S-1

As filed with the Securities and Exchange Commission on March 10, 2004

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

ACCLAIM ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware	7372	38-2698904
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(IRS Employer Identification No.)

One Acclaim Plaza

Glen Cove, New York 11542

(516) 656-5000

(Address and telephone number of registrant’s principal executive offices)

Gerard F. Agoglia

Chief Financial Officer

Acclaim Entertainment, Inc.

One Acclaim Plaza

Glen Cove, New York 11542

(516) 656-5000

(Name, address and telephone number of agent for service)

Copy to:

Edward M. Slezak, Esq. Corporate Counsel Acclaim Entertainment, Inc. One Acclaim Plaza Glen Cove, New York 11542 (516) 656-5000 Joel A.Yunis, Esq. Katten Muchin Zavis Rosenman 575 Madison Avenue New York, New York 10022 Telephone: (212) 940-8800

Approximate date of commencement of Proposed Sale to the Public:    From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    x

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.     ¨

CALCULATION OF REGISTRATION FEE

Title of each Class of Security to be Registered	Amount to be Registered			Proposed Maximum Aggregate Price Per Unit	Proposed Maximum Aggregate Offering Price			Amount of Registration Fee
9% Convertible Subordinated Notes due 2007	$	15,000,000		100% of the Face Value of the 9% Notes	$	15,000,000	(1)	$	1,901	(1)
Common Stock, par value $0.02 per share		29,000,000	(2)	$0.64(7)	$	18,560,000	(7)		None	(8)
Common Stock, par value $0.02 per share		32,000,000	(3)(4)	$0.64(7)	$	20,480,000	(7)	$	2,595	(7)
Common Stock, par value $0.02 per share		1,500,000	(3)(5)	$0.64(7)	$	960,000	(7)	$	122	(7)
Common Stock, par value $0.02 per share		1,000,000	(3)(6)	$0.64(7)	$	640,000	(7)	$	81	(7)

(1) Estimated, pursuant to Rule 457(i) promulgated under the Securities Act of 1933, solely for purposes of determining the registration fee. The 9% Notes are to be offered for resale from time to time by Alexandra Global Master Fund Ltd., one of the selling stockholders and the registered holder of the 9% Notes, based upon prevailing market prices.

(2) This Registration Statement covers the resale by Alexandra Global Master Fund Ltd., one of the selling stockholders and the registered holder of the 9% Notes and the placement agent for the February 2004 private placement, of up to 29,000,000 shares of common stock issuable upon the conversion of the 9% Notes and the exercise of warrants issued in the Company’s February 2004 private placement. This Registration Statement also covers an indeterminate number of shares of Acclaim Entertainment, Inc. common stock that may be issuable by reason of stock splits, stock dividends, or other adjustments under certain conditions in accordance with Rule 416 under the Securities Act of 1933. The shares may be offered from time to time by the holder of the 9% Notes based upon prevailing market prices. Pursuant to the terms of the 9% Notes and the warrants issued in connection with the February 2004 private placement, the 9% Notes and the warrants are initially, subject to adjustment, convertible or exercisable into an aggregate of 27,692,308 common shares.

(3) To be offered for resale from time to time by selling stockholders based upon prevailing market prices.

(4) This Registration Statement covers the resale by certain of the selling stockholders of up to 32,000,000 shares of common stock issuable upon the conversion of the 16% Notes (the “16% Notes”) and the exercise of warrants issued in the September/October 2003 private placement to certain qualified institutional buyers and accredited investors and the placement agent. This Registration Statement also covers an indeterminate number of shares of Acclaim Entertainment, Inc. common stock that may be issuable by reason of stock splits, stock dividends, or other adjustments in accordance with Rule 416 under the Securities Act of 1933. Pursuant to the terms of the 16% Notes and the warrants issued in connection with the September/October 2003 private placement, the 16% Notes and the warrants are initially, subject to adjustment, convertible or exercisable into an aggregate of 29,271,054 common shares.

(5) This Registration Statement covers the resale by Rodney P. Cousens, the Company’s Chief Executive Officer of 1,500,000 shares of common stock issued to Mr. Cousens for his appointment to the position of Chief Executive Officer of the Company and in accordance with the approval by the Company’s stockholders at the Company’s 2003 Annual Meeting of stockholders. This Registration Statement also covers an indeterminate number of shares of Acclaim Entertainment, Inc. common stock that may be issuable by reason of stock splits, stock dividends, or other adjustments in accordance with Rule 416 under the Securities Act of 1933.

