of 200% of the Notes’ conversion price during a specified period, as defined in the agreement, we may, at our option, redeem the Notes in whole but not in part on any date on or after April 5, 2005, at a redemption price, payable in cash, equal to the outstanding principal amount of the Notes plus accrued and unpaid interest thereon to the applicable redemption date if the requirements as documented in the agreement are satisfied. In addition, subject to the consent of the holders of any senior indebtedness, the purchasers of the Notes have a put option to require us to repurchase the notes at a redemption amount equal to the greater of the principal amount of the Notes plus accrued interest thereon, or the market value of the underlying stock, if we experience a change in control.

In the event our common stock price closes at 200% of the Notes’ conversion price in effect at the time for 10 consecutive trading days, we have the right to require the holders of the warrants to exercise the warrants in full, within 10 business days following notification to the warrant holders of the forced exercise.

As of September 28, 2003, we had received $5,500 of the total gross proceeds raised in connection with the sale of the Notes. These Notes are convertible into 7,597 shares of our common stock, based on a conversion price of $0.724 per share, which may be adjusted to $0.57 per share as discussed above. Additionally, in connection with the $5,500 of Notes, as of September 28, 2003, we were obligated to issue warrants to purchase 1,899 shares of our common stock to the private investors, at an exercise price of $0.724 per share, which would be adjusted to $0.57 per share upon stockholder approval as discussed above.

The securities offered have not been registered under the Securities Act of 1933, as amended, or state securities laws, and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, or an applicable exception therefrom. We have agreed to register the shares of our common stock underlying the Notes and warrants within 120 days following the closing. If the registration statement is not effective within 120 days of closing, we must pay a penalty of 1% of the proceeds to the purchasers of the Notes each month it is not thereafter effective.

Based on the accounting guidance in SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” and EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” (1) the conversion option of the Notes, (2) the warrants issued with those Notes and (3) the put option held by the purchasers of the Notes are derivative instruments because we have contractually agreed to register the common shares underlying them and the conversion option is not at a fixed rate. We have recorded these derivative instruments as liabilities, included in accrued expenses in the accompanying balance sheet, at their fair values as determined by an independent valuation. Until the underlying shares are registered and, additionally for the conversion option, until the shareholders’ meeting has occurred which will result in a fixed conversion rate, the instruments are considered derivatives and therefore the related liabilities each reporting period will be adjusted to their fair value. We will record adjustments to the liabilities each reporting period as non-cash financing expense or income in the statement of operations until the instruments are no longer considered derivatives and the then fair value of the instruments will be reclassified from a liability to additional paid-in capital.

We have allocated the proceeds from the sale of the Notes first to the fair values of the derivative instruments related to the Notes with the balance allocated to the Notes. Based on the fair values as of September 28, 2003, the proceeds allocated to the conversion feature of the Notes was $3,838, to the warrants was $1,664 and to the Notes was $6,361. The put option held by the purchasers of the Notes had no value as of September 28, 2003. The fair values of the conversion feature and the warrants represent debt discounts and will be

17

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

amortized to expense over the term of the Notes or, if earlier, upon their conversion to common stock. Under the terms of the Notes, they will automatically convert to common stock at $0.57 per share if and when our stockholders have approved the adjusted conversion price and the shares underlying the Notes and warrants are registered with the SEC as long as our common stock remains listed on Nasdaq. If this automatic conversion were to occur, the unamortized balance of the debt discounts would be recorded as non-cash financing expense at that time. As of September 28, 2003, we recorded a debt discount related to the conversion feature of the Notes of $1,782 and a debt discount of $770 related to the warrants which are both included accrued expenses. These debt discounts relate to the $5,500 gross proceeds raised from the sale of Notes through September 28, 2003.

We incurred placement agent fees of $654 in connection with the Notes transaction, comprised of warrants to purchase 328 shares of our common stock at an exercise price of $0.724 per share with a fair value of $120, and a cash payment of $534. We will amortize these fees on a straight-line basis over the term of the Notes or, if earlier, upon their conversion to common stock. Similar to the warrants issuable to the private investors, because the shares underlying the warrants are not registered, they are considered derivative instruments under EITF Issue No. 00-19 and therefore until the date the shares are registered, we are required to revalue the warrants on a quarterly basis and classify them in accrued expenses. The unamortized portion of these fees is included in other assets as of September 28, 2003.

B. North American Credit Agreement

Our primary lender and we are parties to a North American credit agreement, which expires on August 31, 2004. 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 above our primary lender’s prime rate (5.50% as of September 28, 2003; 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 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 September 28, 2003 and March 31, 2003, 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 North American credit agreement was amended which allowed us to borrow supplemental discretionary loans of $11,000 through May 31, 2003, which thereafter was reduced to $5,000 through September 29, 2003 above the standard formula for short-term funding. In accordance with the terms of the amended credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6,000 of the supplemental discretionary loan and as of September 26, 2003, we repaid the remaining $5,000. As a condition precedent to our primary lender entering into the amendment, two of our major shareholders, who are also 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 returned the cash deposit to the Affiliates on September 26, 2003 concurrently with our repayment of the supplemental discretionary loan. As consideration to the Affiliates for making the deposit, and based upon the

18

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 of 2,000 shares of our common stock with a then aggregate market value of $1,560 ($3,332 as of September 28, 2003) 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.

In June 2003, Nasdaq advised us that their then unpublished internal interpretation of NASD Marketplace Rule 4350(i)(1)(a) requires us to obtain stockholder ratification of the issuance of the shares to the Affiliates. Therefore, the issuance of the 4,000 common shares are subject to stockholder approval, as included in our forthcoming 2003 Proxy Statement, and variable accounting is being applied to the issuance. Nasdaq has subsequently published a proposed amendment to Marketplace Rule 4350(i)(1)(a) which addresses this issue. Since the common shares are now forfeitable, as of June 29, 2003, we reclassified the $1,560 aggregate market value of the shares at issuance from stockholders’ equity to accrued stock-based expenses. We are required to revalue the common shares at each quarter-end, until the market value is fixed if and when the stockholders approve the share issuance. Accordingly, during the six month period ended September 28, 2003 we increased accrued stock-based expenses by $1,772 to the market value of the common shares of $3,332 as of September 28, 2003.

We have expensed the fair value of the stock-based and warrant-based consideration provided to the Affiliates as a non-cash financing expense over the period between the date the initial supplemental loans were advanced in February 2003 and the date they were fully repaid, September 26, 2003. Non-cash financing expense was $1,630 for the three months ended September 28, 2003 and $3,332 for the six months ended September 28, 2003.

There were advances outstanding within the standard borrowing formula under the North American credit agreement of $891 as of September 28, 2003 and $4,154 as of March 31, 2003. The supplemental discretionary loan outstanding was fully repaid as of September 28, 2003 and amounted to $11,000 as of March 31, 2003.

During fiscal 2002 and fiscal 2001, our primary lender advanced to us and we repaid supplemental discretionary loans above the standard formula for short-term funding under our North American credit agreement. 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 are not in an overformula position exceeding $1,000 and are not otherwise in default under the North American credit agreement.

C. Advances from International Factors

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 (5.07% as of September 28, 2003 and 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 (GMAC) or we terminate it upon 90

19

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

days’ prior notice. Our U.K. bank (GMAC) 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 $1,608 as of September 28, 2003 and $4,110 as of March 31, 2003.

In September 2003, a French bank advanced our local subsidiary $1,009 based on the outstanding balances of selected accounts receivable invoices. Customer payments of those invoices made directly to the French bank will be applied to repay the outstanding loan. Our French subsidiary retains the credit risk for the invoices and therefore will cover any customer collection shortfall. The borrowed funds bear interest at 1.30% per annum above the one month EURIBOR rate (3.4% as of September 28, 2003).

D. 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 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, 2004, 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.

E. Promissory Note

In March 2003, we provided a promissory note to an independent software developer in the amount of $804. The balance of the note was $469 as of September 28, 2003 and $737 as of March 31, 2003. The note bears interest at a rate of 8% per annum and is due to be fully paid by February 2004.

F. Our debt matures as follows:

Fiscal years ending March 31,
2004	$	4,830
2005		9,980
2006		174
2007		37
2008		—
Thereafter		2,948
	$	17,969

20

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

14. LOSS PER SHARE

	Three Months Ended						Six Months Ended
	September 28, 2003			August 31, 2002			September 28, 2003			August 31, 2002
Basic and Diluted EPS Computation:
Net loss	$	(4,005	)	$	(28,230	)	$	(22,054	)	$	(25,695	)
Weighted average common shares outstanding		109,084			92,463			103,104			92,014
Basic and Diluted net loss per share	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)

We have excluded the effect of stock options, warrants and our outstanding 10% convertible notes in our calculation of diluted loss per share for the three and six months ended September 28, 2003 and August 31, 2002 because their impact would have been antidilutive. Common stock equivalents excluded from loss per share amounted to 13,552 options and 7,060 warrants as of September 28, 2003 and 12,930 options and 3,945 warrants as of August 31, 2002.

15. EQUITY

In June 2003, we received net proceeds of $8,314 from a private placement of 16,383 shares of our common stock at prices ranging from $0.50 to $0.60 per share. The per share price represented an approximate 20% discount to the current recent public trading price of our common stock. In August 2003, our registration statement covering the shares of common stock issued in the offering became effective. Based on the purchase agreement, we were obligated to pay each investor an amount equal to 1% of the purchase price paid for the shares for every 30-day period which passed commencing August 3, 2003 that the registration statement was not declared effective. Because the registration statement was declared effective subsequent to August 3, 2003, we recorded a charge of $90 which is included in other income (expense) for the three and six months ended September 28, 2003 and accrued expenses as of September 28, 2003. In connection with the private placement, we issued warrants to purchase 478 shares of our common stock with an exercise price of $0.50 per share to certain of the private placement investors and the placement agent. In addition, as a result of the private placement and anti-dilution provisions included in certain warrants then outstanding, the number of shares issuable under the warrants increased and the exercise price of the warrants decreased to $0.50 per share. The following table summarizes the warrant modifications:

	Modified			Original			Expiration Date
Issuance Purpose	Number	Exercise Price		Number	Exercise Price
Junior Participation	2,032	$	0.50	1,270	$	1.25	March, 2006
2002 Officer	2,283		0.50	1,250		2.88	April, 2012
	4,315		0.50	2,520		2.06

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 13B) and the anti-dilution provisions associated with certain warrants outstanding on the date of our authorization to issue the shares unrelated to the Affiliates, the number of shares issuable under the warrants increased and the exercise price decreased to $0.39 per share. We have amortized the excess of the fair value of the total modified warrants over the fair value of the original warrants of $165, 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 through September 26, 2003, the date on which we fully repaid the discretionary supplemental loan. The related non-cash financing expense amounted to $82 for the three months ended September 28, 2003 and $165 for the six months ended September 28, 2003.

21

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

As of September 28, 2003 and March 31, 2003, we had common shares reserved for issuance for the following warrants:

	September 28, 2003			March 31, 2003
Issuance Purpose	Number	Exercise Price		Number	Exercise Price
Junior participation	2,032	$	0.50	1,270	$	1.25
2002 officer	2,283		0.50	1,250		2.88
2003 officer	1,000		0.50	1,000		0.50
1997 financing	569		0.39	569		0.39
2000 financing	210		0.39	210		0.39
2002 financing	255		0.39	255		0.39
2001 private placement	233		3.46	233		3.46
2003 private placement	478		0.50	—		—
	7,060		0.58	4,787		1.44

Please see note 13B regarding 4,000 shares issued to our Co-Chairmen as consideration for their depositing a total of $2,000 with our primary lender in order to provide a limited guarantee on our obligations.

16. RELATED PARTY TRANSACTIONS

Fees for services

We pay sales commissions to a firm which is owned and controlled by one of our co-chairmen. That firm earns these sales commissions based on the amount of our software sales that firm generates. Commissions earned by that firm amounted to $(32) for the three months ended September 28, 2003, $100 for the three months ended August 31, 2002, $(13) for the six months ended September 28, 2003 and $239 for the six months ended August 31, 2002. We owed that firm $366 as of September 28, 2003 and $498 as of March 31, 2003.

During previous fiscal years we received legal services from two separate law firms of which two members of our Board of Directors are partners. In connection with the one firm which continues to represent us, we incurred fees of $227 for the three months ended September 28, 2003, $181 for the three months ended August 31, 2002, $447 for the six months ended September 28, 2003 and $347 for the six months ended August 31, 2002. For the firm that no longer represents us, we incurred fees of $5 for the three months ended August 31, 2002 and $10 for the six months ended August 31, 2002. We owed the firm that continues to represent us, legal fees of $263 as of September 28, 2003 and $353 as of March 31, 2003.

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 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. In May 2003, in accordance with the note’s original terms, 50% of the loan was forgiven. An additional 25% will be forgiven 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 six months ended September 28, 2003, we expensed $119 of the unamortized principal balance. The unamortized principal balance under the loan, included in other receivables, was $48 as of September 28, 2003 and $167 as of March 31, 2003.

22

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 were due and payable on August 31, 2003. The notes provided us full recourse against the officers’ assets. The notes bore interest at our primary lender’s prime rate plus 1.50% per annum. As of September 26, 2003, the two executive officers had fully repaid the principal balance and related accrued interest under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,352, classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on the notes amounted to $324, included in other receivables.

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 the warrants. The principal amount and accrued interest were due and payable on August 31, 2003 and bore interest at our primary lender’s prime rate plus 1.50%. In June 2003, the two executive officers repaid in full the principal amount of the notes of $3,595 and all related accrued interest of $464 then outstanding under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,595, classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on the notes amounted to $426, included in other receivables.

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. In May 2003, the former officer repaid the balance of $100 outstanding under the loan. As of March 31, 2003, the balance outstanding under the loan, included in other assets, was $100.

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. Currently, we are actively pursuing collection of the $250 outstanding balance of the note 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 bore 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). The note was repaid in full, including all accrued interest thereon, in April 2003.

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 13B).

23

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

17. 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 three and six months ended September 28, 2003 and August 31, 2002 below:

	North America			Europe and Pacific Rim			Eliminations			Total
Three Months Ended September 28, 2003
Net revenue from external customers	$	23,240		$	18,105		$	—		$	41,345
Intersegment sales		5			—			(5	)		—
Total net revenue	$	23,245		$	18,105		$	(5	)	$	41,345
Interest income	$	39		$	15		$	—		$	54
Interest expense		879			164			—			1,043
Depreciation and amortization		1,229			238			—			1,467
Operating profit (loss)		2,518			(4,289	)		—			(1,771	)
Three Months Ended August 31, 2002
Net revenue from external customers	$	29,501		$	24,554		$	—		$	54,055
Intersegment sales		45			1,854			(1,899	)		—
Total net revenue	$	29,546		$	26,408		$	(1,899	)	$	54,055
Interest income	$	766		$	26		$	—		$	792
Interest expense		1,687			274			—			1,961
Depreciation and amortization		1,718			460			—			2,178
Operating loss		(18,669	)		(6,463	)		—			(25,132	)
Six Months Ended September 28, 2003
Net revenue from external customers	$	38,801		$	35,614		$	—		$	74,415
Intersegment revenue		5			—			(5	)		—
Total net revenue	$	38,806		$	35,614		$	(5	)	$	74,415
Interest income	$	104		$	44		$	—		$	148
Interest expense		1,827			356			—			2,183
Depreciation and amortization		2,505			482			—			2,987
Operating loss		(8,735	)		(7,632	)		—			(16,367	)
Identifiable assets as of September 28, 2003		35,651			25,697			—			61,348
Six Months Ended August 31, 2002
Net revenue from external customers	$	73,414		$	43,504		$	—		$	116,918
Intersegment revenue		71			5,984			(6,055	)		—
Total net revenue	$	73,485		$	49,488		$	(6,055	)	$	116,918
Interest income	$	981		$	37		$	—		$	1,018
Interest expense		2,672			489			—			3,161
Depreciation and amortization		3,549			835			—			4,384
Operating loss		(19,537	)		(2,271	)		—			(21,808	)
Identifiable assets as of August 31, 2002		139,543			43,352			—			182,895

24

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Our gross revenue was derived from the following product categories:

	Three Months Ended				Six Months Ended
	September 28, 2003		August 31, 2002		September 28, 2003		August 31, 2002
Cartridge-based software:
Nintendo Game Boy	3	%	6	%	3	%	7	%
Subtotal for cartridge-based software	3	%	6	%	3	%	7	%
Disc-based software:
Sony PlayStation 2: 128-bit	61	%	51	%	52	%	45	%
Sony PlayStation 1: 32-bit	3	%	2	%	4	%	2	%
Microsoft Xbox: 128-bit	22	%	21	%	26	%	20	%
Nintendo GameCube: 128-bit	9	%	19	%	12	%	24	%
Subtotal for disc-based software	95	%	93	%	94	%	91	%
PC software	2	%	1	%	3	%	2	%
Total	100	%	100	%	100	%	100	%
Gross revenue by studio:
Internal	49	%	72	%	40	%	58	%
External	51	%	28	%	60	%	42	%
Total	100	%	100	%	100	%	100	%
Gross revenue by segment:
Domestic	55	%	69	%	49	%	69	%
International	45	%	31	%	51	%	31	%
Total	100	%	100	%	100	%	100	%

18. COMMITMENTS AND INDEMNIFICATION

A. Legal Proceedings

On July 11, 2003, we were notified by the Securities and Exchange Commission (the “Commission”) that we have been included in a formal, non-public inquiry entitled “In the Matter of Certain Videogame Manufacturers” that the Commission is conducting. In connection with that inquiry we were required to provide to the Commission certain information. The Commission has advised us that “this request for information should not be construed as an indication from the SEC or its staff that any violation of the law has occurred, nor should it reflect negatively on any person, entity or security.” We have and are continuing to fully cooperate with the inquiry.

Earlier this year, fourteen class action complaints asserting violations of federal securities laws were filed against the Company and certain of its officers and/or directors. By order dated July 3, 2003, the Court consolidated all fourteen actions into one action entitled In re Acclaim Entertainment, Inc. Securities Litigation, Master File No. 2, 03-CV-1270 (E.D.N.Y.) (JS) (ETB), and appointed class members Penn Capital Management, Robert L. Mannard and Steve Russo as lead plaintiffs, and also approved lead plaintiffs’ selection of counsel. Plaintiffs served a Consolidated Amended Complaint (the “Consolidated Complaint”) on or about September 1, 2003. The defendants in the consolidated action are the Company, Gregory Fischbach, Edmond Sanctis, James

25

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Scoroposki and Gerard F. Agoglia. The Consolidated Complaint alleges a class period from October 14, 1999 through January 13, 2003. The Consolidated Complaint alleges that the Company engaged in a variety of wrongful practices which rendered statements made by the Company and its financial statements to be false and misleading. Among other purported wrongful practices, the Consolidated Complaint alleges that Acclaim engaged in “channel stuffing,” a practice by which Acclaim allegedly delivered excess inventory to its distributors to meet or exceed analysts’ earnings expectations and inflate its sales results; entered into “conditional sales agreements” whereby Acclaim’s customers allegedly were induced to accept delivery of Acclaim products prior to a quarter-end reporting period on the condition that Acclaim would accept the return of any unsold product after the quarter-end, and that Acclaim falsified sales reports and manipulated the timing and recognition of price concessions and discounts granted to its retail customers. The Consolidated Complaint further alleges that Acclaim engaged in improper accounting practices, including the improper recognition of sales revenue; manipulation of reserves associated with concessions, chargebacks and/or sales discounts granted to customers; and the improper reporting of software development costs. The Consolidated Complaint alleges that as a result of these practices defendants violated § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and that the individual defendants violated § 20(a) of the 1934 Act. The Consolidated Complaint seeks compensatory damages in an unspecified amount. Pursuant to an agreement with plaintiffs, defendants’ time to answer, move or otherwise respond to the Consolidated Complaint has been extended to December 3, 2003. A preliminary conference before the Court is scheduled for December 5, 2003. We are defending this action vigorously.

In 1999 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 involved 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. Upon review of applicable court dockets, the defendants in this action were granted summary judgment dismissing the plaintiff’s claims; therefore we have no indemnification obligations under the asset purchase agreement.

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. We have since amicably resolved our differences with Mr. Mirra surrounding this matter. Mr. Mirra’s lawsuit against us was settled with no monetary or other damages being paid by either party, and Mr. Mirra will continue, uninterrupted, to be under contract with us until the year 2011.

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.

26

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

B. Indemnification

Under the terms of substantially all of our software revenue sharing agreements with customers that, among other things, rent our software to consumers, we have agreed to indemnify our customers for all costs and damages arising from claims against such customers based on, among other things, allegations that the Company’s software infringes the intellectual property rights of a third party. Such indemnification provisions are accounted for in accordance with SFAS No. 5. Through September 28, 2003, there have not been any claims under such indemnification provisions.

19. SUBSEQUENT EVENTS

On November 10, 2003, we received a term sheet from our primary lender, which provides for the recasting and modification, in its entirety, of our existing domestic credit agreement with our primary lender. The term sheet provides for initial borrowings of up to $30,000 under a revolving credit and factoring loan facility utilizing an asset based borrowing formula and included therein is a provision that provides for $5,000 in supplemental overformula borrowing availability. The domestic loan facility will continue to be secured by our eligible accounts receivable, inventory and other assets, as defined. The term of the domestic loan facility is for three years and is renewable annually thereafter. We and GMAC are working together to finalize the definitive agreements which will embody the terms and provisions of the term sheet.

On November 12, 2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaq’s opinion, the structure of our September/October 2003 private offering of the Notes (please see note 13A) was not in compliance with NASD Marketplace Rule 4350(i)(1)(d). The Note offering was structured in a manner we believe complied with Nasdaq’s published rules. Based upon our continuing discussions with Nasdaq and the holders of the Notes, while there can be no assurance, we believe we will be successful in resolving this matter; however, the ultimate resolution of this matter is not determinable at this time and, if the terms of the securities are modified, it could have a material impact on the financial statements of the Company. In the event that we and Nasdaq cannot resolve this matter, then our securities would be subject to delisting. If a delisting proceeding is commenced, we have the right to appeal such determination; however, there can be no assurance that such an appeal would be successful.

27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As used in this Quarterly Report on Form 10-Q, 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. Amounts are in thousands unless otherwise noted.

This Quarterly Report on Form 10-Q, including Item 2 of Part I (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and Item 3 of Part I (“Quantitative and Qualitative Disclosures About Market Risk”), 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 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.”

The following is intended to update the information contained in our Annual Report on Form 10-KT for the fiscal year ended March 31, 2003 for Acclaim Entertainment, Inc. and its wholly owned subsidiaries and presumes that the readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in such Form 10-KT.

In January 2003, our Board of Directors approved a plan to change our fiscal year end from August 31 to March 31. Our new fiscal year 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

The accompanying consolidated financial statements include our results of operations for the three and six month periods ended September 28, 2003 and the most comparable reported periods of the prior year, the three and six month periods ended August 31, 2002. We have presented the three and six month periods ended August 31, 2002 as prior year comparatives to the current year periods because the seasonal factors affecting both periods are similar, the data is comparable and recasting our prior year results of operations and related supporting schedules would not have been practicable or cost justified.