(6) This Registration Statement covers the resale by Gregory Fischbach and James Scoroposki, the Company’s Co-Chairmen, of 1,000,000 shares (500,000 to each of Mr. Fischbach and Mr. Scoroposki) issuable upon the exercise of warrants granted to Mr. Fischbach and Mr. Scoroposki. This Registration Statement also covers an indeterminate number of shares of Acclaim Entertainment, Inc. common stock that may be issuable by reason of stock splits, stock dividends, or other adjustments in accordance with Rule 416 under the Securities Act of 1933.

(7) The proposed maximum aggregate price per unit was estimated pursuant to Rule 457(c) promulgated under the Securities Act of 1933, solely for the purpose of determining the registration fee, based on the average of high and low prices of the registrant’s common stock as quoted on The Nasdaq SmallCap Market System on March 8, 2004.

(8) Pursuant to Rule 457(l), no additional fee is payable with respect to these securities.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION

DATED MARCH 10, 2004

PROSPECTUS

Acclaim Entertainment, Inc.

$15,000,000

9% Convertible Subordinated

Notes Due 2007

and

63,500,000 Shares of Common Stock

This prospectus covers the resale of (i) $15,000,000 of 9% Convertible Subordinated Notes held by Alexandra Global Master Fund Ltd., one of the selling stockholders and the registered holder of such 9% Notes and (ii) 63,500,000 shares of our common stock by the selling stockholders named in this prospectus. Acclaim will not receive any proceeds from the sale of the Notes or any shares of common stock by the selling stockholders; however, we may receive proceeds from the exercise of warrants issued to certain of the selling stockholders. See “Selling Stockholders” and “Plan of Distribution.”

See “Risk Factors” beginning on page 5 for a discussion of investment risk factors that you should consider before you invest in the common stock offered and sold by this prospectus.

Our common stock is traded on The Nasdaq SmallCap Market System under the symbol “AKLM.” On March 3, 2004, the last reported sale price of the common stock was $0.59 per share. The 9% Notes are not listed for trading on any securities exchange and there is no established trading market for the 9% Notes.

The 9% Notes and the shares of common stock offered in this Prospectus involve a high degree of risk. You should carefully consider the “Risk Factors” beginning on page 5, in determining whether to purchase the 9% Notes and/or shares of our common stock.

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

                         , 2004

TABLE OF CONTENTS

	Page Number
INFORMATION ABOUT ACCLAIM	1
RISK FACTORS	5
DESCRIPTION OF BUSINESS	14
SELECTED CONSOLIDATED FINANCIAL DATA	24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
RELATED PARTY TRANSACTIONS	57
DESCRIPTION OF SECURITIES	60
DESCRIPTION OF THE 9% NOTES	63
PRINCIPAL AND SELLING STOCKHOLDERS	72
USE OF PROCEEDS	80
PLAN OF DISTRIBUTION	80
PROPERTIES	82
DIRECTORS AND EXECUTIVE OFFICERS	82
EXECUTIVE COMPENSATION	86
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT	90
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	92
LEGAL PROCEEDINGS	94
LEGAL MATTERS	94
EXPERTS	95
FORWARD-LOOKING STATEMENTS	96
WHERE YOU CAN FIND MORE INFORMATION	96

i

Summary of the Terms of the Notes

The 9% Senior Subordinated Convertible Notes (the “9% Notes”) may be offered and sold from time to time by Alexandra Global Master Fund, Ltd., one of the selling stockholders and the registered holder of the 9% Notes, who we refer to as the “Holder”. The 9% Notes were issued by the Company in a privately-negotiated transaction pursuant to the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

The 9% Notes are convertible into shares of our common stock, $.02 par value per share of the Company at any time after February 17, 2004 and prior to the maturity of the 9% Notes, unless previously redeemed by the Company, at an initial conversion price of $.65 per share, subject to adjustment under certain conditions. See Description of 9% Notes—Conversion for a description of events which may cause an adjustment to the conversion price. The 9% Notes have not been listed on any securities exchange, we do not intend to so list them and we are not aware of any trading market for the 9% Notes.