Overview

We develop, publish, distribute and market video and computer game software for interactive entertainment consoles and, to a lesser extent, personal computers. 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 those areas and in the Pacific Rim to distribute software within those geographic areas. As an additional aspect of

28

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 17 (Segment Information) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

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 Part I, Item 1 of our quarterly report on Form 10-Q as filed with the SEC, 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.

29

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 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. 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 titles, as evidenced by the retail sell-through rates to consumers in the first quarter of fiscal 2003 and beyond, fell substantially below our revenue expectations. As a result of the lower than anticipated retail sell-through, significant quantities of these products remained in the retail channel. Accordingly, we provided our retail customers with 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 calendar 2002 holiday season.

During fiscal 2003, while the price concessions we previously offered our retail customers did increase the retail sell-through rate, the rate of reduction of retail channel inventory did not attain the level we had originally estimated. Consequently, we 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 certain of our products for that platform to lower prices than we originally estimated at that stage in the platform cycle. Finally, the actual 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 unanticipated events, we provided our retail customers additional price concessions. The resulting $14.4 million increase to the provision for price concessions and returns negatively impacted net revenues, gross profit and net income for fiscal 2003. No further significant adjustments were made to allowances during the three and six months ended September 28, 2003.

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. 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.

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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.

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Operating Results

Summarized below are our operating results for the three and six months ended September 28, 2003 and August 31, 2002 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 to the consolidated financial statements, which are included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Three Months Ended September 28, 2003 Compared to Three Months Ended August 31, 2002

							Changes
	Three Months Ended						2Q’04 Versus 4Q’02
	September 28, 2003			August 31, 2002			$			%
Net revenue	$	41,345		$	54,055		$	(12,710	)	-23.5	%
Cost of revenue		20,472			33,222			(12,750	)	-38.4	%
Gross profit		20,873			20,833			40		0.2	%
Operating expenses
Marketing and selling		6,094			18,557			(12,463	)	-67.2	%
General and administrative(1)		8,875			11,480			(2,605	)	-22.7	%
Research and development		7,390			15,928			(8,538	)	-53.6	%
Stock-based compensation		80			—			80		NA
Restructuring		205			—			205		NA
Total operating expenses		22,644			45,965			(23,321	)	-50.7	%
Loss from operations		(1,771	)		(25,132	)		23,361		-93.0	%
Other income (expense)
Interest expense, net		(989	)		(1,169	)		180		-15.4	%
Non-cash financing expense		(1,828	)		(193	)		(1,635	)	847.2	%
Other income (expense)		583			(1,512	)		2,095		-138.6	%
Total other expense		(2,234	)		(2,874	)		640		-22.3	%
Loss before income taxes		(4,005	)		(28,006	)		24,001		-85.7	%
Income tax provision		—			224			(224	)	-100.0	%
Net loss	$	(4,005	)	$	(28,230	)	$	24,225		-85.8	%

(1) Excludes stock-based compensation of $80.

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Six Months Ended September 28, 2003 Compared to Six Months Ended August 31, 2002

							Changes
	Six Months Ended						Fiscal 2004 Versus Fiscal 2002
	September 28, 2003			August 31, 2002			$			%
Net revenue	$	74,415		$	116,918		$	(42,503	)	-36.4	%
Cost of revenue		40,377			59,913			(19,536	)	-32.6	%
Gross profit		34,038			57,005			(22,967	)	-40.3	%
Operating expenses
Marketing and selling		12,819			31,625			(18,806	)	-59.5	%
General and administrative(1)		17,416			21,893			(4,477	)	-20.4	%
Research and development		18,715			25,295			(6,580	)	-26.0	%
Stock-based compensation		1,250			—			1,250		NA
Restructuring charges		205			—			205		NA
Total operating expenses		50,405			78,813			(28,408	)	-36.0	%
Loss from operations		(16,367	)		(21,808	)		5,441		-24.9	%
Other income (expense)
Interest expense, net		(2,035	)		(2,143	)		108		-5.0	%
Non-cash financing expense		(3,788	)		(386	)		(3,402	)	881.3	%
Other income (expense)		136			(1,109	)		1,245		-112.3	%
Total other expense		(5,687	)		(3,638	)		(2,049	)	56.3	%
Loss before income taxes		(22,054	)		(25,446	)		3,392		-13.3	%
Income tax provision		—			249			(249	)	-100.0	%
Net loss	$	(22,054	)	$	(25,695	)	$	3,641		-14.2	%

(1) Excludes stock-based compensation of $1,250.

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, Game Boy Advance and PC’s. We record revenue net of a provision for price concessions and returns, as discussed above under “Critical Accounting Policies.”

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Summarized below is information about our gross revenue by game console for the three and six months ended September 28, 2003 and August 31, 2002. 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.

	Three Months Ended				Six Months Ended
	September 28, 2003		August 31, 2002		September 28, 2003		August 31, 2002
Cartridge-based software:
Nintendo Game Boy	3	%	6	%	3	%	7	%
Subtotal for cartridge-based software	3	%	6	%	3	%	7	%
Disc-based software:
Sony PlayStation 2: 128-bit	61	%	51	%	52	%	45	%
Sony PlayStation 1: 32-bit	3	%	2	%	4	%	2	%
Microsoft Xbox: 128-bit	22	%	21	%	26	%	20	%
Nintendo GameCube: 128-bit	9	%	19	%	12	%	24	%
Subtotal for disc-based software	95	%	93	%	94	%	91	%
PC software	2	%	1	%	3	%	2	%
Total	100	%	100	%	100	%	100	%
Gross revenue by studio:
Internal	49	%	72	%	40	%	58	%
External	51	%	28	%	60	%	42	%
Total	100	%	100	%	100	%	100	%
Gross revenue by segment:
Domestic	55	%	69	%	49	%	69	%
International	45	%	31	%	51	%	31	%
Total	100	%	100	%	100	%	100	%
New titles released	17		9		27		20

Summarized below is information about our software franchises, all released on multiple platforms, that represented 5% or more of gross revenue for the three and six months ended September 28, 2003 and August 31, 2002:

	Three Months Ended				Six Months Ended
Software Franchise	September 28, 2003		August 31, 2002		September 28, 2003		August 31, 2002
NBA Jam	16	%	—		9	%	—
Burnout	14	%	3	%	23	%	10	%
Summer Heat	11	%	—		6	%	—
A TV	9	%	2	%	8	%	2	%
Extreme G	6	%	—		3	%	2	%
Turok	6	%	66	%	4	%	38	%
All Star Baseball	4	%	3	%	4	%	6	%
Speed Kings	3	%	—		5	%	—
Vexx	1	%	—		7	%	—
Legends of Wrestling	1	%	1	%	2	%	7	%
Aggressive Inline	1	%	12	%	1	%	11	%

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Three Months Ended September 28, 2003 Compared to Three Months Ended August 31, 2002

For the three months ended September 28, 2003, net revenue of $41.3 million decreased by $12.7 million, or 24%, from $54.1 million for the three months ended August 31, 2002. The decrease was caused by a $52.3 million decrease in gross revenue, partially offset by a $39.6 million decrease in the net provision for price concessions and returns.

The $52.3 million decrease in gross revenue was primarily attributable to the release of fewer titles, the lower average number of units sold per title, and lower average selling prices per unit sold as compared with the prior year period. Catalog title sales, which generally sell at lower price points than newly released titles, represented a greater percentage of revenue at lower average selling prices per unit sold. Catalog titles comprised approximately 70% of revenue for the second quarter of fiscal 2004 compared to approximately 24% in the comparable period of the prior year. The $39.6 million decrease in the net provision for price concession and returns resulted from the reduction in gross revenues, higher retail sell-through rates for our products during fiscal 2004 as well as the increase in the provision of $13.6 million recorded in the fourth quarter of fiscal 2002 for Turok: Evolution and Aggressive Inline based on the lower than historical retail sell-through rates for those products and a higher than historical allowance provision rate.

Sales of software titles for the top three game systems accounted for 92% of gross revenue for the three months ended September 28, 2003 compared to 91% for the three months ended August 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.

Six Months Ended September 28, 2003 Compared to Six Months Ended August 31, 2002

For the six months ended September 28, 2003, net revenue of $74.4 million decreased by $42.5 million, or 36%, from $116.9 million for the six months ended August 31, 2002. The decrease was caused by a $84.0 million decrease in gross revenue, partially offset by a $41.5 million decrease in the net provision for price concessions and returns.

The $84.0 million decrease in gross revenue was primarily attributable to the release of fewer titles, the lower average number of units sold per title, and lower average selling prices per unit sold as compared with the prior year period. Catalog title sales, which generally sell at lower price points than newly released titles, represented a greater percentage of revenue at lower average selling prices per unit sold. Catalog titles comprised approximately 53% of revenue for the first half of fiscal 2004 compared to approximately 28% in the comparable period of the prior year. The $41.5 million decrease in the net provision for price concession and returns resulted from the reduction in gross revenues, the higher retail sell-through rates of our products during fiscal 2004 relative to the prior year as well as the increase in the provision of $13.6 million recorded in the fourth quarter of fiscal 2002 for Turok: Evolution and Aggressive Inline based on lower than historical retail sell-through rates for those products and a higher than historical allowance provision rate.

Sales of software titles for the top three game systems accounted for 90% of gross revenue for the six months ended September 28, 2003 compared to 89% for the six months ended August 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.

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 certain software 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”),

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• 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.

Three Months Ended September 28, 2003 Compared to Three Months Ended August 31, 2002

For the three months ended September 28, 2003, gross profit of $20.9 million (51% of net revenue) was the same as gross profit for the three months ended August 31, 2002 (39% of net revenue). The increased gross profit percentage was primarily due to lower average costs per unit and a decrease in the amortization of capitalized software development costs, partially offset by diminished average net selling prices per unit sold (please see “Net Revenue”).

For the three months ended September 28, 2003, amortization of capitalized software development costs amounted to $2.6 million as compared to $3.5 million for the three months ended August 31, 2002.

Six Months Ended September 28, 2003 Compared to Six Months Ended August 31, 2002

For the six months ended September 28, 2003, gross profit of $34.0 million (46% of net revenue) decreased by $23.0 million from $57.0 million (49% of net revenue) for the six months ended August 31, 2002. The decreased gross profit was primarily caused by a :

• $ 29.6 million decrease due to a lower number of units sold and lower average selling prices per unit sold (please see “Net Revenue”), and

• $2.2 million increase in amortization of capitalized software development costs due primarily to the releases of Vexx, All Star Baseball 2004 and Burnout 2, partially offset by a

• $8.9 million increase in gross profit associated with slightly lower per unit costs of software sold.

For the six months ended September 28, 2003, amortization of capitalized software development costs amounted to $7.1 million as compared to $4.9 million for the six months ended August 31, 2002 due to the higher capitalized costs associated with the titles released in fiscal 2004.

Capitalized software development costs, net, amounted to $0.4 million as of September 28, 2003 and $6.9 million as of March 31, 2003.

Gross profit in fiscal 2004 will depend in large part on 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, Our Ability to Achieve Our Projected Revenue Levels and Reduced Operating Expenses and Our Ability to Raise Additional Financing from Outside Investors.”

Operating Expenses

For the three months ended September 28, 2003, operating expenses of $22.6 million (55% of net revenue) decreased by $23.3 million, or 51%, from $46.0 million (85% of net revenue) for the three months ended August 31, 2002. For the six months ended September 28, 2003, operating expenses of $50.4 million (68% of net revenue) decreased by $28.4 million, or 36%, from $78.8 million (67% of net revenue) for the six months ended August 31, 2002.

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Marketing and Selling

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

For the three months ended September 28, 2003, marketing and selling expenses of $6.1 million (15% of net revenue) decreased by $12.5 million, or 67%, from $18.6 million (34% of net revenue) for the three months ended August 31, 2002. For the six months ended September 28, 2003, marketing and selling expenses of $12.8 million (17% of net revenue) decreased by $18.8 million, or 60%, from $31.6 million (27% of net revenue) for the six months ended August 31, 2002. The decreases in the three and six month periods relative to the comparative prior year periods resulted primarily from lower variable marketing expenditures on lower revenues and management’s decision to curtail marketing and advertising expenditures in order to improve short-term liquidity (please see discussion under “Liquidity and Capital Resources”), as well as lower sales commissions related to the decreases in net revenue.

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.

For the three months ended September 28, 2003, general and administrative expenses of $8.9 million (22% of net revenue) decreased by $2.6 million, or 23%, from $11.5 million (21% of net revenue) for the three months ended August 31, 2002. The decrease resulted primarily from a decrease in occupancy costs of $1.1 million, depreciation of $0.8 million, technology costs of $0.6 million and distribution costs of $0.5 million partially offset by higher insurance and legal expenses of $0.4 million.

For the six months ended September 28, 2003, general and administrative expenses of $17.4 million (23% of net revenue) decreased by $4.5 million, or 20%, from $21.9 million (19% of net revenue) for the six months ended August 31, 2002. The decrease resulted primarily from a decrease in employee related costs of $1.7 million, occupancy costs of $1.6 million, depreciation of $1.5 million, technology costs of $0.5 million and distribution costs of $0.6 million partially offset by higher insurance and legal expenses of $1.3 million.

Occupancy costs decreased in the three and six-month periods primarily from lower communication costs. Depreciation expense decreased during the three and six-month periods due to the reclassification of our UK building to held-for-sale in March 2003, at which time we ceased depreciating the building. The building continues to be held for sale as of September 28, 2003.

Administrative employee headcount decreased slightly to 153 as of September 28, 2003 as compared to 160 as of March 31, 2003, but was significantly reduced from the August 31, 2002 headcount number of 229. Please see “Restructuring,” and “Liquidity and Capital Resources” as well as Note 12 (Accrued Restructuring Charges) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

Research and Development

Research and development expenses consist of employee-related and occupancy costs associated with our internal studios as well as contractual costs for external software development. For the three months ended September 28, 2003, research and development expenses of $7.4 million (18% of net revenue) decreased by $8.5 million, or 54%, from $15.9 million (30% of net revenue) for the three months ended August 31, 2002. Fewer titles under development in fiscal year 2004 met the test of technological feasibility, as compared to the prior year, thereby increasing software development expenses by $4.7 million. More than offsetting these additional costs are savings of:

• $4.7 million from lower employee related and overhead costs associated with internal development studios, principally resulting from the closure of our Salt Lake City software development studio at the end of calendar 2002 and

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• $8.9 million from lower external development costs due to the reduced number of titles under development.

For the six months ended September 28, 2003, research and development expenses of $18.7 million (25% of net revenue) decreased by $6.6 million, or 26%, from $25.3 million (22% of net revenue) for the six months ended August 31, 2002. The cost savings were primary attributable to:

• $6.7 million from lower employee related and overhead costs associated with internal development studios, principally resulting from the closure of our Salt Lake City software development studio at the end of calendar 2002 and

• $11.5 million from lower external development costs due to the reduced number of titles under development.

Partially offsetting these reduced costs are increased software development expenses of $11.2 million due to fewer titles under development in fiscal year 2004 that met the test of technological feasibility as compared to the prior year.

Stock-based Compensation

Stock-based compensation of $0.1 million for the three months ended September 28, 2003 represents the increase in market value between the end of the first quarter of fiscal 2004, June 29, 2003 ($1,170 based on a market value per share of $0.78) and the end of the second quarter of fiscal 2004, September 28, 2003 ($1,250 based on a market value per share of $0.83) of the 1.5 million shares of our common stock which our Compensation Committee had approved, and the Board of Directors had ratified, for issuance to Rodney Cousens, for his appointment as CEO. As the issuance of the shares is subject to stockholder approval, the associated expense will fluctuate with the market value of our common stock until the issuance is approved. Stock-based compensation associated with the proposed share issuance amounted to $1.3 million for the six months ended September 28, 2003.

Restructuring

Restructuring charges consist of severance and other termination benefits, lease commitment costs, net of estimated sublease 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 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. The closure of the development studio and reduction of our global administrative headcount reduced our overall headcount by approximately 100 employees and resulted in initial restructuring charges of $4,824 during fiscal 2003. The restructuring charges included accruals for employee termination costs, the write-off of certain fixed assets and leasehold improvements and the accrual of the development studio lease commitment, which is net of estimated sub-lease rental income. An adjustment to our forecast of sub-lease rental income and additional lease costs resulted in an increase to the restructuring charge of $205 during the three months ended September 28, 2003. The development studio lease commitment expires in May 2007 and the employee severance agreements expire over various periods through April 2004. No restructuring charges were incurred for the three and six months ended June 29, 2003 or August 31, 2002, respectively.

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The following table presents the components of the change in the balance of accrued restructuring charges for the three and six months ended September 28, 2003:

	Three Months Ended September 28, 2003			Six Months Ended September 28, 2003
Accrued restructuring costs, beginning of period	$	1,383		$	2,299
Adjustments to lease costs and estimated sub-lease rental income		205			205
Less: costs paid		(412	)		(1,328	)
Ending balance as of September 28, 2003	$	1,176		$	1,176

Other Income and Expense

Interest Expense, Net

Interest expense, net, was $1.0 million for the three months ended September 28, 2003 (2% of net revenue) as compared to $1.2 million for the three months ended August 31, 2002 (2% of net revenue).

Interest expense, net, was $2.0 million for the six months ended September 28, 2003 (3% of net revenue) as compared to $2.1 million for the six months ended August 31, 2002 (2% of net revenue).

Non-cash Financing Expense

Non-cash financing expense principally consists of equity-based costs associated with debt financings which are generally amortized on a straight-line basis over the term of the related financing agreements.

For the three months ended September 28, 2003, non-cash financing expense amounted to $1.8 million (4% of net revenue) as compared to $0.2 million (0.4% of net revenue) for the three months ended August 31, 2002. For the six months ended September 28, 2003, non-cash financing expense amounted to $3.8 million (5% of net revenue) as compared to $0.4 million (0.3% of net revenue) for the six months ended August 31, 2002. The increases relate primarily to $1.6 million of costs for the three months ended September 28, 2003 and $3.3 million for the six months ended September 28, 2003 associated with the warrants to purchase 1,000 shares of our common stock at an exercise price of $0.50 per share issued and the 4,000 shares of common stock proposed to be issued to two of Acclaim’s major shareholders, who are also co-chairmen, as consideration for their deposit of $2,000 with our primary lender. The cash deposit was provided as a limited guarantee of our obligations. We will continue to revalue the shares at each quarter-end, pending stockholder approval of the share issuance. Please see Note 13B (Debt: North American Credit Agreement) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

Other Income (Expense)

For the three months ended September 28, 2003, other income (expense) amounted to income of $0.6 million (1.4% of net revenue) as compared to expense of $1.5 million (2.8% of net revenue) for the three months ended August 31, 2002. For the six months ended September 28, 2003, other income (expense) amounted to income of $0.1 million as compared to expense of $1.1 million for the six months ended August 31, 2002. The changes for the three and six month periods relative to the comparable prior year periods relates primarily to net foreign currency transaction gains in the current year versus losses in the prior year associated with the change in the purchase power of the British Pound Sterling versus the Euro.

Income Taxes

Income tax provision decreased to zero for the three and six months ended September 28, 2003 as compared to an expense of $0.2 million for the three and six months ended August 31, 2002. Although as of

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September 28, 2003 we had a significant U.S. tax net operating loss carryforward, we were not able to recognize a benefit during the three and six months ended September 28, 2003 because of the uncertainty of whether we will be able to utilize the loss carryforward in the future.

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.

Net Loss

For the three months ended September 28, 2003, we reported a net loss of $4.0 million, or $0.04 per diluted share (based on weighted average diluted shares outstanding of 109.1 million), as compared to a net loss of $28.2 million, or $0.31 per diluted share (based on weighted average diluted shares outstanding of 92.5 million) for the three months ended August 31, 2002.

For the six months ended September 28, 2003, we reported a net loss of $22.1 million, or $0.21 per diluted share (based on weighted average diluted shares outstanding of 103.1 million), as compared to a net loss of $25.7 million, or $0.28 per diluted share (based on weighted average diluted shares outstanding of 92.0 million) for the six months ended August 31, 2002.

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 (In thousands, except per share data)

As of September 28, 2003, cash and cash equivalents were $7,323. During the six months ended September 28, 2003, cash and cash equivalents increased by $2,828 compared to a net increase of $6,909 for the six months ended August 31, 2002. Primary contributors to the diminished increase in cash and cash equivalents in the six months ended September 28, 2003 as compared to the six months ended August 31, 2002 were negative impacts of $1,937 related to net cash (used in) and provided by operating activities and $4,770 related to net cash provided by financing activities, partially offset by a positive impact of $3,223 from cash provided by investing activities. Operating activities used $1,937 more cash for the six months ended September 28, 2003 as compared to the six months ended August 31, 2002 due primarily to cash used to pay accrued expense balances and reduced cash used in connection with accounts receivable. Financing activities provided $4,770 less cash for the six months ended September 28, 2003 as compared to the six months ended August 31, 2002, due primarily to a $25,742 increase in net short-term loan repayments, partially offset by net proceeds of $8,314 from our June 2003 private placement, repayments of notes receivable received from our Co-Chairmen of $6,947 and gross proceeds raised from our sale of convertible subordinated notes of $5,500.

As of September 28, 2003, the working capital deficit of $67,209 increased by $3,713 from the $63,496 working capital deficit as of March 31, 2003. The increase in the working capital deficit during the six months ended September 28, 2003 resulted primarily from the $22,054 net loss in the period, partially offset by the gross proceeds of $5,500 received from purchases of convertible subordinated notes, repayments of $7,820 for notes receivable and related accrued interest due from our Co-chairmen, and net proceeds of $8,314 from our June 2003 private placement. 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 and Our Ability to Raise Additional Financing From Outside Investors.”

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As of March 31, 2003, our independent auditors’ report, as prepared by KPMG LLP and dated May 20, 2003, included an explanatory paragraph relating to the substantial doubt as to our ability 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. For the six months ended September 28, 2003, we had a net loss of $22,054 and used $1,133 of cash in operating activities. As of September 28, 2003, we had a stockholders’ deficit of $55,022, a working capital deficit of $67,209 and cash and cash equivalents of $7,323. These factors have continued to raise substantial doubt as to 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 and, based on management’s plans described below, our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern.

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 fiscal 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 had advanced to us a supplemental discretionary loan of $11,000 through May 31, 2003. In accordance with the terms of the amendment to our credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6,000 of the supplemental discretionary loan and as of September 26, 2003, we repaid the remaining $5,000. During the six months ended September 28, 2003, our Co-chairmen fully repaid a total of $6,947 of their outstanding loans and related accrued interest of $873. Additionally, in June 2003, we completed a private placement of 16,383 shares of our common stock to a limited group of private investors, resulting in net proceeds to us of $8,314. In September and October 2003, we completed the sale of our 10% convertible subordinated notes, resulting in gross proceeds of $11,863 of which $5,500 was received as of September 28, 2003.

Our future liquidity will significantly depend in whole or in part on our ability to (1) timely develop and market new software products that meet or exceed our operating plans, (2) realize long-term benefits from our implemented expense reductions, and (3) continue to enjoy the support of our primary lender and vendors. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, continue to realize additional benefits from the expense reductions we have implemented, and timely close on the new domestic loan facility with our primary lender, 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, additional 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 others, and there can be no assurance those consents or approvals will be obtained.

In the event that we do not achieve our business operating plan, continue to derive significant expense savings from our implemented expense reductions and timely close on the new domestic loan facility with our primary lender, we cannot assure our stockholders that our future operating cash flows will be sufficient to meet our operating requirements and debt service requirements. If any of the preceding events were to occur, our operations and liquidity would be materially and adversely affected and we could be forced to cease operations.

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.

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Private Placements

During September and October 2003, we raised gross proceeds of $11,863 in connection with the sale, to a limited group of private investors, of our 10% convertible subordinated notes (the “Notes”), due in 2010. The Notes are initially convertible into 16,385 shares of our common stock, based upon a conversion price of $0.724 per share. The conversion price is based upon the 10 day trailing average closing price of our common stock ending on September 23, 2003. In the event we obtain the authorization from our stockholders, the conversion price for the Notes will be adjusted to $0.57 per share, a 21% discount from the $0.724 conversion price. Accordingly, the Notes would then be convertible into 20,812 shares of our common stock. Interest on the Notes is due semi-annually on each April 15 and October 15, commencing April 15, 2004. The purchasers of the Notes have also received warrants to purchase approximately 4,096 shares of our common stock, at an exercise price of $0.724 per share, which exercise price will also adjust to $0.57 if stockholder approval is obtained. If we do not receive stockholder approval, then additional warrants will be issued to the purchasers of the Notes, to purchase an additional 4,096 shares at the market price of our common stock at the time of issuance.

Subject to the consent of the holders of any senior indebtedness and our common stock price closing at an average of 200% of the Notes’ conversion price during a specified period, as defined in the agreement, we may, at our option, redeem the Notes in whole but not in part on any date on or after April 5, 2005, at a redemption price, payable in cash, equal to the outstanding principal amount of the Notes plus accrued and unpaid interest thereon to the applicable redemption date if the requirements as documented in the agreement are satisfied. In addition, subject to the consent of the holders of any senior indebtedness, the purchasers of the Notes have a put option to require us to repurchase the notes at a redemption amount equal to the greater of the principal amount of the Notes plus accrued interest thereon, or the market value of the underlying stock, if we experience a change in control.

In the event our common stock price closes at 200% of the Notes’ conversion price in effect at the time for 10 consecutive trading days, we have the right to require the holders of the warrants to exercise the warrants in full, within 10 business days following notification to the warrant holders of the forced exercise.

As of September 28, 2003, we had received $5,500 of the total gross proceeds raised in connection with the sale of the Notes. These Notes are convertible into 7,597 shares of our common stock, based on a conversion price of $0.724 per share, which may be adjusted to $0.57 per share as discussed above. Additionally, in connection with the $5,500 of Notes, as of September 28, 2003, we were obligated to issue warrants to purchase 1,899 shares of our common stock to the private investors, at an exercise price of $0.724 per share, which would be adjusted to $0.57 per share upon stockholder approval as discussed above.

The securities offered have not been registered under the Securities Act of 1933, as amended, or state securities laws, and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, or an applicable exception therefrom. We have agreed to register the shares of our common stock underlying the Notes and warrants within 120 days following the closing. If the registration statement is not effective within 120 days of closing, we must pay a penalty of 1% of the proceeds to the purchasers of the Notes each month it is not thereafter effective.

Based on the accounting guidance in SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” and EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” we have determined that (1) the conversion option of the Notes, (2) the warrants issued with those Notes and (3) the put option held by the purchasers of the Notes are derivative instruments because we have contractually agreed to register the common shares underlying them and the conversion option is not at a fixed rate. We have recorded these derivative instruments as liabilities, included in accrued expenses in the accompanying balance sheet at their fair values as determined by an independent appraiser. Until the underlying shares are registered and, additionally for the conversion option, until the shareholders’ meeting has occurred which will result in a fixed conversion rate, the instruments are considered derivatives and therefore the related liabilities each reporting period will be adjusted to their fair value. We will record adjustments to the liabilities each reporting period as non-cash financing expense or

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income in the statement of operations until the instruments are no longer considered derivatives and the then fair value of the instruments will be reclassified from a liability to additional paid-in capital.

We have allocated the proceeds from the sale of the Notes first to the fair values of the derivative instruments related to the Notes with the balance allocated to the Notes. Based on the fair values as of September 28, 2003, the proceeds allocated to the conversion feature of the Notes was $3,838, to the warrants was $1,664 and to the Notes was $6,361. The put option held by the purchasers of the Notes had no value as of September 28, 2003. The fair values of the conversion feature and the warrants represent debt discounts and will be amortized to expense over the term of the Notes or, if earlier, upon their conversion to common stock. Under the terms of the Notes, they will automatically convert to common stock at $0.57 per share if and when our stockholders have approved the adjusted conversion price and the shares underlying the Notes and warrants are registered with the SEC as long as our common stock remains listed on Nasdaq. If this automatic conversion were to occur, the unamortized balance of the debt discounts would be recorded as non-cash financing expense at that time. As of September 28, 2003, we recorded a debt discount related to the conversion feature of the Notes of $1,782 and a debt discount of $770 related to the warrants which are both included accrued expenses. These debt discounts relate to the $5,500 gross proceeds raised from the sale of Notes through September 28, 2003.

We incurred placement agent fees of $654 in connection with the Notes transaction, comprised of warrants to purchase 328 shares of our common stock at an exercise price of $0.724 per share with a fair value of $120, and a cash payment of $534. We will amortize these fees on a straight-line basis over the term of the Notes or, if earlier, upon their conversion to common stock. Similar to the warrants issuable to the private investors, because the shares underlying the warrants are not registered, they are considered derivative instruments under EITF Issue No. 00-19 and therefore until the date the shares are registered, we are required to revalue the warrants on a quarterly basis and classify them in accrued expenses. The unamortized portion of these fees is included in other assets as of September 28, 2003.

In June 2003, we received net proceeds of $8,314 from a private placement of 16,383 shares of our common stock at prices ranging from $0.50 to $0.60 per share. The per share price represented an approximate 20% discount to the current recent public trading price of our common stock. In August 2003, our registration statement covering the shares of common stock issued in the offering became effective. Based on the purchase agreement, we were obligated to pay each investor an amount equal to 1% of the purchase price paid for the shares purchased for every 30-day period which passed commencing August 3, 2003 that the registration statement was not declared effective. Because the registration statement was declared effective subsequent to August 3, 2003, we recorded a charge of $90 which is included in other income (expense) for the three and six months ended September 28, 2003 and accrued expenses as of September 28, 2003. In connection with the private placement, we issued warrants to purchase 478 shares of our common stock with an exercise price of $0.50 per share to certain of the private placement investors and the placement agent.

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 had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in accordance with Marketplace Rule 4310(c)(8)(D) we were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the minimum bid requirement. If at any time prior to January 20, 2004 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 January 20, 2004, 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 90 day grace period in which to demonstrate compliance. If, after January 20, 2004 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.

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On November 12, 2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaq’s opinion, the structure of our September/October 2003 private offering of the Notes (please see note 13A) was not in compliance with NASD Marketplace Rule 4350(i)(1)(d). The Note offering was structured in a manner we believe complied with Nasdaq’s published rules. Based upon our continuing discussions with Nasdaq and the holders of the Notes, while there can be no assurance, we believe we will be successful in resolving this matter; however, the ultimate resolution of this matter is not determinable at this time and, if the terms of the securities are modified, it could have a material impact on the financial statements of the Company. In the event that we and Nasdaq cannot resolve this matter, then our securities would be subject to delisting. If a delisting proceeding is commenced, we have the right to appeal such determination; however, there can be no assurance that such an appeal would be successful.

Please see discussion regarding our North American credit agreement below as well as in Note 13 (Debt) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q. 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 and Our Ability to Raise Additional Financing from Outside Investors.”

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, 2004. 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, 2004. 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 continue 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 September 28, 2003, we were not in compliance with those financial covenants, but received waivers from our primary lender regarding our non-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,

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which is adjusted for any returns, discounts and other customer credits or allowances. Please see Note 2 (Accounts Receivable) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

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 factors. As of September 28, 2003, our primary lender was advancing us 60% of the eligible receivables due from our retail customers. The factoring charge of 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, is recorded in interest expense. 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 (5.50% as of September 28, 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 North American credit agreement was amended which allowed us to borrow supplemental discretionary loans of $11,000 through May 31, 2003, which thereafter was reduced to $5,000 through September 29, 2003 above the standard formula for short-term funding. In accordance with the terms of the amended credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6,000 of the supplemental discretionary loan and as of September 26, 2003 we repaid the remaining $5,000. As a condition precedent to our primary lender entering into the amendment, two of our major shareholders, who are also 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 returned the cash deposit to the Affiliates on September 26, 2003 concurrently with our repayment of the supplemental discretionary loan. 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 of 2,000 shares of our common stock with a then aggregate market value of $1,560 ($3,332 as of September 28, 2003) 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. Please see note 16 (Related Party Transactions) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

In June 2003, Nasdaq advised us that their then unpublished internal interpretation of NASD Marketplace Rule 4350(i)(1)(a) requires us to obtain stockholder ratification of the issuance of the shares to the Affiliates. Therefore, the issuance of the 4,000 common shares are subject to stockholder approval, as included in our forthcoming 2003 Proxy Statement, and variable accounting is being applied to the issuance. Nasdaq has subsequently published a proposed amendment to Marketplace Rule 4350(i)(1)(a) which addresses this issue. Since the common shares are now forfeitable, as of June 29, 2003, we reclassified the $1,560 aggregate market value of the shares at issuance from stockholders’ equity to accrued stock-based expenses. We are required to revalue the common shares at each quarter-end, until the market value is fixed if and when the stockholders approve the share issuance. Accordingly, during the six month period ended September 28, 2003 we increased accrued stock-based expenses by $1,772 to the market value of the common shares of $3,332 as of September 28, 2003.

We have expensed the fair value of the stock-based and warrant-based consideration provided to the Affiliates as a non-cash financing expense over the period between the date the initial supplemental loans were

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advanced in February 2003 and the date they were fully repaid, September 26, 2003. Non-cash financing expense was $1,630 for the three months ended September 28, 2003 and $3,332 for the six months ended September 28, 2003.

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 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 shares of pledged common stock to the Affiliates following a 30-day period in which we are not in an overformula position exceeding $1,000 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 meet our operating and debt requirements. 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.

There were advances outstanding within the standard borrowing formula under the North American credit agreement of $891 as of September 28, 2003 and $4,154 as of March 31, 2003. The supplemental discretionary loan outstanding was fully repaid as of September 28, 2003 and amounted to $11,000 as of March 31, 2003.

On November 10, 2003, we received a term sheet from our primary lender, which provides for the recasting and modification, in its entirety, of our existing domestic credit agreement with our primary lender. The term sheet provides for initial borrowings of up to $30,000 under a revolving credit and factoring loan facility utilizing an asset based borrowing formula and included therein is a provision that provides for $5,000 in supplemental over formula borrowing availability. The domestic loan facility will continue to be secured by our eligible accounts receivable, inventory and other assets, as defined. The term of the domestic loan facility is for three (3) years and is renewable annually thereafter. We and GMAC are working together to finalize the definitive agreements which will embody the terms and provisions of the term sheet.

International Credit Facility and Factoring Agreements

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 $6,200 (£3,800), bear interest at LIBOR plus 2.00% (5.67% as of September 28, 2003). 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 September 28, 2003, the building with which the credit facility was secured was being held for sale and, accordingly, the building was classified as a current asset with a net carrying value of $5,628 (£3,448), which was equal to its fair value as determined by an independent appraisal in fiscal 2003, and the associated mortgage payable under the international facility of $4,678 (£2,867) was classified as a separate component of current liabilities. Please see Note 6 (Building Held for Sale and Mortgage Payable) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

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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 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 (5.07% as of September 28, 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 (GMAC) 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 $1,608 as of September 28, 2003.

In September 2003, a French bank advanced our local subsidiary $1,009 based on the outstanding balances of selected accounts receivable invoices. Customer payments of those invoices made directly to the French bank will be applied to repay the outstanding loan. Our French subsidiary retains the credit risk for the invoices and therefore will cover any customer collection shortfall. The borrowed funds bear interest at 1.30% per annum above the one month EURIBOR rate (3.4% as of September 28, 2003).

Commitments

We generally purchase our inventory of Nintendo software by opening letters of credit when placing the purchase order. As of September 28, 2003, we had $1,032 outstanding under letters of credit. Approximately $600 as of September 28, 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 September 28, 2003, we did not have any significant operating or capital expenditure commitments.

As of September 28, 2003, our future contractual cash obligations were as follows:

	Payments Due Within
Contractual Obligations	Total		1 year		2-3 years		4-5 years		Over 5 years
Debt	$	19,500	$	14,000	$	—	$	—	$	5,500
Mortgage payable		4,678		4,678		—		—		—
Capital lease obligations		1,021		567		410		44		—
Operating leases		7,313		3,003		3,793		517		—
Total contractual cash obligations	$	32,512	$	22,248	$	4,203	$	561	$	5,500

New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” The objective of FIN 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 May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability, or as an asset in some circumstances. This Statement applies to

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three types of freestanding financial instruments, other than outstanding shares. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or assets; a second type includes put options and forward purchase contracts that require or may require the issuer to buy back some of its shares in exchange for cash or other assets; the third type is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares. SFAS No. 150 does not apply to features embedded in a financial instrument that are not a derivative in their entirety.

SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 with one exception, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement during the second quarter of fiscal 2004 did not have an impact on our financial statements.

Related Party Transactions

Fees for services

We pay sales commissions to a firm which is owned and controlled by one of our co-chairmen. That firm earns these sales commissions based on the amount of our software sales that firm generates. Commissions earned by that firm amounted to $(32) for the three months ended September 28, 2003, $100 for the three months ended August 31, 2002, $(13) for the six months ended September 28, 2003 and $239 for the six months ended August 31, 2002. We owed that firm $366 as of September 28, 2003 and $498 as of March 31, 2003.

During previous fiscal years we received legal services from two separate law firms of which two members of our Board of Directors are partners, respectively. For the one firm which continues to represent us, we incurred fees of $227 for the three months ended September 28, 2003, $181 for the three months ended August 31, 2002, $447 for the six months ended September 28, 2003 and $347 for the six months ended August 31, 2002. For the firm that no longer represents us, we incurred fees of $5 for the three months ended August 31, 2002 and $10 for the six months ended August 31, 2002. We owed the firm that continues to represent us legal fees of $263 as of September 28, 2003 and $353 as of March 31, 2003.

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 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. In May 2003, in accordance with the note’s original terms, 50% of the loan was forgiven. An additional 25% will be forgiven 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 six months ended September 28, 2003, we expensed $119 of the unamortized principal balance. The unamortized principal balance under the loan, included in other receivables, was $48 as of September 28, 2003 and $167 as of March 31, 2003.

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 were due and payable on August 31, 2003. The notes provided us full recourse against the officers’ assets. The notes bore interest at our primary lender’s prime rate plus 1.50% per annum. As of September 26, 2003, the two executive officers had fully repaid the principal balance and related accrued interest under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,352, classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on the notes amounted to $324, included in other receivables.

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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 the warrants. The principal amount and accrued interest were due and payable on August 31, 2003 and bore interest at our primary lender’s prime rate plus 1.50%. In June 2003, the two executive officers repaid in full the principal amount of the notes of $3,595 and all related accrued interest of $464 then outstanding under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,595, classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on the notes amounted to $426, included in other receivables.

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. In May 2003, the former officer repaid the balance of $100 outstanding under the loan. As of March 31, 2003, the balance outstanding under the loan, included in other assets, was $100.

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. Currently, we are actively pursuing collection of the $250 outstanding balance of the note 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 bore 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). The note was repaid in full, including all accrued interest thereon, in April 2003.

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 13B (Debt: North American Credit Agreement) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

Consideration for Collateral

Two of our major shareholders, who are also 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 returned the cash deposit to the Affiliates on September 26, 2003 concurrently with our repayment of the supplemental discretionary loan. 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 of 2,000 shares of our common stock with a then aggregate market value of $1,560 ($3,332 as of September 28, 2003) 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. Please see note 16 (Related Party Transactions) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

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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, Our Ability to Achieve Our Projected Revenue Levels and Reduced Operating Expenses and Our Ability to Raise Additional Financing from Outside Investors.

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 fiscal 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 $11.0 million through May 31, 2003. In accordance with the terms of the amendment to our credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6.0 million of the supplemental discretionary loan and as of September 26, 2003 we repaid the remaining $5.0 million. During the six months ended September 28, 2003, our Co-Chairmen fully repaid a total of $6.9 million of their outstanding loans and related accrued interest of $0.9 million. Additionally, in June 2003, we completed a private placement of 16,383,000 shares of our common stock to a limited group of private investors, resulting in net proceeds to us of $8.3 million. In September and October 2003, we completed the sale of convertible subordinated notes resulting in gross proceeds of $11.9 million of which $5.5 million was received as of September 28, 2003.

Our future liquidity will significantly depend in whole or in part on our ability to (1) timely develop and market new software products that meet or exceed our operating plans, (2) realize long-term benefits from our implemented expense reductions, and (3) continue to enjoy the support of our primary lender and vendors. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, continue to realize additional benefits from the expense reductions we have implemented, and timely close on the new domestic loan facility with our primary lender, 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, additional 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 others, and there can be no assurance those consents or approvals will be obtained.

In the event that we do not achieve our business operating plan, continue to derive significant expense savings from our implemented expense reductions and timely close on the new domestic loan facility with our primary lender, we cannot assure our stockholders that our future operating cash flows will be sufficient to meet our operating requirements and debt service requirements. If any of the preceding events were to occur, our operations and liquidity would be materially and adversely affected and we could be forced to cease operations. See “If Cash Flows from Operations Are Not Sufficient to Meet Our Operational Needs, We May Be Forced To Sell Assets, Refinance Debt, Raise Additional Financing from Outside Investors or Further Downsize or Cease Our Operations”, and “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability.”

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.

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As of September 28, 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.

Going Concern Consideration

Our independent auditors’ report for our fiscal 2003 financial statements, 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 fiscal 2003 financial statements do not include any adjustments that might result from the outcome of this uncertainty. For the six months ended September 28, 2003 we had a net loss of $22.1 million and used $1.1 million of cash in operating activities. As of September 28, 2003, we had a stockholders’ deficit of $55.0 million, a working capital deficit of $67.2 million and $7.3 million of cash and cash equivalents. These factors have continued to raise substantial doubt as to our ability to continue as a going concern. Based on management’s plans, our financial statements have been prepared on a going concern basis.

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

During fiscal 2003, we implemented certain expense reduction initiatives that began to reduce our operating expenses during fiscal 2003 and which continued to reduce our expenses in the first half of fiscal 2004. Our operating plan for the remainder of fiscal 2004 focuses on (1) maintaining our lower rate of fixed and variable expenses worldwide, (2) continuing to limit and eliminate non-essential 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 fiscal 2004 net revenues 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 or ceasing our operations. See “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability”.

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 our outstanding debt; and/or (3) the foreclosure on any assets securing our 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 requirements. As of September 28, 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.

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.

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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 had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in accordance with Marketplace Rule 4310(c)(8)(D) we were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the minimum bid requirement. If at any time prior to January 20, 2004 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 January 20, 2004, 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 90 day grace period in which to demonstrate compliance. If, after January 20, 2004 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.

On November 12, 2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaq’s opinion, the structure of our September/October 2003 private offering of the Notes was not in compliance with NASD Marketplace Rule 4350(i)(1)(d). We are working with Nasdaq and the Note holders in an effort to resolve this matter; however, the ultimate resolution of this matter is not determinable at this time and, if the terms of the securities are modified, it could have a material impact on the Company’s financial statements. We believe we will be successful in resolving this matter; however, no assurance can be given as to such resolution and, in the event that we and Nasdaq cannot resolve this matter, then our securities would be subject to delisting. If a delisting proceeding is commenced, we have the right to appeal such determination; however, there can be no assurance 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.

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 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 fiscal 2004 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 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.

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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 franchises each year. In addition, many of these products have substantial production or acquisition costs and marketing budgets. In the first half of fiscal 2004, 49% of our gross revenue was derived from five software products. In fiscal 2003, 55% of our gross revenue was derived from five software products. 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 fiscal 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 game 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 2000 to 2002. 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 redeployed its resources to develop software for multiple consoles. More recently, the entry of Microsoft in November 2001 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.

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

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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 six months ended September 28, 2003 (a portion of which were expensed and the remainder of which were capitalized), were lower than the six months ended August 31, 2002 but our product development cash outlays may increase in the future as a result of the higher costs associated with releasing more games across multiple platforms 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 first half of fiscal 2004, we focused our development efforts and costs on the development of tools and engines necessary for PlayStation 2, Xbox, GameCube and PC’s. Our fiscal 2003 release schedule was developed around PlayStation 2, GameCube, Xbox and Game Boy Advance. The release schedule for the remainder of fiscal 2004 continues to support the PlayStation 2, Xbox and Game Boy Advance platforms as well as PC.

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 retail channel sell through.

Management makes significant estimates and assumptions based on actual historical experience regarding allowances for estimated price concessions and product returns. 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.

As noted above, when the consumer market acceptance of a software title decreases, resulting in lower retail sell-through, the potential for price concessions and returns for those titles increases. 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 titles, as evidenced by the retail sell-through rates to consumers in the first quarter of fiscal 2003 and beyond, fell substantially below our revenue expectations. As a result of the poor retail sell-through, significant quantities of these products remained in the retail channel. Accordingly, we provided our retail customers with 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 2002 holiday season.

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During fiscal 2003, while the price concessions we previously offered our retail customers did increase the retail sell-through rate, the rate of reduction of retail channel inventory did not attain the level we had originally estimated. Consequently, we 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 certain of our products for that platform to lower prices than we originally estimated at that stage in the platform cycle. Finally the actual 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 unanticipated events, we provided our retail customers additional price concessions. The resulting $14.4 million increase to the provision for price concessions and returns negatively impacted net revenues, gross profit and net income for fiscal 2003.

Our allowances for price concession and returns were $35.4 million as of September 28, 2003 and $ 48.3 million as of March 31, 2003. Please see Note 1D (Business and Significant Accounting Policies: Net Revenue) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

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

We are substantially dependent on each hardware company (1) as the sole licensor of the specifications needed to develop software for its game system; (2) as the manufacturer 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 the PlayStation 2 system, the products are manufactured exclusively by Sony. Since each of the hardware companies is also a publisher of games for its own hardware system, they may give priority to their 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.

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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.

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; and

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

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; Konami; Namco; Midway Games; Sega; Take-Two; THQ; 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.

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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 “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 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, 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.

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. 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. While to date such 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.

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.

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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, our 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.

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 November 10, 2003, we had 113,234,491 shares of common stock issued and outstanding, (including 4,000,000 shares of our common stock issued in equal amounts to our co-chairman, which shares are being held by us pending the outcome of our Annual Meeting of Stockholders and which our co-chairman have no current right to vote, pledge, sell or otherwise hypothecate), of which 17,278,975 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 November 10, 2003, 74,138,105 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 November 10, 2003, a total of 11,333,739 shares of common stock are issuable upon the exercise of warrants to purchase our common stock.