This Prospectus also covers, among other things (i) the issuance by the Company to the Holder shares of Common Stock issuable upon conversion of the 9% Notes and (ii) the resale of such shares by the Holder. Interest on the 9% Notes is payable on April 1 and October 1 of each year, commencing October 1, 2004. The 9% Notes are redeemable, in whole or in part, at the option of the Company at any time on or after August 18, 2004, at the redemption prices set forth therein, plus accrued interest, if any, to the redemption date. If a Repurchase Event (as defined in the Indenture and/or the Supplemental Indenture under which the 9% Notes were issued) occurs, each Holder of the 9% Notes will have the right, subject to certain conditions and restrictions, to require the Company to repurchase all outstanding 9% Notes, in whole or in part, owned by such Holder at 100% of their principal amount plus accrued interest, if any, to the date of repurchase. Such repurchases would require the consent of the holder of our senior indebtedness, GMAC Commercial Finance LLC. The 9% Notes are subordinated to all existing and future Senior Indebtedness (as defined in the Indenture and/or the Supplemental Indenture) of the Company. The 9% Notes are governed by an Indenture and a First Supplemental Indenture, each dated February 17, 2004, between the Company and U.S. Bank Trust National Association, as trustee. See Description of 9% Notes.

The Company will not receive any proceeds from the sale of the 9% Notes (or the shares issuable upon conversion thereof) by the Holder.

INFORMATION ABOUT ACCLAIM

Acclaim Entertainment, Inc. was founded in 1987 as a Delaware corporation, and maintains operations in the United States, the United Kingdom, Germany, France, Spain and Australia. We develop, publish, market and distribute, under our brand names, interactive entertainment software for a variety of hardware platforms, including Sony’s PlayStation^® 2, Microsoft’s Xbox^™, and, on a more limited basis, Nintendo’s GameCube^™ and Game Boy^™ Advance and personal computer systems. We develop software internally, as well as engaging third parties to develop software on our behalf. We internally develop our software products through our five software development studios located in the United States and the United Kingdom. Additionally, we contract with independent software developers to create software products for us.

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

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

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

Create and Maintain Diversity in Title Mix, Platforms and Markets.

We strive to develop and publish games spanning a wide range of entertainment categories, including action, action adventure, strategy, stealth, extreme sports, sports and racing, which can be played on the current videogame systems, including Sony’s PlayStation^® 2, Microsoft’s Xbox^™, Nintendo’s GameCube^™ console system and Nintendo’s Game Boy^™ Advance hand held device as well as personal computers. We may design our software for use on multiple platforms, where economically justified, in order to reach a greater potential audience. Accordingly, there are a number of factors that we take into consideration in determining the appropriate gaming systems for each of the titles we develop, including, amongst other things, the gaming system’s user demographics, the potential growth of the installed base of each game system and the competitive landscape at the time of a product’s release.

Create, Acquire and Maintain Strong Brands.

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

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Product Selection and Development Processes.

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

In-house Development Group and External Development Resources.

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

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

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

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

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

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

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

We utilize a brand structure and market our products under distinct key brands including: Acclaim, AKA Acclaim, and Acclaim Sports. We support this strategy through the regularly scheduled introduction of new titles featuring these brands. In the nine months ended December 28, 2003, we released a total of 37 titles for PlayStation 2, Xbox, GameCube, Game Boy Advance and personal computers. In the balance of fiscal 2004 and through fiscal 2005, we currently plan on releasing a total of approximately 50 titles for PlayStation 2, Xbox, Gamecube and personal computers. See “Risk Factors: Our Future Success Depends on our Ability to Release Popular Products.”

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

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

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

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

We market our software domestically, primarily to mass merchants, large retail toy store chains, and specialty stores. Our key domestic retail customers include Wal-Mart, Toys R Us, Best Buy, Electronics Boutique, GameStop, Target and Circuit City. We also reach the rental market through Blockbuster, Movie Gallery and Hollywood Video. Our sales to Wal-Mart accounted for approximately 2%, 6%, 10%, 12% and 15% of our gross revenue for the nine months ended December 28, 2003, seven months ended March 31, 2003, fiscal 2002, 2001 and 2000, respectively. Sales to Toys R Us accounted for approximately 2%, 8%, 9%, 11% and 10% of our gross revenue for the nine months ended December 28, 2003, seven months ended March 31, 2003, fiscal 2002, 2001 and 2000, respectively. Our customers do not have any commitments to purchase our software. Internationally, we administer the sales, marketing, and distribution activities of our European subsidiaries through a central management division, Acclaim Europe, based in London. For sales in other markets, we appoint regional distributors.