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 September 28, 2003, options to purchase a total of 13,551,634 shares of common stock were outstanding under the 1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which 4,507,737 were exercisable.

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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 3. 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 $2,363 as of September 28, 2003 and $1,795 as of March 31, 2003, which is included in accumulated other comprehensive loss in our statements of stockholders’ equity (deficit). We recorded net foreign currency transaction gains of $662 for the three months ended September 28, 2003, losses of $587 for the three months ended August 31, 2002, gains of $128 for the six months ended September 28, 2003 and losses of $213 for the six months ended August 31, 2002.

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.

We have interest rate risk related to our variable interest rate debt outstanding under our North American and International credit agreements. See Note 13 (Debt) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

Item 4. Controls and Procedures.

As of the end of the period covered by 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)-15(e) and have determined that such controls and procedures are adequate and effective.

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PART II

Item 1. Legal Proceedings.

On July 11, 2003, we were notified by the Securities and Exchange Commission (the “Commission”) that we have been included in a formal, non-public inquiry entitled “In the Matter of Certain Videogame Manufacturers” that the Commission is conducting. In connection with that inquiry we were required to provide to the Commission certain information. The Commission has advised us that “this request for information should not be construed as an indication from the SEC or its staff that any violation of the law has occurred, nor should it reflect negatively on any person, entity or security.” We have and are continuing to fully cooperate with the inquiry.

Earlier this year, fourteen class action complaints asserting violations of federal securities laws were filed against the Company and certain of its officers and/or directors. By order dated July 3, 2003, the Court consolidated all fourteen actions into one action entitled In re Acclaim Entertainment, Inc. Securities Litigation, Master File No. 2, 03-CV-1270 (E.D.N.Y.) (JS) (ETB), and appointed class members Penn Capital Management, Robert L. Mannard and Steve Russo as lead plaintiffs, and also approved lead plaintiffs’ selection of counsel. Plaintiffs served a Consolidated Amended Complaint (the “Consolidated Complaint”) on or about September 1, 2003. The defendants in the consolidated action are the Company, Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard F. Agoglia. The Consolidated Complaint alleges a class period from October 14, 1999 through January 13, 2003. The Consolidated Complaint alleges that the Company engaged in a variety of wrongful practices which rendered statements made by the Company and its financial statements to be false and misleading. Among other purported wrongful practices, the Consolidated Complaint alleges that Acclaim engaged in “channel stuffing,” a practice by which Acclaim allegedly delivered excess inventory to its distributors to meet or exceed analysts’ earnings expectations and inflate its sales results; entered into “conditional sales agreements” whereby Acclaim’s customers allegedly were induced to accept delivery of Acclaim products prior to a quarter-end reporting period on the condition that Acclaim would accept the return of any unsold product after the quarter-end, and that Acclaim falsified sales reports and manipulated the timing and recognition of price concessions and discounts granted to its retail customers. The Consolidated Complaint further alleges that Acclaim engaged in improper accounting practices, including the improper recognition of sales revenue; manipulation of reserves associated with concessions, chargebacks and/or sales discounts granted to customers; and the improper reporting of software development costs. The Consolidated Complaint alleges that as a result of these practices defendants violated § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and that the individual defendants violated § 20(a) of the 1934 Act. The Consolidated Complaint seeks compensatory damages in an unspecified amount. Pursuant to an agreement with plaintiffs, defendants’ time to answer, move or otherwise respond to the Consolidated Complaint has been extended to December 3, 2003. A preliminary conference before the Court is scheduled for December 5, 2003. We are defending this action vigorously.

In 1999 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 involved 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

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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. Upon review of applicable court dockets, the defendants in this action were granted summary judgment dismissing the plaintiff’s claims; therefore we have no indemnification obligations under the asset purchase agreement.

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. We have since amicably resolved our differences with Mr. Mirra surrounding this matter. Mr. Mirra’s lawsuit against us was settled with no monetary or other damages being paid by either party, and Mr. Mirra will continue, uninterrupted, to be under contract with us until the year 2011.

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.

Item 6. Exhibits and Reports on Form 8-K.

(a) 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 Registration Rights Agreement between the Company and certain purchasers of the Company’s securities, dated June, 2003 (incorporated by reference to Exhibit 4.3 to the Company’s Form S-3, filed on July 21, 2003)
4.4	Form of Investment Agreement between the Company and certain purchasers of the Company’s securities, dated June, 2003 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-3, filed on July 21, 2003)

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Exhibit No.	Description
4.5	Form of Warrant between the Company and certain purchasers of the Company’s securities, dated June, 2003 (incorporated by reference to Exhibit 4.4 to the Company’s Form S-3, filed on July 21, 2003)
†4.6	Form of Registration Rights Agreement between the Company and certain purchasers of the Company’s securities, dated October, 2003
†4.7	Form of Warrant between the Company and certain purchasers of the Company’s securities, dated October, 2003
†4.8	Form of 10% Convertible Subordinated Note Purchase Agreement between the Company and certain purchasers of the Company’s securities, dated October, 2003
†4.9	Form of Promissory Note between the Company and certain purchasers of the Company’s securities, dated October, 2003
+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 June 15, 2003 between the Company and Gerard F. Agoglia.
+10.7	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)
+10.8	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)
10.9	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)

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Exhibit No.	Description
10.10	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)
10.11	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)
10.12	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)
10.13	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))
10.14	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))
10.15	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))
10.16	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))
10.17	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))
10.18	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))
*10.19	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)
*10.20	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)
*10.21	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)
*10.22	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)

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Exhibit No.	Description
*10.23	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)
10.24	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))
10.25	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))
10.26	Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated July 2, 2001
10.27	Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated July 2, 2001
10.28	Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated October 1, 2001
10.29	Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated October 1, 2001
10.30	Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc.
10.31	Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc.
10.32	Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc.
10.33	Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc.
10.34	Promissory Note executed by Simon Hosken in favor of Acclaim Entertainment, Inc., dated October 31, 2002.
10.35	Amendment and Modification to Revolving Credit and Security Agreement, dated June 29, 2003
10.36	Amended and Restated Cash Deposit Agreement between Gregory E. Fischbach and GMAC Commercial Finance, LLC, dated June 29, 2003
10.37	Amended and Restated Cash Deposit Agreement between James Scoroposki and GMAC Commercial Finance, LLC, dated June 29, 2003
10.38	Amended and Restated Limited Guaranty by Gregory E. Fischbach in favor of GMAC Commercial Finance, LLC, dated June 29, 2003
10.39	Amended and Restated Limited Guaranty by James Scoroposki in favor of GMAC Commercial Finance, LLC, dated June 29, 2003
10.40	Letter Agreement, dated June 29, 2003, between the Company’s Audit Committee and Gregory E. Fischbach and James Scoroposki
10.41	Form of Warrant Agreement between the Company and Gregory E. Fischbach, dated as of June 29, 2003
10.42	Form of Warrant Agreement between the Company and James Scoroposki, dated as of March 31, 2003

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Exhibit No.	Description
†31	Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
†32	Certifications 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.

(b) Current Reports on Form 8-K:

Current Report on Form 8-K filed on July 18, 2003;

Current Report on Form 8-K filed on July 28, 2003;

Current Report on Form 8-K filed on August 19, 2003; and

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

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SIGNATURES

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.

ACCLAIM ENTERTAINMENT, INC.
By:	/s/    RODNEY P. COUSENS
	Rodney Cousens President and Chief Executive Officer

November 17, 2003

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

November 17, 2003

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EX-4.6

Exhibit 4.6

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT, dated as of September 23, 2003 (this “Agreement”), is made by ACCLAIM ENTERTAINMENT, INC., a Delaware corporation (the “Company”), and the Purchasers set forth on Schedule 1 hereto (“Purchasers”).

W I T N E S S E T H:

WHEREAS, pursuant to a Convertible Subordinated Note Purchase Agreement, dated as of the date hereof, between the Company and the Purchasers (the “Purchase Agreement”), the Company has agreed to issue and sell to the Purchasers an aggregate of [$                    ] in principal amount of the Company’s 10 % Convertible Subordinated Notes due October 3, 2010 (the “Notes”), which Notes are convertible into shares (the “Shares”) of common stock of the Company, $0.02 par value per share (“Common Stock”), in accordance with the terms of the Purchase Agreement and the Notes. Additionally, pursuant to the Purchase Agreement, the Company has agreed to provide to the Purchaser one or more warrants (the “Warrants”) to purchase shares of the Company’s Common Stock (the “Warrant Shares”).

WHEREAS, to induce the Purchasers to execute and deliver the Purchase Agreement, the Company has agreed to provide to the Purchasers and their permitted assigns certain registration rights under the Securities Act of 1933, as amended (the “Securities Act”), and applicable state securities laws; and

WHEREAS, this Agreement, together with the Notes, the Purchase Agreement and the Warrants, are hereinafter collectively referred to as the “Transaction Documents”.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows:

1. Definitions.

As used in this Agreement, the following terms shall have the following meanings:

(a) “Claims” shall have the meaning ascribed to it in Section 6(a).

(b) “Effectiveness Date” means the 120^th day following the Closing Date.

(c) “Excess Liability” shall have the meaning ascribed to it in Section 6(e).

(d) “Filing Date” means the 60^th day following the Closing Date.

(e) “Holder” or “Holders” mean a holder or holders of Registrable Securities.

(f) “Indemnified Person” shall have the meaning ascribed to it in Section 6(a).

(g) “Registrable Securities” shall mean (i) the Shares and the shares of Common Stock or other securities issued or issuable to the Purchaser or its permitted transferee or designee (a) upon conversion of the Notes and upon the exercise of the Warrants, or (b) upon any distribution with respect to, any exchange for or any replacement of such Notes or Warrants, or (c) upon any conversion, exercise or exchange of any securities issued in connection with any such distribution, exchange or replacement; (ii) securities issued or issuable upon any stock split, stock dividend, recapitalization or similar event with respect to such shares of Common Stock; and (iii) any other security issued as a dividend or other distribution with respect to, in exchange for, or in replacement of, the securities referred to in the preceding clauses.

(h) “Registration Period” shall have the meaning ascribed to it in Section 2(ii).

(i) “Registration Statement” means a registration statement or registration statements of the Company filed under the Securities Act covering Registrable Securities.

(j) “Register,” “Registered” and “Registration” refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis (“Rule 415”), and the declaration or ordering of effectiveness of such registration statement by the United States Securities and Exchange Commission (the “Commission”).

(k) “Rule 144” shall have the meaning ascribed to it in Section 8.

(l) “Securities Act” shall mean the Securities Act of 1933, as amended.

(m) “Shares” means the Underlying Shares and the Warrant Shares.

(n) “Violations” shall have the meaning ascribed to it in Section 6(a).

(o) “Warrant Shares” means the shares of Common Stock issued or issuable upon exercise of, or otherwise in respect of, the Warrants.

Capitalized terms defined in the introductory paragraph or the recitals to the Agreement shall have the respective meanings therein provided. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Purchase Agreement or elsewhere in the Transaction Documents.

2. Mandatory Registration.

(i) The Company shall use its best efforts to prepare and file with the Commission not later than the Filing Date a Registration Statement or Registration Statements (as necessary) on Form S-3 covering the resale of all of the Registrable Securities, in an amount sufficient to cover the resale of the Shares issuable upon conversion of the Notes and exercise of the Warrants in either case where the conversion price and exercise price is $.724 or $.57 per share. In the event that Form S-3 is unavailable and/or inappropriate for such a registration, the Company shall use such other form as is available and appropriate for such a registration. Any Registration Statement prepared pursuant hereto shall register for resale at least that number of shares of Common Stock equal to the Shares. The Company shall use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date; provided that, if (1) the Registration Statement is not declared effective by the Effectiveness Date, (2) prior to the one year anniversary of the Effectiveness date, the Registration Statement required to be filed by the Company pursuant to this Section shall cease to be available for use by any holder of the Note which is named therein as a selling stockholder for any reason (including, without limitation, by reason of a stop order, a material misstatement or omission in such Registration Statement or the information contained in such Registration Statement having become outdated), or (3) the Company fails, refuses or is otherwise unable timely to issue Shares upon conversion of the Notes or upon exercise of the Warrants in accordance with the terms of the Notes and the Warrants, or certificates therefor as required under the Transaction Documents, then the Company shall pay to each Purchaser an amount equal to one percent (1%) per month of the purchase price paid for the Notes purchased by the Purchaser. Thereafter, for every 30 days that pass during which any of the events described in clauses (1), (2), and (3) above occurs and is continuing (the “Blackout Period”), the Company shall pay to such Purchaser an additional amount equal to one percent (1%) of the purchase price paid for the Notes purchased by the Purchaser. Each such payment shall be due within five (5) days of the end of each calendar month of the Blackout Period until the termination of the Blackout Period and within five (5) days after such termination. Such payments shall be in partial compensation to the Purchaser, and shall not constitute the Purchaser’s exclusive remedy for such events. The Blackout Period shall terminate upon (x) the effectiveness of the Registration Statement in the case of clauses (l) and (2) above; (y) listing or inclusion and/or trading of the Common Stock on an Approved Market, as the case may be, in the case of clause (3) above; and (z) delivery of such shares or certificates in the case of clause (4) above.

(ii) The Company shall use its best efforts to keep each Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of (i) the date on which all of the Registrable Securities have been sold and (ii) the date on which the Registrable Securities (in the opinion of counsel to each Purchaser and acceptable to legal counsel for the Company) may be immediately sold without restriction (including without limitation as to volume restrictions by each holder thereof) without registration under the Securities Act (the “Registration Period”).

(iii) If any offering pursuant to a Registration Statement, pursuant to Section 2 hereof, involves an underwritten offering (which may only be with the consent of the Company), each Purchaser shall have the right to select legal counsel and an investment banker or bankers and manager or managers to administer to the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Company.

(iv) If the Registrable Securities are registered for sale under the Securities Act, the Purchasers shall cease any distribution of such shares under the Registration Statement not more than twice in any 12-month period, for up to 30 days each, upon the request of the Company if: (x) such distribution would require the public disclosure of material non-public information concerning any transaction or negotiations involving the Company or any of its affiliates that, in the good faith judgment of the Company’s Board of Directors, would materially interfere with such transaction or negotiations, (y) such distribution would otherwise require premature disclosure of information that, in the good faith judgment of the Company’s Board of Directors, would adversely affect or otherwise be detrimental to the Company or (z) the Company proposes to file a registration statement under the Securities Act for the offering and sale of securities for its own account in an underwritten offering and the managing underwriter therefor shall advise the Company in writing that in its opinion the continued distribution of the Registrable Securities would adversely affect the success of the offering of the securities proposed to be registered for the account of the Company. The Company shall promptly notify each Purchaser at such time as (i) such transactions or negotiations have been otherwise publicly disclosed or terminated, or (ii) such non-public information has been publicly disclosed or counsel to the Company has determined that such disclosure is not required due to subsequent events. If the events described in either clauses (x) or (y) of this section 2(iv) shall occur, then the Company shall provide each Purchaser with a copy of the Company’s Board of Directors minutes or resolutions evidencing such Board determination. Notwithstanding the foregoing, the Company may not require the Purchaser to cease any distribution of such shares under the Registration Statement for the thirty (30) day period following the date of the Company’s provision to the Purchaser of a Redemption Notice pursuant to the Purchase Agreement.

3. Obligations of the Company. In connection with the registration of the Registrable Securities, the Company shall do each of the following:

(a) Prepare and file with the Commission the Registration Statements required by Section 2 of this Agreement and such amendments (including post-effective amendments) and supplements to the Registration Statements and the prospectuses used in connection with the

Registration Statements, as may be necessary to keep the Registration effective at all times during the Registration Period, and, during the Registration Period, to comply with the provisions of the Securities Act with respect to the disposition of all of the Registrable Securities until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statements;

(b) If the Registrable Securities are included in a Registration Statement, the Company shall promptly furnish, after such Registration Statement is prepared, filed with the Commission, publicly disseminated and distributed and received by the Company, to each Purchaser and its legal counsel, a copy of the Registration Statement, each preliminary prospectus, each final prospectus, and all amendments and supplements thereto and such other documents as each Purchaser may reasonably request in order to facilitate the disposition of its Registrable Securities;

(c) As soon as practicable for the Company and its counsel, but no later than two business days after receipt thereof, furnish to each Purchaser and its counsel copies of appropriate correspondence between the Company and the Commission with respect to any registration statement or amendment or supplement thereto filed pursuant to this Agreement;

(d) Use all best efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or blue sky laws, if applicable, of such jurisdictions as the Purchaser may reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period and (iv) take all other actions necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subsection (d) be obligated to be so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction;

(e) List such securities on The Nasdaq SmallCap Market, if the Company’s securities are listed on such market, and all the other national securities exchanges on which any securities of the Company are then listed, and file any filings required by The Nasdaq SmallCap Market and/or such other securities exchanges; provided, however, that no representation is made that the Company will remain listed on the Nasdaq SmallCap Market;

(f) Notify each Purchaser and (if requested by such Purchaser) confirm such advice in writing, (i) when or if the prospectus or any prospectus supplement or post-effective amendment has been filed with the Commission, and, with respect to the Registration Statement or any post-effective amendment, when the same has been declared effective by the Commission, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the prospectus or for additional information, (iii) of the issuance by the Commission

of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (v) of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing;

(g) If any fact contemplated by clause (v) of paragraph (f), above, shall exist, prepare a supplement or post-effective amendment to the Registration Statement or the related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchaser of the Registrable Securities the prospectus will not contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading;

(h) If the Company has consented to an underwritten offering and such offering is underwritten, at the request of any Purchaser, to furnish on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such Purchaser, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act and (B) the registration statement, the related prospectus and each amendment or supplement thereof comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as to financial statements or other financial data contained therein) and (ii) a letter dated such date from the Company’s independent public accountants addressed to the underwriters and to such Purchaser, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters may reasonably request;

(i) Cooperate with the Purchasers to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and to enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Purchaser may reasonably request, and registered in such names as the Purchasers may request; and, within three business days after a Registration Statement which includes Registrable Securities is ordered effective by the Commission, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to each Purchaser) an

appropriate instruction and opinion of such counsel, satisfactory to the Company, and the Purchaser and its legal counsel;

(j) Enter into customary agreements (including, in the case of an underwritten offering, underwriting agreements in customary form, and including provisions with respect to indemnification and contribution in customary form and consistent with the provisions relating to indemnification and contribution contained herein) and take all other customary and appropriate actions in order to expedite or facilitate the disposition of such Registrable Securities and in connection therewith:

(i) make such representations and warranties to each Purchaser and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings;

(ii) to the extent requested and customary for the relevant transaction, enter into a securities sales agreement with any Purchaser and such representative of such Purchaser as such Purchaser shall select relating to the Registration and providing for, among other things, the appointment of such representative as agent for such Purchaser for the purpose of soliciting purchases of Registrable Securities, which agreement shall be customary in form, substance and scope and shall contain customary representations, warranties and covenants; and

(iii) deliver such customary documents and certificates as may be reasonably requested by any Purchaser whose Registrable Securities are being sold or by the managing underwriters, if any.

The above shall be done (y) at the effectiveness of such Registration Statement (and each post-effective amendment thereto) in connection with any registration, and (z) at each closing under any underwriting or similar agreement as and to the extent required thereunder.

(k) The Company shall hold in confidence and not make any disclosure of information concerning any Purchaser provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws and/or the requests of any self-regulatory organizations, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning any Purchaser is sought in or by a court or governmental body of competent jurisdiction or though other means, give prompt notice to such Purchaser prior to making such disclosure, and allow such Purchaser, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

4. Obligations of the Purchaser to Provide Information. In connection with the registration of the Registrable Securities, each Purchaser shall furnish to the Company such

information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities, and each Purchaser shall execute any and all such documents in connection with such registration as the Company and its legal counsel may reasonably request. At least ten business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Purchaser of the information the Company requires of any Purchaser to be included in the Registration Statement. Each Purchaser shall give sufficient notice to the Company before selling any Registrable Securities so that the Company may prepare and file any necessary post-effective amendments to the Registration Statement or such additional filings as shall be necessary or desirable.

5. Expenses of Registration. All expenses, other than underwriting discounts and commissions and other fees and expenses of investment bankers and other than brokerage commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualification fees, printing and accounting fees, and the fees and disbursements of counsel for the Company, and the fees of one counsel to each Purchaser with respect to each Registration Statement filed pursuant hereto, shall be borne by the Company provided, that the expenses of the Purchaser’s counsel shall not exceed $15,000. Any amounts paid by the Company for transaction and/or registration fees should not exceed $15,000.

6. Indemnification. In the event any Registrable Securities are included in a Registration Statement under this Agreement:

(a) The Company will indemnify and hold harmless the Purchasers, each of the investment advisor and sub-advisor of the Purchaser and their officers, directors, members, partners and shareholders, and each person, if any, who controls any Purchasers within the meaning of the Securities Act or the Exchange Act (each, an “Indemnified Person”), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, “Claims”) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the Commission) or the omission to state therein any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state or foreign securities law or any rule or regulation under the Securities Act, the Exchange Act or any state or foreign securities law (the matters in foregoing clauses (i) through (iii) being, collectively, “Violations”). The Company shall, subject to the provisions of

Section 6(b) below, reimburse each Purchaser, promptly as such expenses are incurred and are due and payable, for any reasonable legal and other reasonable costs, expenses and disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise, including without limitation, the costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which such Purchaser is a party), incurred by it in connection with the investigation or defense of any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) shall not (i) apply to any Claim arising out of or based upon a modification which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (ii) with respect to any preliminary prospectus, inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the final prospectus, as then amended or supplemented, if such final prospectus was timely made available by the Company pursuant to Section 3(b) hereof; (iii) be available to the extent that such Claim is based upon a failure of any Purchaser to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(b) hereof; or (iv) apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by any Purchaser pursuant to Section 9. Notwithstanding anything to the contrary in this Agreement or the Purchase Agreement, the aggregate payments for indemnification, including the reasonable fees and expenses of legal counsel, made by the Company to each Purchaser or each of its officers, directors, and shareholders, and each person, if any, who controls the Purchaser within the meaning of the Securities Act or the Exchange Act, pursuant to this Section 6 with respect to a Violation, Claim, or series of Violations or Claims, shall not exceed an amount equal to the Purchase Price; provided, however, that such Purchaser shall not be entitled to an indemnification payment pursuant to both Section 12 of the Purchase Agreement and Section 6 of this Agreement as a result of a claim which may arise under both the Purchase Agreement and this Agreement.

(b) Each Purchaser will indemnify the Company and its officers and directors against any Claims arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company, by or on behalf of such Purchaser, expressly for use in connection with the preparation of the Registration Statement (including any modifications, amendments or supplements thereto), subject to such limitations and conditions as are applicable to the indemnification provided by the Company in this Section 6; provided, however, that in no event shall any indemnity by such Purchaser under this Section 6 exceed the amount of the net proceeds received by such Purchaser in connection with the offering effected through such Registration Statement.

(c) Promptly after receipt by an Indemnified Person under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and to the extent that the indemnifying party so desires, jointly with any other indemnifying party similarly notified, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person, provided, however, that an Indemnified Person shall have the right to retain its own counsel with the reasonable fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person and any other party represented by such counsel in such proceeding. In such event, the Company shall pay for only one separate legal counsel for each Purchaser, and such legal counsel shall be selected by such Purchaser. The failure to deliver written notice to an indemnifying party within a reasonable time after the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person under this Section 6, except to the extent that the indemnifying party is materially prejudiced in its ability to such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable.

(d) No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Person of an unconditional and irrevocable release from all liability in respect of such claim or litigation.

(e) Notwithstanding the foregoing, to the extent that any provisions relating to indemnification or contribution contained in the underwriting agreements entered into among the Company, the underwriters and any Purchaser in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in such underwriting agreements shall be controlling as to the Registrable Securities included in the public offering; provided, however, that if, as a result of this Section 6(e), such Purchaser, or the investment advisor or sub-investment advisor of the Purchaser or each of its officers, directors, members, partners, shareholders or any person controlling such Purchaser is or are held liable with respect to any Claim for which they would be entitled to indemnification hereunder but for this Section 6(e) in an amount which exceeds the aggregate proceeds received by such Purchaser from the sale of Registrable Securities included in a registration pursuant to such underwriting agreement (the “Excess Liability”), the Company shall reimburse the Purchaser for such Excess Liability.

7. Contribution. To the extent any indemnification by an indemnifying party is prohibited or limited under applicable law, the indemnifying party agrees to contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage, liability or expense in such proportion as is appropriate to reflect the relative fault of the

indemnifying party on the one hand and the Indemnified Person on the other hand in connection with the statements or omissions which resulted in such Claim, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and the Indemnified Person shall be determined by reference to, among other things, whether the untrue statement of a material fact or the omission to state a material fact on which such Claim is based relates to information supplied by the indemnifying party or by the Indemnified Person, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the forgoing, (a) no contribution shall be made under circumstances where the payor would not have been liable for indemnification under the fault standards set forth in Section 6, (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation and (c) contribution by any seller of Registrable Securities shall be limited in amount to the net proceeds received by such seller from the sale of such Registrable Securities. The Company and the Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if any Purchaser and any other party were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in this Section.

8. Reports Under Exchange Act. With a view to making available to the Purchasers the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Purchasers to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees to:

(i) make and keep public information available, as those terms are understood and defined in Rule 144;

(ii) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

(iii) furnish to any Purchaser so long as such Purchaser owns Shares or Notes promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or periodic report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Purchaser to sell such securities pursuant to Rule 144 without registration.

9. Assignment of the Registration Rights. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by any Purchaser to any transferee of the Shares or Notes held by such Purchaser if: (a) such Purchaser agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of the name and address of such transferee or assignee; (c) at or before the time the Company receives the written notice contemplated by clause (b) of this sentence, the transferee

or assignee agrees in writing with the Company to be bound by all of the provisions contained herein; and (d) the transfer of the relevant Shares complies with the restrictions set forth in Section 4 of the Purchase Agreement.

10. Amendment of Registration Rights. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and each Purchaser. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon such Purchaser and the Company.

11. Miscellaneous.

(a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities or Notes convertible into such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities or Notes.

(b) Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be effective upon personal delivery, via facsimile (upon receipt of confirmation of error-free transmission) or two business days following deposit of such notice with an internationally recognized courier service, with postage prepaid and addressed to each of the other parties thereunto entitled at (i) if to the Company, to the address set forth below in this Section 11(b), or (ii) if to a Purchaser, to the address set forth below such Purchaser’s name on the signature page below, or (iii) at such other addresses as a party may designate by ten (10) days advance written notice to each of the other parties hereto.

COMPANY:	Acclaim Entertainment, Inc. One Acclaim Plaza Glen Cove, New York 11542 Attention: Mr. Gerard Agoglia                  Chief Financial Officer Tel.: (516) 656-5000 Fax: (516) 656-2039
	With copies to:
	Acclaim Entertainment, Inc. One Acclaim Plaza Glen Cove, New York 11542 Attention: Edward M. Slezak, Esq.                  Corporate Counsel Tel.: (516) 656-2234 Fax: (516) 656-2039

(c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

(d) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, without giving effect to conflicts of laws issues. Each of the parties agrees to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. This Agreement may be signed in two or more counterparts, each of which shall be deemed an original. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such validity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. Subject to the provisions of Section 10 hereof, this Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement.

(e) This Agreement, together with the other Transaction Documents, constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof.

(f) Subject to the requirements of Section 9 hereof, this Agreement shall inure for the benefit of and be binding upon the successors and assigns of each of the parties hereto.

(g) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.

(h) The Company acknowledges that any failure by the Company to perform its obligations under Section 2, or any delay in such performance could result in direct and indirect damages to the Purchasers, and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct and consequential damages caused by any such failure or delay. Nothing herein shall limit each Purchaser’s right to pursue any claim seeking such direct or consequential damages.

IN WITNESS WHEREOF, this Registration Rights Agreement has been duly executed by the undersigned on the date first written above.

ACCLAIM ENTERTAINMENT, INC.

By:

Name:

Title:

By:

Name:

Title:

Address:

EX-4.7

Exhibit 4.7

ACCLAIM ENTERTAINMENT, INC.

WARRANT TO PURCHASE SHARES OF COMMON STOCK

THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON THE HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER COUNSEL ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE, “BLUE SKY” OR SIMILAR SECURITIES LAW.

September 23, 2003

ACCLAIM ENTERTAINMENT, INC.

For good and valuable consideration the receipt and sufficiency of which is hereby acknowledged by Acclaim Entertainment, Inc., a Delaware corporation, with its principal office at One Acclaim Plaza, Glen Cove, New York 11542 (the “Company”), [                    ] (the “Holder”), subject to the terms and conditions of this Warrant, is hereby granted the right to purchase, at the initial exercise price of $.724 per share of common stock, $0.02 par value, of the Company (the “Common Stock”) (the “Initial Exercise Price”), at any one or more times after the date hereof until 5:00 p.m. on September 23, 2010, other than as provided herein, in the aggregate, [                    ] ([                    ]) shares of Common Stock (the “Shares”) subject to adjustment as provided herein.

The Initial Exercise Price will be adjusted to $.57 per share in the event that the Company receives stockholder approval for the issuance of this Warrant at an exercise price of $.57 per share. Assuming the Company’s stockholders approve such a transaction, then at the time of such stockholder approval, the Holder may, or the Company shall have the right to require the Holder to, relinquish this Warrant for a new Warrant on the same terms as set forth herein, other than the Initial Exercise Price, which shall be so adjusted to $.57.

This Warrant initially is exercisable at the Initial Exercise Price payable in cash (except as provided below), by certified or official bank check in New York Clearing House funds or other form of payment satisfactory to the Company, subject to adjustment as provided in Section 5 hereof.

1. Exercise of Warrant. (a) The purchase rights represented by this Warrant are exercisable at the option of the Holder hereof, in whole or in part, at one or more times during any period in which this Warrant may be exercised as set forth above. The Holder shall not be deemed to have exercised its purchase rights hereunder until the Company receives written notice of the Holder’s intent to exercise its purchase rights hereunder. The written notice shall be in the form of the Subscription Form attached hereto and made a part hereof. Less than all of the Shares may be purchased under this Warrant. In lieu of exercising this Warrant by the payment of cash, the Holder may elect to receive, without the payment by the Holder of any additional consideration, shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to the holder hereof a number of shares of Common Stock computed using the following formula:

	Y (A - B)
X =	A

Where

X — The number of shares of Common Stock to be issued to the Holder pursuant to this net exercise;

Y — The number of shares of Common Stock in respect of which the exercise election is made;

A — The Market Price of one share of the Company’s Common Stock at the time the exercise election is made;

B — The Exercise Price (as adjusted to the date of net exercise).

In addition to issuing to the Holder the number of shares represented by “X” in the forgoing formula pursuant to such exercise, the Company shall also reduce the number of Shares covered by this Warrant by the number of shares represented by “Y” in the foregoing formula.

As used herein, the term “Market Price” shall mean the average of the closing price of the Company’s Common Stock on any national securities exchange, on the Nasdaq National Market or the Nasdaq SmallCap Market, or, if the Company’s Common Stock is not so listed on any national securities exchange, on the Nasdaq National Market or the Nasdaq SmallCap Market, then on the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, for the ten (10) trading days prior to the date the Holder exercises this Warrant.

(b) In the event the Company’s Common Stock closes at (dependent upon whether the Company receives stockholder approval for the issuance of the Underlying Shares at $.57 per share) 200% of either (i) if the Company does not receive stockholder approval, then the average closing price of the Common Stock for the 10 trading days ending on the trading day immediately preceding the date hereof or (ii) if the Company does receive stockholder approval, then $.57, for ten (10) consecutive trading days, then the Company shall have the right to require the holder of the Warrants which were granted in connection with the transaction contemplated by this term sheet, to exercise the Warrants in full, within ten (10) business days following the Company providing to the warrant holder a notice of forced exercise.

2. Issuance of Certificates. Upon the exercise of this Warrant, the issuance of certificates for Shares underlying this Warrant shall be made forthwith (and in any event within five days) after the Company’s receipt of (i) written notice hereunder as specified in Section 1 above) and (ii) good funds in respect of the Purchase Price (as defined in Section 4(b) hereof) pursuant to Section 4 hereof for the shares so exercised and such certificates shall be issued in the name of the Holder hereof.

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3. Restriction on Transfer; Investment Representations; Registration Rights.

(a) Restriction on Transfer. The Holder acknowledges that neither this Warrant nor any Shares issuable upon exercise hereof have been registered under the Securities Act of 1933, as amended (the “Act”), and neither may be sold or transferred in whole or in part unless the Holder shall have first given prior written notice to the Company describing such sale or transfer and furnished to the Company an opinion of Company counsel, to the effect that the proposed sale or transfer may be made without registration under the Act; provided, however, that the foregoing shall not apply if there is in effect a registration statement with respect to this Warrant or the Shares issuable upon exercise hereof, as the case may be, at the time of the proposed sale or transfer. Upon exercise, in part or in whole, of this Warrant, each certificate issued representing the Shares underlying this Warrant shall bear a legend to the foregoing effect.

(b) Investment Representations. The Holder represents that: (i) it is an accredited investor within the meaning of Regulation D under the Act; (ii) it is acquiring this Warrant and upon exercise hereof, the Shares, for its own account for investment only, and not with a view towards, or for resale in connection with, their distribution; (iii) it has had an opportunity to discuss the Company’s business and affairs with management of the Company and is satisfied with the results thereof; (iv) it has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of its investment; and (v) it has received a copy of the Company’s Annual Report on Form 10-K relating to fiscal year ended March 31, 2003.

(c) Registration Rights. The Holder shall have such rights to request the Company to register all or any of the Shares issuable upon exercise of this Warrant as set forth in the Registration Rights Agreement between the Company and Holder dated the date hereof.

4. Price.

(a) Initial and Adjusted Purchase Price. The initial Purchase Price shall be equal to the Initial Exercise Price. The adjusted Purchase Price shall be the price that shall result from time to time from any and all adjustments of the initial purchase price in accordance with the provisions of Section 5 hereof.

(b) Purchase Price. The term “Purchase Price” herein shall mean the initial Purchase Price or the adjusted Purchase Price, as the case may be.

5. Adjustments of Purchase Price and Number of Shares. The Shares subject to this Warrant and the Purchase Price thereof shall be appropriately adjusted by the Company in accordance herewith.

(a) Adjustment to Purchase Price and Number of Shares. In case, prior to the expiration of this Warrant by exercise or by its terms, the Company shall issue any shares of its Common Stock as a stock dividend or subdivide the number of outstanding shares of its Common Stock into a greater number of shares, then in either of such cases, the then applicable purchase price per share of the shares of Common Stock purchasable pursuant to this Warrant in effect at the time of such action shall be proportionately reduced and the number of shares at that

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time purchasable pursuant to this Warrant shall be proportionately increased; and conversely, in the event the Company shall contract the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, then, in such case, the then applicable purchase price per share of the shares of Common Stock purchasable pursuant to this Warrant in effect at the time of such action shall be proportionately increased and the number or shares of Common Stock purchasable pursuant to this Warrant shall be proportionately decreased. If the Company shall, at any time during the term of this Warrant, declare a dividend payable in cash on its Common Stock and shall, at substantially the same time, offer to its stockholders a right to purchase new Common Stock from the proceeds of such dividend or for an amount substantially equal to the dividend, all Common Stock so issued shall, for the purpose of this Warrant, be deemed to have been issued as a stock dividend. Any dividend paid or distributed upon the Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable upon conversion thereof.

(b) Purchase Price Reset Provision. In the event that prior to the expiration of this Warrant the Company sells publicly or privately (i) shares of its Common Stock, (ii) securities convertible into shares of its Common Stock, or (iii) options or warrants to purchase shares of its Common Stock or securities convertible into shares of its Common Stock at a sale, conversion or exercise price per share (the “Issue Price”), as the case may be, less than the Purchase Price then in effect, the Purchase Price shall be reset to the Issue Price and the number of shares purchasable pursuant to this Warrant shall be increased pro rata to the percentage reduction in the Purchase Price, provided, however, that the reset provision shall not apply to (i) any shares issued upon exercise or conversion of any currently outstanding options, warrants or convertible securities, or (ii) any Common Stock options or warrants issuable pursuant to an existing employee stock option plan or other existing compensation arrangement or any underlying Common Stock issued on the exercise thereof, but not pursuant to any amendment relating thereto to the extent such amendment increases the number of shares issuable under such plan or arrangement. The Issue Price shall be calculated taking into account the amount paid for the issuance of such Common Stock, option or warrant or convertible security and the amount, if any, payable upon the exercise or conversion thereof.

(c) Recapitalization. In case, prior to the expiration of this Warrant by exercise or by its terms, the Company shall be recapitalized by reclassifying its outstanding Common Stock, (other than a change in par value to no par value), or the Company or a successor corporation shall consolidate or merge with or convey all or substantially all of its or of any successor corporation’s property and assets to any other corporation or corporations (any such other corporations being included within the meaning of the term “successor corporation” hereinbefore used in the event of any consolidation or merger of any such other corporation with, or the sale of all or substantially all of the property of any such other corporation to, another corporation or corporations), then, as a condition of such recapitalization, consolidation, merger or conveyance, lawful and adequate provision shall be made whereby the Holder of this Warrant shall thereafter have the right to purchase, upon the basis and on the terms and conditions specified in this Warrant, in lieu of the shares of Common Stock of the Company theretofore purchasable upon the exercise of this Warrant, such shares of stock, securities or assets of the other corporation as to which the Holder of this Warrant would have been entitled had this Warrant been exercised immediately prior to such recapitalization, consolidation, merger or conveyance; and in any such event, the rights of the Warrant Holder to any adjustment in the number of shares of Common

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Stock purchasable upon the exercise of this Warrant, as hereinbefore provided, shall continue and be preserved in respect of any stock which the Holder becomes entitled to purchase.

(d) Dissolution. In case the Company at any time while this Warrant shall remain unexpired and unexercised shall sell all or substantially all of its property or dissolve, liquidate or wind up its affairs, lawful provision shall be made as part of the terms of any such sale, dissolution, liquidation or winding up, so that the Holder of this Warrant may thereafter receive upon exercise hereof in lieu of each share of Common Stock of the Company which it would have been entitled to receive, the same kind and amount of any securities or assets as may be issuable , distributable or payable upon any such sale, dissolution, liquidation or winding up with respect to each share of Common Stock of the Company; provided, however, that in any case of any such sale or of dissolution, liquidation or winding up, the right to exercise this Warrant shall terminate on a date fixed by the Company. Such date so fixed shall be no earlier than 3 P.M. New York City Time, on the forty-fifth (45th) day next succeeding the date on which notice of such termination of the right to exercise this Warrant has been given by mail to the registered Holder of this Warrant at its address as it appears on the books of the Company.

(e) No Fractional Shares. Upon any exercise of this Warrant by the Holder, the Company shall not be required to deliver fractions of one share, but adjustment in the purchase price payable by the Holder shall be made in respect of any such fraction of one share on the basis of the purchase price per share then applicable upon exercise of this Warrant.

(f) Notices. In the event that, prior to the expiration of this Warrant by exercise or by its terms, the Company shall determine to take a record of its stockholders for the purpose of determining stockholders entitled to receive any dividend, stock dividend, distribution or other right whether or not it may cause any change or adjustment in the number, amount, price or nature of the securities or assets deliverable upon the exercise of this Warrant pursuant to the foregoing provisions, the Company shall give at least ten (10) days’ prior written notice to the effect that it intends to take such record to the registered Holder of this Warrant at its address as it appears on the books of the Company, said notice to specify the date as of which such record is to be taken, the purpose for which such record is to be taken, and the effect which the action which may be taken will have upon this Warrant.

(g) Registered Owner. The Company may deem and treat the registered Holder of the Warrant at any time as the absolute owner hereof for all purposes, and shall not be affected by any notice to the contrary.

(h) Status. This Warrant shall not entitle any Holder thereof to any of the rights of a stockholder, and shall not entitle any Holder thereof to any dividend declared upon the Common Stock unless the Holder shall have exercised the within Warrant and purchased the shares of Common Stock prior to the record date fixed by the Board of Directors for the determination of Holders of Common Stock entitled to exercise any such rights or receive said dividend.

(i) No Adjustment for Small Amounts. The Company shall not be required to give effect to any adjustment in the Purchase Price unless and until the net effect of one or more adjustments, determined as above provided, shall have required a change of the Purchase Price by at least ten cents, but when the cumulative net effect of more than one adjustment so

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determined shall be to change the actual Purchase Price by at least ten cents, such change in the Purchase Price shall thereupon be given effect.

6. Replacement of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in case of such loss, theft, destruction or mutilation, of indemnity or security reasonably satisfactory to it in its sole discretion, and reimbursement to the Company of all expenses incidental or relating thereto, and upon surrender and cancellation of this Warrant (unless lost, stolen or destroyed), the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant.

7. Notices to Warrant Holder. Except as set forth in Section 5(f) hereto, nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company.

8. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested:

(a) If to the registered Holder of this Warrant, to the address of such Holder as shown on the books of the Company; or

(b) If to the Company, to the address set forth on the first page of this Warrant or to such other address as the Company may designate by notice to the Holder.

9. Successors. All the covenants, agreements, representations and warranties contained in this Warrant shall bind the parties hereto and their respective heirs, executors, administrators, distributees, permitted successors and permitted assigns. This Warrant may not be transferred without the prior written consent of the Company. Any attempted assignment in violation of the preceding sentence shall be void and of no effect.

10. Holdings. The headings in this Warrant are inserted for purposes of convenience only and shall have no substantive effect.

11. Law Governing. This Warrant is delivered in the State of New York and shall be construed and enforced in accordance with, and governed by, the laws of the State of New York, without giving effect to conflicts of law principles. Each of the parties agrees to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions.

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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its corporate name by, and such signature to be attested to by, a duly authorized officer as of the date first above written.

ACCLAIM ENTERTAINMENT, INC.

By:

Name:

Title:

ACCEPTED AND AGREED:

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ASSIGNMENT

(To Be Executed By the Registered Holder

to Effect a Transfer of the Within Warrant)

FOR VALUE RECEIVED                                                                                                                                                                                                                

hereby sells, assigns and transfers unto                                                                                                                                                                                           

(Name)

(Address)

the right to purchase Common Stock evidenced by the within Warrant, to the extent                      of shares of Common Stock, and does hereby irrevocably constitute and appoint

to transfer the said right on the books of the Company, with full power of substitution.

Dated:                     , 20    .

(Signature)

NOTICE: The signature to this assignment must correspond with the name as written upon the case of the within Warrant in every particular, without alteration or enlargement, or any change whatsoever and must be guaranteed by a bank, other than a savings bank or trust company, having an office or correspondent in New York, or by a firm having membership on a registered national securities exchange and an office in New York, New York.

FORM OF SUBSCRIPTION

(To be signed only upon exercise of Warrant)

To Acclaim Entertainment, Inc.

The undersigned hereby elects to [check applicable subsection]:

(a) Purchase                     ¹ shares of Common Stock of Acclaim Entertainment, Inc. pursuant to the terms of the attached Warrant and tenders herewith payment in full for the purchase price of the shares being purchased, together with all applicable transfer taxes, if any;

OR

(b) Exercise the attached Warrant for [all of the shares] [                      of the shares] [cross out inapplicable phrase] purchasable under the Warrant pursuant to the net exercise provisions of Section 1 of such Warrant.

The undersigned hereby represents that:

(a) it is an accredited investor within the meaning of Regulation D under the Act; and

(b) it is acquiring the Shares for its own account for investment only, and not with a view towards, or for resale in connection with, their distribution.

Dated:

(Signature must conform in all respects to

name of Holder as specified on the face of

the Warrants)

(Address)

¹ Insert here the maximum number of shares or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised.

EX-4.8

Exhibit 4.8

10% CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT

THIS 10% CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT, dated as of September 23, 2003 (this “Agreement”), is entered into by and between ACCLAIM ENTERTAINMENT, INC., a Delaware corporation (the “Company”), and the Purchaser whose name is set forth on the signature page hereto (the “Purchaser”).

RECITALS:

WHEREAS, the Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemptions from registration provided by Regulation D (“Regulation D”) promulgated by the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”); and

WHEREAS, the Purchaser wishes to purchase, and the Company wishes to sell and issue to the Purchaser, upon the terms and subject to the conditions stated in this Agreement, an aggregate of [$                    ] in principal amount of the Company’s 10% Convertible Subordinated Notes due September 23, 2010 in the form attached hereto as Exhibit A (the “Notes” and collectively, with the Underlying Shares (as defined below) and the Warrants (as defined below), the “Securities”), which Notes shall be convertible into shares of common stock of the Company, $0.02 par value per share (the “Common Stock”), in accordance with the terms of this Agreement and the Notes. The Underlying Shares shall mean the shares of Common Stock issued or issuable upon conversion of the Notes or exercise of the Warrants;

WHEREAS, in connection the sale of the Notes, the Company will also issue to the Purchaser warrants to purchase shares of the Company’s Common Stock and, upon the terms and subject to the conditions of this Agreement, may issue to the Purchaser additional warrants to purchase shares of the Company’s common stock under certain circumstances (each a “Warrant” and collectively, the “Warrants”). The exercise price and the number of shares of Common Stock which may be purchased from the Company pursuant to the Warrants shall be determined as set forth herein and in each Warrant.