Some of our titles are based upon brands or franchises that we have licensed from third parties, such as Major League Baseball, the National Basketball Association and their respective players’ associations and Disney Interactive. Typically, we are obligated to make certain non-refundable advance payments against royalties that may become due from the sales of the games, which embody such licensed rights. We can recoup these advance payments against royalty payments otherwise due in connection with future software sales. License agreements relating to these rights generally extend for a term of anywhere from two to seven years. These agreements are terminable upon the occurrence of a number of factors, including our material breach of the agreement, failure to pay amounts due to the licensor in a timely manner, bankruptcy or insolvency. Some of these licenses are limited to specific territories and/or specific game platforms. Each license typically provides that the licensor retains the right to exploit the licensed property for all other purposes, including the right to license the property for use with other products and, in some cases, software for other game platforms. From time to time, licenses may not be renewed or may be terminated. See “Risk Factors: Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales”.

Each title may embody a number of separately protected intellectual properties such as the trademark for the brand featured in the software, the software copyrights, the name and label trademarks, and the copyright for Sony’s, Microsoft’s and Nintendo’s proprietary technical information. We have registered the “Acclaim” logo and name in the United States and in numerous foreign territories and we own the copyrights for many of our game programs. “Nintendo,” “Game Boy,” “Game Boy Color,” “GameCube,” “Game Boy Advance,” and “N64” are trademarks of Nintendo; “Sony,” “Sony Computer Entertainment,” “PlayStation,” and “PlayStation 2” are trademarks of Sony; “Microsoft” and “Xbox” are trademarks of Microsoft and “Sega,” “Saturn” and “Dreamcast” are trademarks of Sega. We do not own the trademarks, copyrights or patents covering the

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proprietary information and technology utilized in the game systems marketed by Sony, Microsoft or Nintendo. Additionally, in certain instances, we do not own the trademarks, copyrights or patents for properties licensed from third parties, or the brands, concepts or game programs featured in and comprising the software. Accordingly, we must rely on the trademarks, copyrights and patents of these third-party licensors for protection from infringement of such intellectual property. Under our license agreements with certain independent software developers, we may bear the risk of claims of infringement brought by third parties and arising from the sale of our software.

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.

On December 28, 2003, we had 560 employees. We believe that our relationship with our employees is good. None of our employees are subject to a collective bargaining agreement, and we have not experienced any labor-related work stoppages.

You should not use historical trends or factors affecting our operating results and financial condition to anticipate results or trends in future periods. See “Risk Factors” below. Also, you should not consider historic financial performance as a reliable indicator of future performance.

Our principal executive offices are located at One Acclaim Plaza, Glen Cove, New York 11542, and our main telephone number is (516) 656-5000. Our Internet website is: http://www.acclaim.com. Information contained on our website should not be deemed part of this prospectus.

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RISK FACTORS

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

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

Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with 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 $11.0 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. In June 2003, we completed a private placement of approximately 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 our 16% convertible subordinated notes, resulting in gross proceeds of $11.9 million. As of December 28, 2003, our primary lender had advanced to us a supplemental discretionary loan of $4.0 million. In February 2004, we completed the sale of our 9% senior convertible subordinated notes from which we raised gross proceeds of $15.0 million. We are required to make semiannual interest payments on the notes issued in the September, October and February note offerings, unless such notes are converted into common stock.

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, (3) continue to enjoy the support of our primary lender and vendors and (4) register with the SEC the common shares underlying the September/October 2003 and the February 2004 convertible notes financings. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, and continue to realize additional benefits from the expense reductions we have implemented, 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 register with the SEC the shares underlying the September/October 2003 and February 2004 convertible notes financings, 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.”

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

As of December 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 nine months ended December 28, 2003 we had a net loss of $31.0 million and used $16.1 million of cash in operating activities. As of December 28, 2003, we had a stockholders’ deficit of $63.9 million, a working capital deficit of $68.9 million and $5.8 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 nine months of fiscal 2004. Our operating plan for the remainder of fiscal 2004 and fiscal 2005 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 or 2005 net revenues and cash flow from operations 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 fail to comply with 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 December 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

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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.

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.

On January 21, 2004, we received a letter from Nasdaq indicating that the Company had been granted an extension, until January 24, 2005, within which to regain compliance with the minimum $1.00 bid price per share requirement of The Nasdaq SmallCap Market. In the notice, the Nasdaq staff noted that since the Company meets the initial inclusion criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c), it is eligible for this additional compliance period. However, if prior to January 24, 2005, the bid price of the Company’s common stock does not close at $1.00 per share or more for a minimum of 10 consecutive trading days, then the Company is required to (1) seek shareholder approval for a reverse stock split at or before its next shareholder meeting and (2) promptly thereafter effectuate the reverse stock split. The Company has committed in writing to Nasdaq to effectuate those measures in the event compliance is not achieved prior to January 24, 2005. If at any time before January 24, 2005, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Nasdaq staff will provide notification that the Company complies with Marketplace Rule 4310(c)(8)(D). The Company cannot provide any assurance that it will receive an affirmative vote of its stockholders authorizing a reverse stock split, if required, nor that the Company will regain compliance with the minimum bid price requirement.