WHEREAS, in connection with the consummation of the transactions contemplated by this Agreement, the parties hereto are also entering into, of even date herewith, a registration rights agreement (the “Registration Rights Agreement”). This Agreement, together with the Notes, the Registration Rights Agreement and the Warrants are hereinafter collectively referred to as the “Transaction Documents”.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

AGREEMENTS:

1. AGREEMENT TO PURCHASE; CLOSING

(a) Purchase of Notes. Subject to the terms and conditions set forth herein, the Company hereby agrees to issue and sell to each of the Purchaser, and each of the Purchaser hereby severally, and not jointly, agrees to purchase from the Company the principal amount of Notes set forth on Schedule 1(a) attached hereto at the Closing (as such term is defined in Section 1(b) hereof). Each Purchaser’s aggregate purchase price (the “Purchase Price”) for the Notes to be purchased hereunder is also set forth on Schedule 1(a). In connection with the purchase of the Notes by the Purchaser, the Company shall issue to the Purchaser at the Closing (as defined below) Warrants in accordance with Section 12 of this Agreement.

(b) Closing. The closing (the “Closing”) of the purchase and sale of the Notes and the issuance of the Warrants will take place at the offices of the Company, One Acclaim Plaza, Glen Cove, New York 11542 on September 26, 2003, or at such other place and time as may be mutually agreed by the Purchaser and the Company. The date of the Closing is referred to herein as the “Closing Date.” At the Closing, the Company will deliver to the Purchaser the Notes and the Warrants, in exchange for payment by the Purchaser of the Purchase Price by wire transfer of immediately available funds payable to the Company. The Notes shall be registered in each of the Purchaser’s names.

2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER; ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION

Each of the Purchasers hereby severally, and not jointly, represents and warrants to the Company as to itself only that:

(a) Accredited Investors. The Purchaser is: (i) experienced in making investments of the kind contemplated by this Agreement; (ii) able, by reason of business and financial experience, to protect its own interests in connection with the transactions contemplated by this Agreement; (iii) able to afford the entire loss of its investment in the Securities; (iv) an “accredited investor” as that term is defined in Rule 501(a) of Regulation D; and (v) not a broker-dealer or an affiliate of a broker-dealer as such terms are defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(b) No Public Distribution. The Purchaser is acquiring the Securities for its own account, for investment purposes only, and not with a present view towards the public sale or distribution thereof, except pursuant to a sale or sales that are registered under the Securities Act or exempt from such registration. The Purchaser has not been organized for the purpose of investing in securities of the Company, although such investment is consistent with its purposes.

(c) Subsequent Offers and Sales. All subsequent offers and sales of the Securities by the Purchaser shall be made pursuant to an effective registration statement under the Securities Act or pursuant to an applicable exemption from such registration; with any offers and sales which are being made pursuant to an applicable exemption from registration being accompanied by a legal opinion obtained by the Purchaser, which legal opinion being satisfactory to the Company and the Company’s legal counsel.

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(d) Accuracy of Purchaser’s Representations and Warranties. The Purchaser understands that the Securities are being offered and sold to it in reliance upon exemptions from the registration requirements of the United States federal securities laws, and that the Company is relying upon the truth and accuracy of the Purchaser’s representations and warranties contained in the Transaction Documents and any ancillary documents thereto, as applicable, and the Purchaser’s compliance with the Transaction Documents and any ancillary documents thereto, in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Shares in accordance with the terms and provisions of the Transaction Documents.

(e) Public Filings. The Purchaser: (i) has been provided with and has reviewed all requested information concerning the business of the Company, including, without limitation, the Company’s Annual Report on Form 10-KT for the seven month period ended March 31, 2003 (the “2003 10-KT”), Quarterly Report on Form 10-Q for the period ended June 2, 2003 (the “2004 10-Q”); all prior quarterly and annual reports of the Company as has been requested by the Purchaser; and (ii) has had all requested access to the management of the Company and has had the opportunity to ask questions of the management of the Company.

(f) Capacity and Authority. The Purchaser has the requisite capacity and authority to execute, deliver and perform each of the Transaction Documents and any an all ancillary documents thereto and to consummate the transactions contemplated thereby. Each of the Transaction Documents executed and delivered by the Purchaser have been duly executed and delivered by the Purchaser and each is a valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with their terms.

(g) Due Execution. This Agreement and the other Transaction Documents, and any ancillary documents thereto and the transactions contemplated hereby and thereby that have been executed and delivered by the Purchaser, have been duly and validly authorized by the Purchaser and such agreements, when executed and delivered by each of the other parties thereto will each be a valid and binding agreement of the Purchaser, enforceable against the Purchaser in accordance with their respective terms, except to the extent that enforcement of such agreements may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors’ rights generally and to general principles of equity.

(h) Brokers. The Purchaser has not employed, engaged or retained, or otherwise incurred any liability to, any person as a broker, finder, agent or other intermediary in connection with the transactions contemplated herein.

(i) No General Solicitation. The Purchaser did not learn of the investment in the Securities as a result of any public advertising or general solicitation.

(j) Subordination of Notes. As set forth in Section 10 hereto, the Purchaser represents and warrants that it is aware that the Notes are subordinate to the Senior Indebtedness (as hereinafter defined) and any and all payments which the Holder (as hereinafter defined) shall receive pursuant to the Note are subject to Section 10 of this Agreement.

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(k) Stockholder Approval. As set forth in Section 4(h) of this Agreement, the Purchaser represents and warrants that it understands that the issuance of the Underlying Shares (as hereinafter defined) at a price of $.57 is subject to the Company’s receipt of stockholder approval and that the Company does not make any representation or warranty as to its ability to obtain such stockholder approval.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to the Purchaser that:

(a) Organization. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware. Each of the Company’s subsidiaries is a corporation duly organized and validly existing under the laws of its respective jurisdiction of incorporation. Each of the Company and its subsidiaries is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a Material Adverse Effect on the Company (as hereinafter defined). All of the outstanding capital stock of the Company’s subsidiaries is owned either directly or indirectly by the Company. The Company and its subsidiaries have all requisite corporate power and authority, and hold all licenses, permits and other required authorizations from governmental authorities, necessary to conduct their business as it is now being conducted or proposed to be conducted and to own or lease their properties and assets as they are now owned or held under lease.

(b) Capitalization. On the date hereof, the authorized capital of the Company consists of 200,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $.02 per share (“Preferred Stock”). As of July 31, 2003 there were 113,084,491 shares of Common Stock issued and outstanding and no shares of Preferred Stock issued or outstanding. Schedule 3(b) sets forth all of the options, warrants and convertible securities of the Company, and any other rights to acquire securities of the Company (collectively, the “Derivative Securities”) which are outstanding on July 31, 2003, including in each case: (i) the name and class of such Derivative Securities; and (ii) the number of shares of Common Stock into which such Derivative Securities are convertible as of July 31, 2003. All outstanding securities of the Company are validly issued, fully paid and nonassessable. No stockholder of the Company is entitled to any preemptive rights with respect to the purchase of or sale of any securities by the Company. Except as contemplated herein, none of the shares of capital stock of the Company are reserved for any purpose, other than the issuance upon exercise or conversion of the Derivative Securities, and the Company is neither subject to any obligation (contingent or otherwise), nor has any option, to repurchase or otherwise acquire or retire any shares of its capital stock.

(c) Issuance of the Securities and Warrant Shares. The Notes are duly authorized, issued and delivered and the Underlying Shares when issued in accordance with the terms of the Notes or the Warrants, as the case may be, will be duly authorized and validly issued, fully paid and non-assessable, free and clear of any liens imposed by or through the Company, will not be subject to preemptive rights, and will not subject the holder thereof to personal liability by reason of being such a holder. There are no preemptive rights of any stockholder of the Company to acquire the Securities or the Warrants. As disclosed in a press release filed by the Company on January 31, 2003, the Company has received notification from Nasdaq (as defined below) that the Common Stock does not meet the minimum bid requirements and is therefore subject to

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delisting from Nasdaq. The Company has duly reserved from its authorized and unissued shares a sufficient number of shares of Common for issuance upon conversion of the Notes and exercise of the Warrants.

(d) Reporting Company Status. The Common Stock is registered under Section 12 of the Exchange Act. The Company files reports with the Commission pursuant to Section 12 and/or 15(d) of the Exchange Act. To the knowledge of the Company, the Company has duly filed all materials and documents required to be filed pursuant to all reporting obligations under either Section 13(a) or 15(d) of the Exchange Act. The Common Stock is listed and traded on The Nasdaq SmallCap Stock Market (“Nasdaq”).

(e) Legality. The Company has the requisite corporate power and authority to enter into each of the Transaction Documents and to issue and deliver the Securities.

(f) Due Execution. The Transaction Documents, and the transactions contemplated thereby, have been duly and validly authorized by the Company; the Transaction Documents have been duly executed and delivered by the Company and are each the legal, valid and binding agreement and obligation of the Company, enforceable in accordance with their respective terms, except to the extent that enforcement of such agreement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors’ rights generally and to general principles of equity.

(g) Non-contravention. The execution and delivery of the Transaction Documents, and the consummation by the Company of the transactions contemplated thereby, does not (i) result in a violation of either the Certificate of Incorporation or By-laws of the Company, or (ii) constitute a default under (or an event which with notice or lapse of time or both could become a default) or give to others any rights of termination, amendment or cancellation of, any material agreement, indenture or instrument to which the Company is a party unless the same shall have been waived or consented to by the other party, or result in a violation of any law, rule, regulation, order, judgment or decree (foreign or domestic and including federal and state securities laws and regulations) applicable to the Company or by which any material property or asset of the Company is bound or affected other than any of the foregoing which would not have a Material Adverse Effect (as hereinafter defined). Except as set forth in Schedule 3(g), neither the filing of the registration statement required to be filed by the Company pursuant to the Registration Rights Agreement nor the offering or sale of the Notes, the Warrants and the Underlying Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied on or prior to the date hereof, for or relating to the registration of any shares of the Common Stock.

(h) Approvals. Other than the filing of a Registration Statement with the Securities and Exchange Commission (the “SEC”) ,the filing of a listing application for the Underlying Shares with Nasdaq, as each are contemplated by the Registration Rights Agreement, and the receipt by the Company of approval from the SEC for such Registration Statement to be declared effective ,the receipt by the Company of the appropriate approvals and/or confirmations from Nasdaq, and the receipt by the Company of the stockholder approval contemplated by Section 4(h) of this Agreement, no authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, stock exchange or market or the stockholders of the Company is required to be obtained by the Company for the entry into or the performance of the Transaction Documents.

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(i) SEC Documents, Financial Statements. Since September 1, 2002, the Company has filed all reports, schedules, forms and statements required to be filed by it with the Commission pursuant to the reporting requirements of the Exchange Act (hereinafter, the “SEC Documents”). As of their respective dates, none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents were prepared in accordance with U.S. generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or year end accounting or audit adjustments or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated subsidiaries and results of their operations and cash flows for the periods covered thereby (subject, in the case of unaudited statements, to normal year-end audit adjustments).

(j) Undisclosed Liabilities. The Company has no material obligation or liability (whether accrued, absolute, contingent, unliquidated, or otherwise, whether due or to become due) arising out of transactions entered into at or prior to the Closing of this Agreement, or any action or inaction at or prior to the Closing of this Agreement, or any state of facts existing at or prior to the Closing of this Agreement, except (a) liabilities described in or reflected in the SEC Documents up to and including the 2004 10-Q and (b) liabilities incurred in the ordinary course of business since the date of the 2004 10-Q.

(k) Absence of Certain Changes. Except as disclosed in the SEC Documents, since March 31, 2003, there has been no material adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole (each, a “Material Adverse Effect”).

(l) Insurance. The Company and its subsidiaries maintain property and casualty, general liability, personal injury and other similar types of insurance that are reasonably adequate and consistent with industry standards and historical claims experience. The Company and its subsidiaries have not received notice from, and have no knowledge of any threat by, any insurer (that has issued any insurance policy to the Company or its subsidiaries) that such insurer intends to deny coverage under or cancel, discontinue or not renew any insurance policy covering the Company or any of its subsidiaries presently in force.

(m) Compliance with Law. To the knowledge of the Company, the Company and its subsidiaries have complied in all material respects with all applicable statutes and regulations of the United States and of all states, municipalities and applicable agencies and foreign jurisdictions or bodies in respect of the conduct of its business and operations, and the failure, if any, by the Company or its subsidiaries to have fully complied with any such statute or regulation has not resulted in a Material Adverse Effect.

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(n) Absence of Litigation. Except as disclosed in the SEC Documents, to the knowledge of the Company, there is no action, suit, formal inquiry or investigation, or proceeding before or by any court, public board or body pending or, to the knowledge of the Company or any of its subsidiaries, affecting the Company or any of its subsidiaries, in which an unfavorable decision, ruling or finding would have a Material Adverse Effect or adversely affect the transactions contemplated by the Transaction Documents or the validity or enforceability of, or the authority or ability of the Company to perform its obligations under the Transaction Documents.

(o) Investment Company Act. The Company and its subsidiaries are not conducting, and will not conduct, their business in a manner which would cause any of them to become an “investment company,” as defined in Section 3(a) of the Investment Company Act of 1940, as amended.

(p) Private Offering; Trust Indenture Act. Subject to the accuracy of the Purchaser’s representations and warranties set forth in Section 2 hereof, the offer, sale and issuance of the Securities, as contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and the Company is not required to qualify an indenture relating to the Notes under the Trust Indenture Act of 1939, as amended. Prior to the effectiveness of the registration statement contemplated by the Registration Rights Agreement, the Company agrees not to take any action that would render the issuance and sale of such securities to become subject to the registration requirements of the Securities Act. The Company has not offered or sold the Securities by any form of general solicitation or general advertising, as such terms are used in Rule 502(c) under the Securities Act.

(q) Full Disclosure. Neither this Agreement, the other Transaction Documents nor any of the schedules, exhibits, written statements, documents or certificates prepared or supplied by the Company with respect to the transactions contemplated hereby contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which made. Except as disclosed in the SEC Documents and except for matters affecting the industry of the Company as a whole, there exists no fact or circumstance which, to the knowledge of the Company upon due inquiry, could reasonably be anticipated to have a Material Adverse Effect or could adversely affect the ability of the Company to perform its obligations set forth in the Transaction Documents.

(r) Brokerage Fees. Except as set forth on Schedule 3(r), the Company and its subsidiaries have not incurred any liability for any consulting fees or agent’s commissions in connection with the offer and sale of the Securities and the transactions contemplated by this Agreement.

4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS

(a) Transfer Restrictions. The Purchaser acknowledges that, except as provided in the Registration Rights Agreement, (i) none of the Securities have been, or are being, registered under the Securities Act, and such securities may not be transferred unless (A) subsequently registered thereunder or (B) they are transferred pursuant to an exemption from such registration; and (ii) any sale of the Securities made in reliance upon Rule 144 under the Securities Act may

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be made only in accordance with the terms of said Rule, accompanied by a legal opinion obtained by the Purchaser which is satisfactory to the Company’s legal counsel. The provisions of Section 4(a) and 4(b) hereof, together with the rights and obligations of the Purchaser under the Transaction Documents, shall be binding upon any subsequent transferees of the Securities.

(b) Restrictive Legend. The Purchaser acknowledges and agrees that, until such time as the Securities shall have been registered under the Securities Act or the Purchaser demonstrates to the reasonable satisfaction of the Company and its legal counsel that such registration shall no longer be required, the Notes and certificates evidencing the Securities shall bear a restrictive legend in substantially the following form:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SHARES UNDER SAID ACT OR AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION SHALL NO LONGER BE REQUIRED.

The Company and the Holders (as hereinafter defined) hereby expressly agree that the Notes shall contain, among other provisions, a provision providing substantially as follows:

THIS NOTE IS SUBJECT TO PROVISIONS IN THE 10% CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT DATED AS OF SEPTEMBER 23, 2003 FOR THE SUBORDINATION OF THIS NOTE TO SENIOR INDEBTEDNESS OF THE COMPANY, UPON ALL THE TERMS AND CONDITIONS THEREIN SPECIFIED.

(c) Filings. The Company undertakes and agrees that it will make all required filings in connection with the sale of the Securities to the Purchaser, as required by United States laws and regulations, or by any domestic securities exchange or trading market, and if applicable, the filing of a notice on Form D (at such time and in such manner as required by the Rules and Regulations of the Commission), and to provide copies thereof to the Purchaser promptly after such filing or filings.

(d) Reporting Status. The Company shall timely file, or timely obtain extensions of time to file, all reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act and shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination.

(e) State Securities Filings. The Company shall from time to time promptly take such action as either the Purchaser or any of its representatives, if applicable, may reasonably request to qualify the Securities for offering and sale under the securities laws (other than United States federal securities laws) of the jurisdictions in the United States as shall be so identified to the

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Company, and to comply with such laws so as to permit the continuance of sales therein, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subsection (f) be obligated to be so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction.

(f) Use of Proceeds. The Company will use the net proceeds from the sale of the Notes for the Company’s working capital.

(g) Registration Rights. The Company acknowledges that if the Notes are converted or the Warrants are exercised, it has provided the Purchaser with certain registration rights under the Securities Act as set forth in the Registration Rights Agreement.

(h) Stockholder Approval. The Company shall seek and use its best efforts to obtain, on or before the date which is 90 days after the Closing Date, the approval of its stockholders of the issuance of the Underlying Shares at the adjusted conversion price of $.57 per share (the “Stockholder Approval”). The Company shall call a meeting of stockholders to be held within 90 days after the Closing Date, shall prepare and file with the Commission as promptly as practical, but in no event later than 30 days after the Closing Date, preliminary proxy materials which set forth a proposal to seek such Stockholder Approval and shall recommend approval thereof by its stockholders. The Company shall furnish to the Purchaser and its counsel a copy of its definitive proxy materials for such meeting of stockholders and any amendments or supplements thereto promptly after the same are mailed to stockholders or filed with the Commission, shall inform the Purchaser of the progress of solicitation of proxies for such meeting and shall inform the Purchaser of any adjournment of such meeting and shall report the result of the vote of any stockholders on such proposition on the day such vote is taken.

(i) Reservation of Common Stock Issuable upon Conversion of Notes and Exercise of Warrants. The Company hereby agrees at all times to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of providing for the full conversion of Notes and exercise of the Warrants such number of shares of Common Stock as shall from time to time equal the number of shares sufficient to permit the full conversion of Notes and exercise of the Warrants . All calculations pursuant to this paragraph shall be made without regard to restrictions on beneficial ownership.

(j) Covenant as to Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of the Notes and/or exercise of the Warrants will, upon issuance pursuant to the terms of the Notes and/or the Warrants, as the case may be, be fully paid and nonassessable.

5. TRANSFER AGENT INSTRUCTIONS

The Company warrants that no instruction, other than the instructions referred to in this Section 5, prior to the registration and sale under the Securities Act of the Securities will be given by the Company to its transfer agent in respect of the Underlying Shares and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement and applicable law.

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Nothing in this Section 5 shall affect in any way the Purchaser’s obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If the Purchaser provides the Company with an opinion of counsel reasonably satisfactory to the Company and its legal counsel that registration of a resale by the Purchaser of any of the Securities in accordance with Section 4(a) of this Agreement is not required under the Securities Act, the Company shall permit the transfer of the Securities and promptly instruct the Company’s transfer agent to issue one or more certificates for Common Stock without legend in such names and in such denominations as specified by the Purchaser.

6. CONDITIONS TO THE COMPANY’S OBLIGATION TO ISSUE THE NOTES AND WARRANTS

Each Purchaser understand that the Company’s obligation to issue the Notes and the Warrants on the Closing Date to the Purchaser pursuant to this Agreement is conditioned upon the satisfaction by the Purchaser or the waiver by the Company of each of the following conditions:

(a) The accuracy on the Closing Date of the representations and warranties of the Purchaser contained in this Agreement, as if made on the Closing Date, and the performance by the Purchaser including, but in no way limited to, the delivery by the Purchaser to the Company of the full Purchase Price for the purchase of the securities, on or before the Closing Date, of all covenants and agreements of the Purchaser contained in the Transaction Documents and required to be performed on or before the Closing Date.

(b) The absence or inapplicability of any and all laws, rules or regulations prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained.

(c) The Purchaser shall have executed each of the Transaction Documents and any and all ancillary documents thereto and delivered the same to the Company.

(d) The Company shall have received from the Purchaser such other certificates and documents as it or its representatives, if applicable, shall reasonably request, and all proceedings taken by the Purchaser in connection with the Transaction Documents contemplated by this Agreement and the other Transaction Documents and all documents and papers relating to such Transaction Documents shall be satisfactory to the Company.

7. CONDITION TO THE COMPANY’S OBLIGATION TO ADJUST THE CONVERSION AND EXERCISE PRICES

(a) Stockholder Approval. The Purchaser understands that the Company’s obligation to adjust the conversion price of the Notes and the exercise price of the Warrants to $.57 per share is conditioned upon the Company obtaining stockholder approval for the issuance of the Underlying Shares and the shares issuable upon exercise of the Warrants at that price. The Company shall either convene a stockholders meeting or mail a Consent Solicitation so as to provide the stockholders the opportunity to approve the issuance of the issuance of the Underlying Shares and the shares issuable upon exercise of the Warrants at $.57 per share.

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8. CONDITIONS TO THE PURCHASER’S OBLIGATION TO PURCHASE THE NOTES

The Company understands that the Purchaser’s obligation to purchase the Notes and acquire the Warrants on the Closing Date is conditioned upon the satisfaction by the Company or the waiver by the Purchaser of each of the following conditions:

(a) The accuracy on the Closing Date of the representations and warranties of the Company contained in this Agreement as if made on the Closing Date, and the performance by the Company, on or before the Closing Date, of all covenants and agreements of the Company contained in the Transaction Documents and required to be performed on or before the Closing Date.

(b) The Company shall have executed the Transaction Documents and any and all ancillary documents thereto and delivered same to the Purchaser.

(c) On the Closing Date, the Purchaser shall have received an opinion of counsel for the Company, dated the Closing Date in the form attached hereto as Exhibit A.

(d) On the Closing Date, the Purchaser shall have received a certificate executed by the President or the Chief Executive Officer of the Company and by the Chief Financial Officer of the Company, stating that all of the representations and warranties of the Company set forth in the Transaction Documents are accurate as of the Closing Date and that the Company has performed all of its covenants and agreements required to be performed under the Transaction Documents on or before the Closing Date.

(e) The Purchaser shall have received an incumbency certificate, dated as of the Closing Date, for the officers of the Company executing this Agreement, and any other documents or instruments delivered in connection with the Transaction Documents at the Closing.

(f) The Purchaser shall have received a certificate of the Secretary of the Company, dated the Closing Date, as to the continued and valid existence of the Company, certifying the attached copy of the By-laws of the Company, the authorization of the execution, delivery and performance of the Transaction Documents, and the resolutions adopted by the Board authorizing the actions to be taken by the Company contemplated by the Transaction Documents.

(g) The Purchaser shall have received from the Company such other certificates and documents as they or their representatives, if applicable, shall reasonably request, and all proceedings taken by the Company in connection with the Transaction Documents contemplated by this Agreement and the other Transaction Documents and all documents and papers relating to such Transaction Documents shall be satisfactory to the Purchaser.

(h) No injunction, order, investigation, claim, action or proceeding before any court or governmental body shall be pending or threatened wherein an unfavorable judgment, decree or order would restrain, impair or prevent the carrying out of this Agreement or the other

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Transaction Documents or any of the transactions contemplated hereby or thereby, declare unlawful the transactions contemplated by this Agreement or the other Transaction Documents or cause any such transaction to be rescinded.