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. In addition, the delisting of our common stock would raise the interest rate on our 9% Senior Subordinated Convertible Notes to 13% from 9%.

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 business plan for the fourth quarter of fiscal 2004 or fiscal 2005.

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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.

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 nine months of fiscal 2004, approximately 50% of our gross revenue was derived from five software products. In fiscal 2003, approximately 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

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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 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 nine months ended December 28, 2003 were lower than the nine months ended December 1, 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 nine months 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. The release schedule for the remainder of fiscal 2004 and through fiscal 2005 continues to primarily support the PlayStation 2 and Xbox consoles and on a more limited basis the GameCube and Game Boy Advance platforms as well as PC. Additionally, we will be required to expend significant funds to develop tools and engines to enable us to develop software titles for the new hardware platforms expected to be introduced in calendar years 2005 and 2006. If we do not have sufficient cash to develop quality tools and engines for the new platforms, our operations and financial results would be negatively affected.

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

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of product shipment, taking into account the potential for price concessions and product returns based primarily on: market acceptance of products; 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.

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 life 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 $32.4 million as of December 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 unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

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 (especially Microsoft and Sony) (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.

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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. Furthermore, some of our competitors have significantly greater resources than we do and, thus, are better positioned to secure intellectual property licenses. We cannot assure stockholders that our licenses will be extended on reasonable terms or at all, or that we will be successful in acquiring or renewing licenses to property rights with significant commercial value.

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

We Depend On Skilled Personnel

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

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;

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• 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.

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.

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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.

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

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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 March 3, 2004, we had 113,403,810 shares of common stock issued and outstanding, (including 4,000,000 shares of our common stock issued in equal amounts to our co-chairmen, which shares are being held by us pending stockholder approval of the issuance and which our co-chairmen 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 March 3, 2004, 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 March 3, 2004, a total of 20,285,124 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 December 28, 2003, options to purchase a total of 13,148,684 shares of common stock were outstanding under the 1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which 4,776,886 were exercisable.

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

DESCRIPTION OF BUSINESS

Overview

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

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

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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 outside those territories to distribute and market our software to many other territories throughout the world. As an additional aspect of our business, we distribute software products that have been developed by third parties. A less significant aspect of our business is the development and publication of strategy guides relating to our software products and the issuance of certain “special edition” comic magazines to support certain of our brands.

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

Substantially all of our revenue is derived from one industry segment, the development, publication, marketing and distribution of interactive entertainment software. For information regarding our foreign and domestic operations, see Note 22 (Segment Information) of the notes to the Consolidated Financial Statements on page F-66 of this prospectus.

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K may be found on our website at www.acclaim.com.

Strategy

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

Create and Maintain Diversity in Product Mix, Platforms and Markets. We are committed to maintaining a diversified mix of product offerings which mitigates our operating risks, and broadens our demographic market appeal. See “Risk Factors: We Depend on a Relatively Small Number of Franchises for a Significant Portion of Our Revenue and Profits.” Therefore, we strive to develop and publish games spanning a wide range of entertainment categories, including action, action adventure, extreme sports, sports and racing, which can be played on the current videogame systems, including Sony’s PlayStation^® 2, Microsoft’s Xbox^™, Nintendo’s GameCube^™ console systems and Nintendo’s Game Boy^™ Advance hand held device as well as personal computers. We may design our software for use on multiple platforms, where economically justified, in order to reach a greater potential audience. Accordingly, there are a number of factors that we take into consideration in determining the appropriate gaming system for each of the titles we develop, including, amongst other things, the gaming system’s user demographics, the potential growth of the installed base of each game system and the competitive landscape at the time of a product’s release.

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

Disciplined Product Selection and Development Processes. The success of our publishing business depends, in significant part, on our ability to develop games that will generate high unit volume sales while simultaneously meeting our quality standards. Our publishing units use a formal control process (The Greenlight

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Process) for the selection, development, production and quality assurance of our products. We apply this process to products under development with external, as well as internal, resources. This Greenlight Process includes upfront concept evaluation as well as in-depth reviews of each project at numerous intervals during the development process by a team that includes senior management and a number of operating managers from our brand management, sales, marketing, and product development areas.