(i) The Company shall have obtained in writing or made all consents, waivers, approvals, orders, permits, licenses and authorizations of, any registrations, declarations, notices to and filings and applications with, any governmental authority or any other person or entity (including, without limitation, securityholders and creditors of the Company) required to be obtained or made in order to enable the Company to observe and comply with all its obligations under this Agreement or the other Transaction Documents and to consummate the transactions contemplated hereby, and including, without limitation, the written waiver, dated September 25, 2003, obtained by the Company from the holder of its Senior Indebtedness, waiving the benefits afforded in Section 10(c) of this Agreement.

9. EVENTS OF DEFAULT; REMEDIES

(a) Events of Default. If any of the events specified in Sections 9(b)-(f) shall occur (herein individually referred to as an “Event of Default”), the holder of any outstanding Note issued pursuant to this Agreement (the “Holder”) may, so long as such condition exists, declare the entire principal and unpaid accrued interest thereon immediately due and payable, by notice in writing to the Company and, subject to the provisions of Section 10 hereof, pursue any available legal remedies for the amount due on the Note.

(b) Payments. Default in the payment of the principal or unpaid accrued interest of the Note when due and payable if such default is not cured by the Company within ten (10) days after the Holder has given the Company written notice of such default.

(c) Bankruptcy. The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or relief under the federal Bankruptcy Code, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of the Company, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action.

(d) Commencement of an Action. If, within sixty (60) days after the commencement of an action against the Company (and service of process in connection therewith on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated.

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(e) Default of Senior Indebtedness. Any declared default of the Company under any Senior Indebtedness (as defined in Section 10 hereof) that gives the holder thereof the right to accelerate such Senior Indebtedness, and such Senior Indebtedness is in fact accelerated by the holder, or in the event that any Senior Indebtedness has become due and payable upon maturity and has not been satisfied.

(f) Covenants and Agreements. The Company shall default in the performance of any of its material covenants and agreements set forth in any provision of this Agreement and the continuance of such default for thirty (30) days after a Purchaser has given the Company written notice of such default.

(g) Other Remedies. If any Event of Default shall occur and be continuing, the Holder shall have solely the remedies set forth in this Section 9.

10. SUBORDINATION

The indebtedness evidenced by the Note is hereby expressly subordinated to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all the Company’s Senior Indebtedness (as defined herein).

(a) Agreement To Subordinate. The Company agrees, and each Holder by accepting a Note agrees, that the indebtedness and other payment obligations incurred under this Agreement or evidenced by the Notes, including without limitation all indemnification obligations of the Company under Section 12, are subordinated in right of payment, to the extent and in the manner provided in this Section 10, to the prior indefeasible payment in full in cash of the Senior Indebtedness, and that the subordination is for the benefit of the holders of Senior Indebtedness, and the Senior Indebtedness shall rank senior to the Notes (and in such case only to the extent and on the terms and conditions set forth herein). “Senior Indebtedness” shall mean the principal of and unpaid accrued interest on, and all other obligations now outstanding or hereafter arising from time to time under: (a) the Revolving Credit and Security Agreement (“Credit 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 Finance LLC, as successor in interest by merger to GMAC Commercial Credit LLC, formally known as BNY Factoring LLC, as successor by merger to BNY Financial Corporation (“GMAC”), as lender, as amended and restated on February 28, 1995, and as amended thereafter or hereafter; and (b) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor, any additional loans or advances hereafter made in respect of the Senior Indebtedness and any amendment, modification, or change in such Senior Indebtedness and the documents evidencing the same.

(b) Liquidation, Dissolution, Bankruptcy. Upon any distribution to creditors of the Company in a liquidation or a total or partial dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property:

(1) holders of Senior Indebtedness shall be entitled to receive payment in full in cash of the Senior Indebtedness or provision satisfactory to the holders of Senior Indebtedness

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shall be made for such payment before the Holders shall be entitled to receive any payment of principal of or interest on the Notes or in respect of any other obligation arising under this Agreement; and

(2) until the Senior Indebtedness is paid in full, in cash, any distribution to which the Holders would be entitled but for this Section 10 shall be made to holders of Senior Indebtedness as their interests may appear.

(c) Senior Indebtedness. If any Senior Indebtedness is outstanding and the holder of such Senior Indebtedness has not waived in writing the benefits of this sentence, the Company may not pay principal of or interest on the Notes or make any payment in respect of any other obligation arising under this Agreement or acquire or redeem any Notes for cash or property (notwithstanding conversion of the Notes into the Underlying Shares pursuant to Section 11 of this Agreement) unless and until such Senior Indebtedness shall have been discharged in accordance with its terms or the holders of such Senior Indebtedness shall have waived in writing the benefit of this sentence, after which the Company shall resume making any and all required payments in respect of the Notes including any missed payments; provided, that, so long as the Company is not in default under the Senior Indebtedness on the date of maturity of the Notes, the Company shall pay the Holders the principal and the interest accrued on the Note in full satisfaction thereof.

(d) Acceleration of Payment of Notes and Exercise of Remedies. Until the Senior Indebtedness shall have been paid in full in cash, in the event that, and during the continuance of any Event of Default described in Section 9 hereof, all or any portion of the unpaid principal amount of the Notes shall have been declared due and payable pursuant to the provisions of Section 9 hereof, such declarations shall not be effective until the date on which the Senior Indebtedness has been paid in full in cash.

(e) When Distribution Must Be Paid Over. Without limiting the other provisions of this Section 10, in the event that any Note is declared due and payable before its Stated Maturity, then no payment or distribution of any kind or character shall be made in respect of such Note and the holders of the Senior Indebtedness outstanding at the time of such declaration shall be entitled to receive payment in full in cash of all amounts due (including by reason of acceleration), or appropriate provision satisfactory to the holders of such Senior Indebtedness shall be made for such payment, before the Holder is entitled to receive any payment or distribution of any kind or character. Notwithstanding the foregoing, if a distribution is made to any Holder that pursuant to this Section 10 should not have been made pursuant to this Section 10 to such Holder, the Holder who receives the distribution shall upon request of the holders of the Senior Indebtedness hold such distribution in trust and pay it to the such holders of Senior Indebtedness.

(f) Subrogation. After all Senior Indebtedness is paid in full in cash and until the Notes are paid in full, the Holders shall be subrogated to the rights of holders of Senior Indebtedness to receive the payments or distributions applicable to the Senior Indebtedness, to the extent payments with respect to the Notes have been applied to the payment of the Senior Indebtedness. Any payment or distribution made under this Section 10 to holders of Senior Indebtedness which otherwise would have been made to the Holders except for the provisions of this Section 10 shall

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not, as between the Company, its creditors (other than the holders of the Senior Indebtedness) and the Holders, be deemed to be a payment by the Company to or on account of the Senior Indebtedness, and no payments or distributions to the Holders of cash, property or securities by virtue of the subrogation herein provided shall, as between the Company, its creditors (other than the holders of the Senior Indebtedness) and the Holders, be deemed to be a payment to or on account of the Notes, it being understood that the provisions of this Section 10 are and are intended solely for the purpose of defining the relative rights of the holders of the Notes on the one hand and the holders of Senior Indebtedness on the other.

(g) Relative Rights. This Section 10 defines the relative rights of the Holders and holders of Senior Indebtedness. Nothing in this Agreement shall:

(1) impair, as between the Company and the Holders, the obligations of the Company, which are absolute and unconditional, to pay principal of and interest on the Notes in accordance with their terms (provided, however, that this provision is not intended to limit the restrictions on payments on the Notes set forth in Section 10(c) hereof); or

(2) prevent any Holder from exercising its available remedies upon a Default or an Event of Default, subject to the rights of holders of Senior Indebtedness to receive distributions otherwise payable to the Holders (provided, however, that this provision is not intended to limit the provisions of Section 10(d)).

(h) Subordination May Not Be Impaired by Company. No right of a holder of Senior Indebtedness to enforce the subordination of the indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Company or by its failure to comply with this Agreement.

(i) Reinstatement. If, at any time, all or part of any payment with respect to Senior Indebtedness previously made by the Company or any other person is rescinded for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of the Company or such other person), the subordination provisions set forth herein shall continue to be effective or be reinstated (including with respect to payments on the Notes prior to such reinstatement), as the case may be, all as though such payment had not been made.

(j) Proofs of Claim. If, while any Senior Indebtedness is outstanding, any Event of Default under Section 9 or of this Agreement, with respect to the Company only, occurs each Holder shall, to the extent permitted by applicable law, duly and promptly take such action as the holder of Senior Indebtedness may reasonably request to collect any payment hereunder to which the holders of Senior Indebtedness may be entitled hereunder or under the Notes, and to file appropriate claims or proofs of claim in respect of this Agreement and the Notes. Upon the failure of any Holder to take any such action, the holder of the Senior Indebtedness is hereby irrevocably authorized and empowered (in its own name or otherwise and to the extent permitted by applicable law), but shall have no obligation, to demand, use, collect and receive every payment or distribution referred to hereunder and under any such Note and to file claims and proofs of claim with respect to this Agreement and the Notes and the Holders hereby appoint the holder of the Senior Indebtedness as attorney-in-fact for such Holders to take any and all actions permitted by this paragraph to be taken by such Holders; provided, however, that the holder of

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the Senior Indebtedness shall only be permitted to file such proofs of claim upon notice to each Holder and to the extent that the Holders have failed to make such filings by the date which is ten (10) days prior to the last date on which such Holders are permitted to make such filings as a matter of applicable Bankruptcy Law.

(k) Non-Impairment. The Holders agree and consent that, without notice to or assent by them, and without affecting the liabilities and obligations of the Company and the rights and benefits of the holders of the Senior Indebtedness set forth in this Section 10:

(1) the obligations and liabilities of the Company and any other party or parties for or upon the Senior Indebtedness may, from time to time, be increased, renewed, refinanced, extended, modified, amended, restated, compromised, supplemented, terminated, waived or released;

(2) the holders of Senior Indebtedness, and any representative or representatives acting on behalf thereof, may exercise or refrain from exercising any right, remedy or power granted by or in connection with any agreements relating to the Senior Indebtedness; and

(3) any balance or balances of funds with any holder of Senior Indebtedness at any time outstanding to the credit of the Company may, from time to time, in whole or in part, be surrendered or released,

all as the holders of any Senior Indebtedness, or any representative or representatives acting on behalf thereof, may deem advisable, and all without impairing, abridging, diminishing, releasing or affecting the subordination of the Notes to the Senior Indebtedness.

(k) No Modification. The provisions of this Section 10 and the defined terms used in this Section 10 are for the benefit of the holders from time to time of Senior Indebtedness and, so long as any Senior Indebtedness or any commitments with respect thereto remain outstanding, such provisions and defined terms may not be modified, rescinded or canceled in whole or in part; provided, that this Section 10 and the defined terms used in this Section 10 may be modified, amended or supplemented by the parties to this Agreement upon obtaining the prior written consent of the holders of the Senior Indebtedness.

(l) Waivers; Reliance by Holders of Senior Indebtedness. To the extent permitted by applicable law, the Holders and the Company hereby waive (1) notice of acceptance hereof by the holders of the Senior Indebtedness and (2) all diligence in the collection or protection of or realization upon the Senior Indebtedness. Each Holder, by accepting any Note, acknowledges and agrees that the subordination provisions in this Section 10 are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of the Notes, to acquire and continue to hold, or to continue to hold, such Senior Indebtedness and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness.

(m) Enforcement of Rights. The Company and the Holders hereby expressly agree that the holders of Senior Indebtedness may enforce any and all rights derived herein by suit, either in equity or at law, for specific performance of any agreement contained in this Section 10 or for judgment at law and any other relief whatsoever appropriate to such action or procedure.

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(n) Undertaking. By its acceptance of the Note, the Holder agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the lender of any Senior Indebtedness in order to implement the foregoing provisions of this Section 10.

(o) Prohibition of Payment of Notes. The Holder and the Company hereby acknowledge that, pursuant to the terms of the Credit Agreement, the Company may not, directly or indirectly, make any payments of principal or interest in respect of the Notes; except that the Company may make (i) regularly scheduled, semiannual payments of interest in respect of the Notes and (ii) payment of accrued interest upon conversion of the Notes, provided that, in either case, immediately prior to and after giving effect to any such interest payments, no Default, Event of Default or Overadvance (as such terms are defined in the Credit Agreement) exists or would exist under the Credit Agreement.

11. CONVERSION OF NOTE

(a) Conversion.

(1) Subject to and upon compliance with the provisions of this Section 11, except as otherwise specified herein, following the receipt of the approval of the stockholders of the Company to the issuance of the Underlying Shares at $.57 per share, pursuant to Section 4(i) hereto, without regard to the then market price of the Common Stock, the Note shall automatically be converted into that number of shares of Common Stock equal to the face amount of the Note divided by $.57, subject to this Section 11, adjusted only as provided in Section 11(d) hereof; provided, however, that such conversion will only occur at such time after stockholder approval is obtained and (i) a registration statement is effective covering the Underlying Shares and (ii) the Common Stock is listed on Nasdaq.

(2) At any time, and from time to time, the Note may be converted by the Purchaser, in whole or in part, into that number of shares of the Company’s Common Stock equal to the principal amount of the Note being converted or, if less than the entire principal amount of the Note is to be so converted, the portion thereof to be converted, divided by the Conversion Price in effect on the applicable date. As used herein, the term “Conversion Price” means $.724 per share; provided, however, that if the stockholder approval contemplated by Section 4(i) is obtained, then the Conversion Price shall be $.57 per share, in either case subject to adjustment as provided herein.

(3) For the purposes of Section 11, the term “Common Stock” shall mean the Common Stock or any shares of capital stock of the Company into which such shares shall be changed or reclassified after the Closing Date.

(b) Conversion Process.

(i) Automatic Conversion. Immediately following the approval of the stockholders of the Company of the issuance of the Underlying Shares at $.57 and the satisfaction of the conditions set forth in Section 11(a)(1) above, the Note, without any action on the part of the Holders or the Company, shall forthwith cease to be outstanding, shall be cancelled and retired,

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shall no longer be transferable, and no payment or other consideration shall be made or paid, in respect thereof. As soon as reasonably practicable following the approval of the stockholders of the Company of the issuance of the Underlying Shares at $.57, the Company shall mail to each Holder notice, substantially in the form attached to the Note, informing such Holder of the stockholders approval and of the automatic conversion of the Note to the Underlying Shares. As soon as reasonably practicable after receipt of the notice, the Holder shall surrender the Note duly endorsed or assigned to the Company or in blank, at the office or agency of the Company maintained for that purpose for cancellation. Upon receipt of the Note, the Company shall cancel the Note. The Note shall be deemed to have been converted immediately on the close of business on the day immediately following the day that the Company receives the approval of the stockholders for the issuance of the Underlying Shares and at such time the rights of the Holders shall cease, and the Holder entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in section 11(c) hereof.

(ii) Voluntary Conversion. In the event the Holder exercises its conversion right pursuant to Section 11(a)(2), the Holder of any Note to be so converted shall surrender such Note duly endorsed or assigned to the Company or in blank, to the Company or at the office of any Conversion Agent, accompanied by a duly signed conversion notice substantially in the form attached to the Note to the Company stating that the Holder elects to convert such Note or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted.

Notes shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Notes for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Notes (or the portion thereof being converted) as Holders shall cease, and the person or persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, but in no event later than three trading days after the conversion date, the Company shall cause to be issued and delivered to the converting Holder certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in good funds of accrued and unpaid interest, if any, on the Note, or portion of the principal amount thereof converted, as the case may be.

In the case of any Note which is converted in part only, upon such conversion the Company shall execute and deliver to the Holder thereof, at the expense of the Company, a new Note or Notes in aggregate principal amount equal to the unconverted portion of the principal amount of such Notes.

The Company hereby initially appoints the Transfer Agent as the Conversion Agent.

(c) Fraction of Shares. No fractional shares of Common Stock shall be issued upon conversion of the Note. Instead of any fractional share of Common Stock which would

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otherwise be issuable upon the conversion of the Note, the Company shall issue one full share for any fractional share of or in excess of .50 of a share, and no shares for any fractional shares below .50 of a share.

(d) Adjustment of Underlying Shares.

(1) In case the Company shall at any time after the Closing Date and prior to conversion of the Note (1) declare a dividend on the Common Stock payable in shares of its capital stock, (2) subdivide the Common Stock into a greater number of shares, (3) combine the Common Stock into a smaller number of shares, or (4) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the number of Underlying Shares, in effect immediately prior to the close of business on the record date for the determination of stockholders entitled to receive such dividend or to participate in such subdivision, contribution or reclassification or, if no record date is selected or the fixing of a record date is inapplicable, immediately prior to the effective time of such subdivision, combination, or reclassification, shall be proportionately adjusted so that the Holder shall be entitled to receive the aggregate number and kind of shares which, if such Note had been converted immediately prior to such time, such Holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. Such adjustment shall be made successively whenever any event listed in this section 11(d) shall occur and shall take effect at the close of business on the aforementioned record date or at the aforementioned effective time, as the case may be. In the event that after fixing any such record date any such dividend or other transaction is not effected, the number of Underlying Shares shall be readjusted to the number of Underlying Shares which would then have been in effect if such record date had not been fixed.

(2) In case the Company shall, (i) by dividend or otherwise, at any time distribute to all holders of its Common Stock cash (excluding any cash portions of distributions referred to elsewhere in this Section 11(d)) in an aggregate amount that, combined together with (a) all other such all-cash distributions made within the preceding 12 months in respect to which no adjustment has been made and (b) any cash and their fair market of other consideration paid or payable in respect of any tender offers by the Company for Common Stock concluding within the preceding 12 months in respect of which no adjustment has been made, exceeds 25% of the Company’s market capitalization (defined as being the product of the current market price of the Common Stock times the number of shares of Common Stock then outstanding) on the record date for such distribution(as determined by the Board of Directors), and or (ii) purchase Common Stock pursuant to a tender offer made by the Company or any of its subsidiaries which involves an aggregate consideration that together with (a) any cash and the fair market value of any other consideration paid or payable in any other tender offer by the Company or any of its subsidiaries of Common Stock expiring within the 12 months preceding the expiration of such tender offer in respect of which no adjustment has been made (as determined by the Board of Directors) and (b) the aggregate amount of any such all-cash distributions referred to in (i) above to all holders of Common Stock within the 12 months preceding the expiration of such tender offer in respect of which no adjustments have been made, exceeds 25% of the Company’s market capitalization on the expiration of such tender offer, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect

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immediately prior to the effectiveness of the Conversion Price reduction contemplated by this subsection (d) by a fraction of which the numerator shall be the current market price per share (determined as provided in this Section 11(d) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock determined as aforesaid), such reduction to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution.

(3) In case at any time on or after the Closing Date the Company shall issue shares of its Common Stock or instruments convertible into or exercisable for Common Stock (“Common Stock Equivalents”) (collectively, the “Newly Issued Shares”), other than an issuance pro rata to all holders of its outstanding Common Stock, at a price below the greater of (x) the Conversion Price in effect at the time of such issuance and (y) the current market price of the Common Stock at the time of such issuance, then following such issuance of Newly Issued Shares the Conversion Price shall be adjusted as follows:

(A) In the case of such issuance occurring when the Conversion Price in effect at the time of such issuance is greater than the current market price of the Common Stock at such time, the Conversion Price following any such adjustment shall be determined by multiplying the Conversion Price immediately prior to such adjustment by a fraction, of which the numerator shall be the sum of (a) the number of shares of Common Stock outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the conversion of all options, warrants, purchase rights or convertible securities which are exercisable at the time of the issuance of the Newly Issued Shares) plus (b) the number of shares of Common Stock which the aggregate consideration, if any, received by the Company for the number of Newly Issued Shares would purchase at a price equal to the Conversion Price in effect immediately prior to the time of such issuance, and the denominator shall be the sum of (X) the number of shares of Common Stock outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the exercise or conversion of all options, warrants, purchase rights or convertible securities which are exercisable or convertible at the time of the issuance of the Newly Issued Shares) plus (Y) the number of Newly Issued Shares. The adjustment provided for in this paragraph may be expressed as the following mathematical formula:

	( O +(C / CP))    x CP
NCP =	(     O + N     )

where:
	C	=	aggregate consideration received by the Company for the Newly Issued Shares
	N	=	number of Newly Issued Shares
	O	=	number of shares of Common Stock outstanding (on a fully diluted basis, as described above) immediately prior to the issuance of the Newly Issued Shares
	CP	=	Conversion Price immediately prior to the issuance of the Newly Issued Shares
	NCP	=	Conversion Price immediately after the issuance of the Newly Issued Shares

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(B) In the case of such issuance occurring when the current market price of the Common Stock at the time of such issuance is greater than the Conversion Price in effect at such time, the Conversion Price following any such adjustment shall be determined by multiplying the Conversion Price immediately prior to such adjustment by a fraction, of which the numerator shall be the sum of (a) the number of shares of Common Stock outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the conversion of all options, warrants, purchase rights or convertible securities which are exercisable at the time of the issuance of the Newly Issued Shares) plus (b) the number of shares of Common Stock which the aggregate consideration, if any, received by the Company for the number of Newly Issued Shares would purchase at a price equal to the current market price of the Common Stock at the time of such issuance, and the denominator shall be the sum of (X) the number of shares of Common Stock outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the exercise or conversion of all options, warrants, purchase rights or convertible securities which are exercisable or convertible at the time of the issuance of the Newly Issued Shares) plus (Y) the number of Newly Issued Shares. The adjustment provided for in this paragraph may be expressed as the following mathematical formula:

	( O +(C / FMV))    x CP
NCP =	(       O + N       )

where:
	C	=	aggregate consideration received by the Company for the Newly Issued Shares
	N	=	number of Newly Issued Shares
	O	=	number of shares of Common Stock outstanding (on a fully diluted basis, as described above) immediately prior to the issuance of the Newly Issued Shares
	FMV	=	current market price of the Common Stock at the time of issuance of the Newly Issued Shares
	CP	=	Conversion Price immediately prior to the issuance of the Newly Issued Shares
	NCP	=	Conversion Price immediately after the issuance of the Newly Issued Shares

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Notwithstanding the foregoing, no adjustment shall be made under this Section 11(d) by reason of:

(A) the issuance by the Company of shares of Common Stock pro rata to all holders of the Common Stock so long as (i) any adjustment to the Conversion Price that is required elsewhere in this Section 11(d) is made and (ii) the Company shall have given notice of such issuance thereof to the Holder;

(B) the issuance by the Company of the Notes and the Warrants pursuant to this Agreement or the issuance by the Company of shares of Common Stock upon conversion of the Notes in accordance with the terms hereof and thereof or upon exercise of the Warrants in accordance with the terms thereof; and

(C) the issuance by the Company of Common Stock or options to purchase Common Stock to employees, directors and consultants under the a stock compensation plan duly adopted by the Board of Directors.

For the purpose of any computation under this Section 11(d) the “current market price” per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the five consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the Nasdaq or, if the shares of Common Stock are not listed or admitted to trading on the Nasdaq, on the principal national securities exchange on which the shares are listed or admitted to trading, or if they are not listed or admitted to trading on any national securities exchange, the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose.