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

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

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

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

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

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

Software Development

During the nine months ended December 28, 2003, approximately 42% of our gross revenue was derived from software developed at our internal studios. The balance of our gross revenue for the nine months ended December 28, 2003 was derived from software developed by third-party developers. Through the balance of fiscal 2004 and the first six months of fiscal 2005, we estimate that the majority of our revenue will be derived from software developed in our own studios, through the release of our major franchise titles such as Alias, All Star Baseball, Legends of Wrestling: Showdown, NBA Jam, The Red Star and 100 Bullets.

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

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

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

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Products

We utilize a brand structure and market our titles under distinct key brands including Acclaim, AKA Acclaim, and Acclaim Sports. We support this strategy through the regularly scheduled introduction of new titles featuring these brands. In the nine months ended December 28, 2003, we released a total of 37 titles for PlayStation 2, Xbox, GameCube, Game Boy Advance and personal computers. Through the balance of fiscal 2004 and through the first six months of fiscal 2005, we currently plan on releasing a total of approximately 50 titles for PlayStation 2, Xbox, Gamecube, Game Boy Advance and personal computers. In fiscal 2004, we have released, to date, 12 titles for PlayStation 2, 12 titles for Xbox, 5 titles for Gamecube, 3 titles for Nintendo Game Boy and 5 titles for PC. See “Risk Factors: Our Future Success Depends on our Ability to Release Popular Products”.

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

Our titles incorporate a variety of exclusive and non-exclusive licenses, including:

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

• Television and film—Alias;

• Sports personalities—Derek Jeter and Hulk Hogan;

• Extreme sports personalities—Dave Mirra;

• Racing—Juice, Speed Kings and XGRA;

• Arcade—Crazy Taxi; and

• Comic books—100 Bullets, Turok, Shadowman and The Red Star.

Some of the agreements granting us the rights to use these brands are restricted to individual properties, while some of the agreements cover a series of properties or grant rights to create software based on or featuring particular licenses over a period of time. See “Risk Risk Factors: Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales” and Note 2 (License Agreements) to the Notes to the consolidated financial statements included herein.

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

	Nine Months Ended December 28, 2003	Seven Months Ended March 31, 2003	Fiscal Years Ended August 31,
			2002	2001	2000
Microsoft Xbox	12	6	6	—	—
Nintendo GameCube	5	8	13	—	—
Sony PlayStation 2	12	9	11	9	—
Sony PlayStation	—	—	—	12	9
Nintendo 64	—	—	—	—	10
Sega Dreamcast	—	—	—	5	16
Nintendo Game Boy	3	4	11	6	9
PC	5	1	1	3	4
Total	37	28	42	35	48

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Market

We do, and will continue to, develop and publish products for multiple hardware platforms, as this diversification is a key element of our business strategy. In the past, no hardware platform or video game system has achieved substantial long-term dominance in the interactive entertainment market, however, Sony Playstation 2 maintains the largest installed base of console systems. New entrants into the interactive entertainment and multimedia industries, such as cable television, telephone companies, and diversified media and entertainment companies, in addition to a proliferation of new technologies, such as online networks and the Internet, have increased the competition in our markets. See “Risk Factors: Industry Trends, Platforms Transitions and Technological Change May Adversely Affect Our Revenue and Profitability” and “Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition with the Hardware Manufacturers Affects Our Revenue and Profitability.”

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

Platform License Agreements

We and various Sony computer entertainment companies (collectively, “Sony”) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the “Sony” name and its proprietary information and technology in order to develop and distribute software for PlayStation and PlayStation 2 in various territories throughout the world, including North America, Australia, Europe and Asia. We pay to Sony a royalty fee, plus the manufacturing cost, for each unit Sony manufactures for us. This payment is made upon the manufacture of the units. In March 2004, our agreements with Sony for the Playstation platforms will renew automatically and expire in March 2005. We do not expect any difficulties in renewing these licenses in the future. See “Risk Factors: If We are Unable to Obtain or Renew Licenses from Hardware Companies, We Will Not be Able to Release Software for Popular Systems.”

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

Acclaim and Microsoft have entered into an agreement pursuant to which we have a non-exclusive, non-transferable license to design, develop and distribute software for the Xbox system. Territories where Xbox software may be distributed by us are determined on a title-by-title basis by Microsoft when the concept of the applicable software title is approved by Microsoft. We pay Microsoft a royalty fee for each unit of finished products manufactured on our behalf by third-party manufacturers approved by Microsoft. Our agreement with

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Microsoft expires in 2004 and renews automatically for 1 year terms. We do not expect any difficulties in renewing that license. See “Risk Factors: If We are Unable to Obtain or Renew Licenses from Hardware Companies, We Will Not be Able to Release Software for Popular Systems.”