(e) Merger. If the Company shall merge or consolidate with another corporation, the Holder shall thereafter have the right, upon conversion of the Note to receive solely the kind and amount of shares of stock (including, if applicable, Common Stock), other securities, property or cash or any combination thereof receivable by a holder of the number of shares of Common Stock for which such Note might have been exercised immediately prior to such merger or consolidation (assuming, if applicable, that the holder of such Common Stock failed to exercise its rights of election, if any, as to the kind or amount of shares of stock, other securities, property or cash or combination thereof receivable upon such merger or consolidation). Any shares of stock or other securities to be received upon conversion in such event shall be registered for resale under the securities laws in the same manner and to the same extent as the shares of stock or other securities received by the Company’s other outstanding common stock holders, both registered and unregistered, except to the extent that the rules and regulations of the SEC require different procedures or forms.

(f) Notice of Certain Corporate Action. In case:

(1) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its earned surplus;

(2) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights;

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(4) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation, merger, share exchange or combination to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale, transfer or conveyance of all or substantially all of the assets of the Company; or

(5) of the voluntary or involuntary dissolution, liquidation or winding up of the Company;

then the Company shall cause to be filed at the offices of the Company, and shall cause to be mailed to the Holder at its last addresses as it shall appear in the records of the Company, at least twenty (20) days or ten (10) days in any case specified in clause (1) or (2) of this Section 11(f) prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (4) of this Section 11(f).

(g) Transfer and Exchange of Note. The Note shall not be transferred except pursuant to an applicable exemption under the Securities Act, subject to receipt by the Company of an opinion from Purchaser’s counsel and subject to the consent of the Company. Such transfer and assignment shall be made in accordance with applicable federal and state securities laws. At any time and from time to time, upon not less than twenty (20) days’ notice to that effect given by the Holder and, upon surrender of the Note at the Company’s office by the Holder, the Company will deliver in exchange therefor, without expense to the Holder, except as set forth below, one or more Notes for the same aggregate principal amount as the then unpaid principal amount of the Note so surrendered, provided such Notes are in denominations of at least One Million Dollars ($1,000,000) or any amount in excess thereof as the Holder shall specify, dated as of the date to which interest has been paid on the Note so surrendered or, if such surrender is prior to the payment of any interest thereon, then dated as of the date of issue, registered in the name of such Person or Persons as may be designated by the Purchaser, and otherwise of the same form and tenor as the Note so surrendered for exchange. The Company may require the payment of a sum sufficient to cover any stamp tax or governmental charge imposed upon such exchange or transfer.

(h) Loss, Theft, Mutilation or Destruction of Note. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of the Note, the Company will make and deliver without expense to the Holder thereof, a new Note, of like tenor, in lieu of such lost, stolen, mutilated or destroyed Note.

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(i) Expenses. The Company agrees to pay duplicating and printing costs and charges for shipping the Note, adequately insured, to the Purchaser’s address set forth in the Company’s records or at such other place as the Purchaser may designate.

(j) Cancellation of Converted Note. The Note or portions thereof delivered for conversion shall be cancelled by or at the direction of the Company.

12. ISSUANCE OF THE WARRANTS In connection with the transactions contemplated hereby, the Company agrees to issue to the Purchaser a Warrant, or Warrants, as the case may be, to purchase shares of the Company’s Common Stock. The terms of the Warrant shall be as follows:

(a) A Warrant will be issued at the Closing, and will entitle the holder thereof to purchase such number of shares of the Company’s Common Stock equal to twenty five percent (25%) of the number of Underlying Shares, at an exercise price per share equal to the average closing price of a share of Common Stock for the ten (10) trading days immediately preceding the Closing Date. In the event that the Company obtains stockholder approval for the issuance of the Underlying Shares at $.57 per share, then such Warrant may be returned to the Company by the holder and cancelled, and a new Warrant, for the same number of shares, will be issued to the holder thereof, with the sole change to the reissued Warrant being that the exercise price thereof will be adjusted to $.57 per share.

(b) In the event that the Company does not obtain stockholder approval for the issuance of the Underlying Shares at $.57 per share, then the Purchaser will be entitled to receive a second Warrant from the Company entitling the holder thereof to purchase such number of shares of the Company’s Common Stock equal to twenty five percent (25%) of the number of Underlying Shares, at an exercise price per share equal to the average closing price of a share of Common Stock for the ten (10) trading days immediately preceding and including the date upon which such Warrant is issued by the Company. This second warrant, if issued, will be issued by the Company within ten (10) business days following the date upon which stockholder approval is not obtained.

13. INDEMNIFICATION

(a) Indemnification of Purchaser by the Company.

(1) The Company hereby agrees to indemnify and hold harmless each of the Purchaser, its affiliates and its investment advisor, if any, and their respective officers, managers, members, directors, partners, shareholders, and employees (collectively, the “Buyer Indemnitees”), from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, “Losses”), and agrees to reimburse the Buyer Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Buyer Indemnitees and to the extent arising out of or in connection with:

(i) a material misrepresentation, omission of fact or breach of any of the Company’s representations or warranties contained in this

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Agreement or the Registration Rights Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or

(ii) a material failure by the Company to perform any of its covenants, agreements, undertakings or obligations set forth in this Agreement or the Registration Rights Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement.

(2) Notwithstanding anything to the contrary in this Agreement or the Registration Rights Agreement, the aggregate payments for indemnification (including the reasonable fees and expenses of legal counsel) made by the Company to the Buyer Indemnitees pursuant to this Section 13(a) with respect to any Loss, Claim, or series of Losses or Claims, shall not exceed the Purchase Price; provided, however, that such Buyer Indemnitees shall not be entitled to indemnification payments pursuant to both Section 13 of this Agreement and Section 6 of the Registration Rights Agreement as a result of a claim which may arise under both this Agreement and the Registration Rights Agreement; further, providedthat any remedy for an Event of Default paid under either Section 8 or 10 hereto, shall not allow for indemnification pursuant to this Section 13(a) and indemnification under this Section 13(a) for any Loss or Claim shall not be deemed an Event of Default under Section 9 hereto.

(b) Indemnification of the Company by Purchaser.

The Purchaser hereby agrees to indemnify and hold harmless the Company, its affiliates and their respective officers, directors, partners and members (collectively, the “Company Indemnitees”), from and against any and all Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), to the extent arising out of or in connection with any misrepresentation, omission of fact or breach of any of the Purchaser’s representations, warranties or covenants contained in this Agreement, or the Registration Rights Agreement and any failure by the Purchaser to perform any of its covenants, agreements, undertakings or obligations set forth in this Agreement, or the Registration Rights Agreement. Notwithstanding anything to the contrary in this Agreement, the aggregate payments for indemnification (including the reasonable fees and expenses of legal counsel) made by the Purchaser to the Company pursuant to this Section 11(b) with respect to any Loss, Claim, or series of Losses or Claims, shall not exceed the Purchase Price.

(c) Third Party Claims.

Promptly after receipt by either party hereto seeking indemnification pursuant to this Section 13 (an “Indemnified Party”) of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a “Claim”), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 13 is being sought (the “Indemnifying Party”) of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is

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materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld) settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment.

(d) Notwithstanding Section 16(b) of this Agreement, the indemnification described in this Section 13 shall be the sole and exclusive remedy for any inaccuracy or breach of any representation or warranty, condition, or covenant made in this Agreement or in the Transaction Documents.

14. EXPENSES

(a) The Company covenants and agrees with the Purchaser that the Company shall pay or cause to be paid the following: (i) all expenses in connection with registration or qualification of the Underlying Shares for offering and sale under federal securities laws, and state securities laws; and (ii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section, including the fees and disbursements of the Company’s counsel, accountants and other professional advisors, if any. Additionally, the Company agrees to reimburse the investors for their legal expenses for negotiating and closing the issuance of the Notes and the Warrants and relating to the implementation of the registration rights, which expense reimbursement will not exceed $15,000 in the aggregate for all Purchasers under this Section 14(a) and Section 5 of the Registration Rights Agreement.

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(b) Other than as set forth in Section 13(a) above and in Section 5 of the Registration Rights Agreement, each of the parties hereto agree that they shall each be responsible for and pay their own expenses and fees, including all legal, accounting and other professional fees, associated with the transactions contemplated by Transaction Documents.

15. SURVIVAL

The representations and warranties of the Company and the Purchaser shall survive the Closing until such time as the Registration Statement covering the Underlying Shares has been declared effective by the SEC and available for use for at least 5 consecutive trading days after the stockholder approval contemplated by Section 4(h) has been obtained. The agreements and covenants of the Company and the Purchaser, including indemnification obligations under Section 11, shall survive the execution and delivery of this Agreement and the delivery of the Securities hereunder until the Company has satisfied in full its obligations under the terms of the Registration Rights Agreement; provided that, any claim for indemnification made under this Agreement must be made prior to the first anniversary of the Closing Date.

16. MISCELLANEOUS

(a) Subject to the subordination provisions set forth in Section 10 and to the consent of the holders of any Senior Indebtedness, the Company may, at its option, redeem the Notes in whole but not in part on any date on or after April 1, 2005, upon notice as set forth below, at a Redemption Price, payable in cash, equal to the outstanding principal amount of the Notes plus accrued and unpaid interest thereon to the applicable redemption date (the “Redemption Price”), on the date of redemption (the “Redemption Date”) if the following requirements are satisfied:

(A) the Closing Price of the Common Stock has exceeded 200% of the Conversion Price (as defined in Section 11 and as such may be adjusted from time to time) then in effect for at least 20 trading days in any consecutive 30-trading day period ending on the trading day prior to the date of mailing of the notice of redemption pursuant hereto (the “Notice Date”) and

(B) at all times from the beginning of the 30-trading day period referred to in the preceding clause (A) to the Redemption Date a registration statement under the Securities Act covering resales of the Underlying Securities, and complying with the Registration Rights Agreement, is effective and available for use by the Holders for resales of the Underlying Securities issued or issuable upon conversion of the Notes and such registration statement is expected to remain effective for the 30 days following the Redemption Date.

(2) Notice of Redemption. Notice of redemption shall be given in the manner provided in Section 16(j) hereof to the Holders of Notes to be redeemed. Such notice shall be given not less than 20 nor more than 60 days prior to the Redemption Date.

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All notices of redemption shall state:

(i) the Redemption Date;

(ii) the Redemption Price including the amount of interest accrued and unpaid to the Redemption Date, if any;

(iii) that on the Redemption Date the Redemption Price will become due and payable upon each such Note to be redeemed, and that interest thereon shall cease to accrue on and after such date;

(iv) the Conversion Price, the date on which the right to convert the principal of the Notes to be redeemed will terminate and the places where such Notes may be surrendered for conversion; and

(v) the place or places where such Notes are to be surrendered for payment of the Redemption Price.

(3) Effect of Notice of Redemption. Notice of redemption having been given as provided in Section 16(a)(2) hereof, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the applicable Redemption Price and from and after such date (unless the Company shall default in the payment of the Redemption Price) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with such notice, such Note shall be paid by the Company at the Redemption Price;

If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the Redemption Price thereof shall, until paid, bear interest from the Redemption Date at 16% per annum.

(4) Deposit of Redemption Price. Prior to or on the Redemption Date, the Company shall deposit with a United States commercial bank located in The City of New York and having capital and surplus equal to at least $500 million, to be held in trust for the Holders of Notes redeemed, an amount of money sufficient to pay the Redemption Price of all the Notes to be redeemed on the Redemption Date, other than any Notes called for redemption on the Redemption Date which have been converted in accordance with Section 11 prior to the date of such deposit.

If any Note called for redemption is converted into Common Stock in accordance with Section 11, any money so deposited and held in trust for the redemption of such Note shall (subject to any right of the Holder of such Note) be paid to the Company at the Company’s request.

(b) Mandatory Redemption. Subject to the subordination provisions set forth in Section 10 and to the consent of the holders of any Senior Indebtedness, the Purchaser has the right to require the Company to repurchase the Notes at a redemption amount equal to the greater of (1) the principal amount of the Note plus accrued interest thereon, or (2) the market value of the

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Underlying Stock, upon the occurrence of a change in control of the Company. For the purposes of this Section 16(b), “change in control” shall mean (a) any transfer (whether in one or more transactions) of ownership by James Scoroposki and Gregory Fischbach (collectively, the “Original Owners”) to a Person who is neither an Original Owner nor an affiliate of an Original Owner which would result in the beneficial ownership of the Original Owners of less than ten percent in the aggregate of the Common Stock of the Company or (b) any merger, consolidation or sale of substantially all of the property of assets of the Company.

(c) Governing Law; Jurisdiction. This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of New York, without giving effect to conflicts of laws issues. Each of the parties submits to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement or any of the transactions contemplated hereby, and hereby waives, to the maximum extent permitted by law, any objection, including any objections based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions.

(d) Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be deemed an original.

(e) Headings. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.

(f) Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or unenforceability of this Agreement in any other jurisdiction.

(g) Successors. This Agreement shall inure to the benefit of, and be binding upon the successors and assigns of each of the parties hereto.

(h) Amendments. This Agreement may be amended only by an instrument in writing signed by the parties hereto.

(i) Merger. This Agreement, together with the other Transaction Documents, supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof.

(j) Notices. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be effective upon personal delivery, via facsimile (upon receipt of confirmation of error-free transmission) or two business days following deposit of such notice with an internationally recognized courier service, with postage prepaid and addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by five days advance written notice to each of the other parties hereto.

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Company:	Acclaim Entertainment, Inc. One Acclaim Plaza Glen Cove, New York 11542 ATTENTION: Gerard Agoglia                          Chief Financial Officer Tel.: (516) 656-5000 Fax: (516) 656-2039
	with a copy to:
	Acclaim Entertainment, Inc. One Acclaim Plaza Glen Cove, New York 11542 ATTENTION: Edward M. Slezak                          Vice President, Corporate Counsel Tel.: (516) 656-2234 Fax: (516) 656-2045
Purchaser:

17. NON-DISCLOSURE

The Purchaser acknowledges that the Company is a publicly-listed company and, as such, is subject to strict regulation governing the disclosure of information relating to corporate transactions. Except as required by law, without the prior written consent of the Company, the Purchaser will not directly or indirectly, make any public comment, statement or communication to any individual or entity with respect to, or otherwise disclose the existence of discussions regarding a possible transaction between the parties or any of the terms, conditions, or other aspects of this Agreement until such time as the transaction is completed, or any confidential information provided by the Company to the Purchaser. Further, the Purchaser acknowledges that it may not trade in the securities of the Company when it is in possession of material, non-public information and that it agrees that it will not do so. The Purchaser will not use any confidential information provided by Company to the Purchaser for any purpose other than evaluating an investment by the Purchaser in the Shares. Confidential Information shall include all non-public information provided by the Company to the Purchaser, but shall not include information that (a) is now or subsequently becomes generally available to the public through no wrongful act or omission of the Purchaser, (b) the Purchaser can demonstrate to have had rightfully in its possession prior to disclosure to the Purchaser by the Company, and (c) the Purchaser rightfully obtains from a third party who has the right to transfer or disclose it. If the Purchaser is required by law, based on an opinion provided by the Purchaser’s counsel, to make any such disclosure, it shall first provide to the Company the content of the proposed disclosure, the reasons that such disclosure is required by law, and the time and place that the disclosure will be made.

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The Company and the Purchaser each recognize that in the event that any party fails to perform, observe, or discharge any or all of its obligations under this Section 16, any remedy at law may prove to be inadequate relief to the aggrieved party. The Company and the Purchaser therefore agree that an aggrieved party under this Section 16, if such party so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

IN WITNESS WHEREOF, this Agreement has been duly executed by each of the undersigned on the date first written above.

COMPANY:

ACCLAIM ENTERTAINMENT, INC.

By:

Name:

Title:

PURCHASER:

By:

Name:

Title:

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SCHEDULE 3(b)

Outstanding Derivative Securities and Related Registration Rights

As of June 29, 2003

Unexercised options issued and outstanding	13,870,883
Options reserved for future issuance	4,245,788
Total options unexercised and reserved for future issuance	18,116,671
Warrants to purchase common stock issued and outstanding	5,264,778
Shares issuable upon conversion of rights plan as of 6/29/03	8,522,241
Available and reserved for employee stock purchase plan	1,799,570
Total other	10,351,811
Total derivative securities outstanding as of the date hereof	33,733,260

Note 1: As of the date hereof, the following persons have registration rights not satisfied: Gregory Fischbach (1,125,000); James Scoroposki (1,125,000); and GMAC Commercial Credit LLC (100,000), as adjusted.

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Schedule 3(g)

The Company has granted certain registration rights to warrant holders. In connection with the filing of the registration statement contemplated by the Registration Rights Agreement, certain of such warrant holders will be entitled to piggy back registration.

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Schedule 3(n)

Pursuant to a letter agreement between HCFP/Brenner Securities, LLC and Acclaim Entertainment, Inc., dated May 29, 2003.

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EX-4.9

Exhibit 4.9

10% CONVERTIBLE SUBORDINATED NOTE

THIS NOTE IS SUBJECT TO PROVISIONS IN THE 10% CONVERTIBLE SUBORDINATED NOTE AGREEMENT DATED AS OF OCTOBER 23, 2003 FOR THE SUBORDINATION OF THIS NOTE TO SENIOR INDEBTEDNESS OF THE COMPANY, UPON ALL THE TERMS AND CONDITIONS THEREIN SPECIFIED.

ACCLAIM ENTERTAINMENT, INC.

10% Convertible Subordinated Note, due October 3, 2010

	Glen Cove, New York
[$                    ]	October 3, 2003

Acclaim Entertainment, Inc., a corporation duly organized and existing under the laws of the State of Delaware (the “Company”), for value received, hereby promises to pay to [                    ] (the “Purchaser”), or its registered assigns (the Purchaser or its assigns being the “Holder”), the principal sum of [                    ] Dollars ($                    ) on October 3, 2010 (the “Maturity”), and to pay interest (computed on the basis of a 365 day year) (i) on the unpaid principal balance thereof from the date of this Note at the rate of ten percent (10%) per annum from the date hereof, payable semi-annually on each April 15 and October 15, commencing April 15, 2004 (each semi-annual interest payment date hereinafter collectively referred to as an “Interest Payment Date”), and if unpaid thereafter shall be paid when the unpaid principal balance shall become due and payable (whether at Maturity, or by declaration, acceleration or otherwise).

The interest and principal payments payable with respect to this Note, on any Interest Payment Date, at Maturity or by declaration, acceleration or otherwise, pursuant to the Note Agreement (as defined herein), shall be paid to the Purchaser in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Such interest and principal payments shall be made to the Purchaser in accordance with the provisions of the Note Agreement.

This Note is issued pursuant to the 10% Convertible Subordinated Note Purchase Agreement, dated September 23, 2003, by and between the Company and the Purchasers listed therein (the “Note Agreement”). The Holder of this Note is subject to, and entitled to the benefits of, the Note Agreement, and may enforce the Note Agreement and exercise the remedies provided for thereby or otherwise available in respect thereof. Subject to the terms and conditions of the Note Agreement, immediately following conversion, if any, of this Note, the Holder hereto shall receive that number of shares of Common Stock as set forth in the Notice of Conversion, a form of which is attached hereto (the “Underlying Shares”).

This Note may be transferred or assigned by the Purchaser only as provided in the Note Agreement. As provided in the Note Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed by the

Purchaser or the Purchaser’s attorney duly authorized in writing, a new Note for a like aggregate principal amount and otherwise of similar tenor, will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the Holder and owner hereof for the purpose of receiving payments and for all other purposes, and the Company shall not be affected by any notice to the contrary.

In the case of an Event of Default (as defined in the Note Agreement), the principal of this Note in certain circumstances may be declared or otherwise become due and payable in the manner and with the effect provided in the Note Agreement.

This Note is subject to conversion into Common Stock, in whole or in part, pursuant to the terms and conditions of the Note Agreement and conversion shall be evidenced by a Notice of Conversion as attached hereto. This Note is not subject to prepayment or redemption by the Company prior to its expressed Maturity except as provided in Section 16(a) of the Note Agreement.

THE INDEBTEDNESS EVIDENCED BY THIS NOTE IS SUBORDINATE AND SUBJECT IN RIGHT OF PAYMENT TO THE SENIOR INDEBTEDNESS (AS DEFINED IN THE NOTE AGREEMENT), AND THIS NOTE IS ISSUED SUBJECT TO THE PROVISIONS OF THE NOTE AGREEMENT WITH RESPECT THERETO. EACH HOLDER OF THIS NOTE, BY ACCEPTING THE SAME, AGREES TO AND SHALL BE BOUND BY SUCH PROVISIONS.

CONVERSION OF THIS NOTE INTO THE UNDERLYING SHARES AT A CONVERSION PRICE OF $0.57 PER SHARE IS SUBJECT TO THE COMPANY’S RECEIPT OF THE APPROVAL OF THE STOCKHOLDERS. THE COMPANY DOES NOT REPRESENT OR WARRANT THAT IT SHALL BE ABLE TO OBTAIN SUCH APPROVAL.

No reference herein to the Note Agreement and no provision of this Note or of the Note Agreement shall alter or impair the obligation of the Company which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Note at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Note as provided in the Note Agreement.

All terms used in this Note which are defined in the Note Agreement shall have the meanings assigned to them in the Note Agreement.

This Note has been delivered to the Purchaser in New York, New York, and the Note and the Note Agreement are governed by and shall be construed and enforced in accordance with and the rights of the parties shall be governed by the law of the State of New York excluding choice-of-law principles.

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed on the date first written above.

ACCLAIM ENTERTAINMENT, INC.

By:

Title:

NOTICE OF CONVERSION

On [                             , 2003] the stockholders of Acclaim Entertainment, Inc. (the “Company”) [have/have not] approved the issuance of the Common Stock into which the 10% Convertible Subordinated Note (the “Note”) is convertible at a discount to the then current market price of the Common Stock, and the Company hereby irrevocably converts this Note into (            ) shares of Common Stock in accordance with the terms of the 10% Convertible Subordinated Note Agreement and represents that the shares issuable and deliverable upon such conversion, together with written confirmation of transmittal by wire transfer to the Holder in payment for any fractional shares and in payment of accrued, but unpaid interest on the Note.

ACCLAIM ENTERTAINMENT, INC.

By:

Title:

EX-31

Exhibit 31

CERTIFICATION

I, Rodney P. Cousens, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 17, 2003

/S/    RODNEY P. COUSENS

Rodney P. Cousens

Chief Executive Officer

1

Exhibit 31

CERTIFICATION

I, Gerard F. Agoglia, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 17, 2003

/S/    GERARD F. AGOGLIA

Gerard F. Agoglia

Chief Financial Officer

2

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Acclaim Entertainment, Inc. (the “Company”) on Form 10-Q for the quarter ended September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rodney P. Cousens, 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/    RODNEY P. COUSENS

Rodney P. Cousens

Chief Executive Officer

November 17, 2003

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Acclaim Entertainment, Inc. (the “Company”) on Form 10-Q for the quarter ended September 28, 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

November 17, 2003

2