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

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

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

Marketing and Advertising

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

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

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

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

• Product sampling through demonstration software;

• Consumer contests and promotions;

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

• Publicity activities; and

• Trade shows.

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

Online, Broadband and Wireless Technologies

We think that there will be opportunities for further exploitation of our intellectual properties through the Internet, online services, hand held and other wireless devices and dedicated Internet online game services, as the

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hardware platform technology evolves and becomes more accepted. We are actively exploring the establishment of online game playing opportunities for the Internet and wireless services as (1) a method for realizing additional revenue from our products and (2) an additional platform for our products. We also plan to develop online components which will support online play for certain of our existing franchises, as well as for new software titles currently being developed for the next generation platforms. As an example, we intend to release an online version of All-Star Baseball 2005, Worms 3D, ATV Quad Power Racing 3 and Juice for one or more of the game platforms. As wireless and online technologies evolve, we think that a number of our intellectual properties may have the potential to be exploited through these mediums.

Manufacturing

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

Production, Sales and Distribution

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

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

We distribute our software by tailoring our distribution methods to each geographic market. In North America, our software is sold directly by our sales force, complemented by regional sales representative organizations which receive commissions based on the net sales of each product sold. We maintain an in-house sales management team to supervise the regional sales representatives. These sales representatives also act as sales representatives for some of our competitors. One of the sales representative organizations marketing our software is owned by James Scoroposki, an officer, director and principal stockholder of Acclaim.

We market our software domestically, primarily to mass merchants, large retail toy store chains, and specialty stores. Our key domestic retail customers include Wal-Mart, Toys R Us, Best Buy, Electronics Boutique, GameStop, Target and Circuit City. We also reach the rental market through Blockbuster, Movie Gallery and Hollywood Video. Our sales to Wal-Mart accounted for approximately 2%, 6%, 10%, 12% and 15% of our gross revenue for the nine months ended December 28, 2003, seven months ended March 31, 2003, fiscal 2002, 2001 and 2000, respectively. Sales to Toys R Us accounted for approximately 2%, 8%, 9%, 11% and 10% of our gross revenue for the nine months ended December 28, 2003, seven months ended March 31, 2003, fiscal 2002, 2001 and 2000, respectively. Our customers do not have any commitments to purchase our software.

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

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

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

Intellectual Property Licenses

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

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

Patent, Trademark, Copyright and Product Protection

Each hardware manufacturer incorporates a security device in the software and in each of their respective hardware platforms. This is done in an effort to prevent unlicensed manufacture of software and infringement of the hardware manufacturers proprietary rights. Under our various license agreements with Sony, Microsoft and Nintendo, we are obligated to obtain all available trademark, copyright and patent protection for the original work we develop and embody in, or use in conjunction with, the software we create. We are also required to display on game packaging materials the proper notice of such protection, as well as notice of the licensor’s intellectual property rights.

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

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

Competition

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

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

Data derived from the Toy Retail Sales Tracking Service (“TRSTS”) indicates that, for calendar 2003, our market share of software sold for PlayStation 2 was 1.6%, for Xbox was 1.9%, for GameCube was 2.2% and for PCs was 0.8%. For calendar 2002, our market share of software sold for PlayStation 2 was 3.1%, for Xbox was 2.6%, for GameCube was 4.4% and for Game Boy Advance was 1.6%. The market for software for PCs is fragmented and we have a small share of that market.

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

• Availability of significant financial resources;

• The quality of titles;

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

• Publisher’s access to retail shelf space;

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

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• The price of each title;

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

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

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

Comic Book and Other Publishing

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

Seasonality

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

Employees

On December 28, 2003 we had 560 employees. We believe that our relationship with our employees is good. None of our employees are subject to a collective bargaining agreement, and we have not experienced any labor-related work stoppages.

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements, and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this prospectus. We derived the consolidated statements of operations data for the fiscal years ended August 31, 1999 and August 31, 1998 and the consolidated balance sheet data as of August 31, 2000, August 31, 1999 and August 31, 1998 from our audited consolidated financial statements not included in this prospectus. We derived the consolidated statements of operations data for the seven months ended March 31, 2003 and for the fiscal years ended August 31, 2002, August 31, 2001 and August 31, 2000 and the consolidated balance sheet data as of March 31, 2003, August 31, 2002 and August 31, 2001, from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the nine months ended December 28, 2003 and December 1, 2002 and seven months ended March 31, 2002 and the consolidated balance sheet data as of December 28, 2003 and December 1, 2002 from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statement data includes, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation. The historical results are not necessarily indicative of future operating results.

	Nine Months Ended						Seven Months Ended						Fiscal Years Ended
	December 28, 2003			December 1, 2002			March 31, 2003			March 31, 2002			August 31, 2002			August 31, 2001			August 31, 2000			August 31, 1999			August 31, 1998
	(Unaudited)			(Unaudited)						(Unaudited)
	(In thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenue	$	113,688		$	180,060		$	101,589		$	160,188		$	268,688		$	197,568		$	188,626		$	430,974		$	326,561
Cost of revenue		60,320			92,614			76,507			62,891			118,386			62,023			105,396			200,980			148,660
Gross profit		53,368			87,446			25,082			97,297			150,302			135,545			83,230			229,994			177,901
Operating expenses
Marketing and selling		21,908			52,045			32,295			30,132			57,892			31,631			71,632			72,245			61,691
General and administrative		26,503			32,258			24,549			25,165			43,374			40,839			56,378			64,322			50,848
Research and development		27,492			36,994			25,392			23,133			44,139			39,860			57,410			50,452			37,367
Stock-based compensation		945			—			—			—			—			—			—			—			—
Restructuring charges		227			—			4,824			—			—			—			—			—			—
Impairment on building held for sale		—			—			2,146			—			—			—			—			—			—
Litigation recovery		—			—			—			—			—			—			—			(1,753	)		—
Goodwill writedown		—			—			—			—			—			—			17,870			—			—
Total operating expenses		77,075			121,297			89,206			78,430			145,405			112,330			203,290			185,266			149,906
(Loss) earnings from operations		(23,707	)		(33,851	)		(64,124	)		18,867			4,897			23,215			(120,060	)		44,728			27,995
Other income (expense)
Interest expense, net		(3,516	)		(3,592	)		(3,317	)		(4,119	)		(5,765	)		(10,172	)		(7,691	)		(6,344	)		(6,832	)
Non-cash financing expense		(3,085	)		(579	)		(756	)		(1,182	)		(1,504	)		(350	)		—			—			—
(Loss) gain on early retirement of debt		—			—			—			(1,221	)		(1,221	)		2,795			—			—			—
Other income (expense)		(740	)		(1,423	)		201			(843	)		(1,660	)		1,699			(3,902	)		646			291
Total other expense		(7,341	)		(5,594	)		(3,872	)		(7,365	)		(10,150	)		(6,028	)		(11,593	)		(5,698	)		(6,541	)
(Loss) earnings before income taxes		(31,048	)		(39,445	)		(67,996	)		11,502			(5,253	)		17,187			(131,653	)		39,030			21,454
Income tax (benefit) provision		—			121			(191	)		(944	)		(720	)		(106	)		91			2,972			764
Net (loss) earnings	$	(31,048	)	$	(39,566	)	$	(67,805	)	$	12,446		$	(4,533	)	$	17,293		$	(131,744	)	$	36,058		$	20,690
Net (loss) earnings per share data:
Basic	$	(0.30	)	$	(0.43	)	$	(0.73	)	$	0.15		$	(0.05	)	$	0.29		$	(2.36	)	$	0.66		$	0.40
Diluted	$	(0.30	)	$	(0.43	)	$	(0.73	)	$	0.14		$	(0.05	)	$	0.26		$	(2.36	)	$	0.57		$	0.37
Ratio of earnings to fixed charges(1)(2)		N/A			N/A			N/A			2.8			N/A			2.5			N/A			4.5			3.2
Deficiency in coverage of fixed charges	$	(31,048	)	$	(39,445	)	$	(67,996	)	$	—		$	(5,253	)	$	—		$	(131,653	)	$	—		$	—

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	December 28, 2003			December 1, 2002			March 31, 2003			August 31,
										2002			2001			2000			1999		1998
	(Unaudited)			(Unaudited)
Consolidated Balance Sheet Data:
Working capital (deficiency)	$	(68,903	)	$	(18,512	)	$	(63,496	)	$	(7,287	)	$	(39,413	)	$	(76,769	)	$	29,391	$	(19,100	)
Total assets		58,181			127,601			79,937			182,895			125,630			93,093			271,248		178,868
Short-term debt		20,690			19,398			35,399			54,508			54,653			30,108			27,652		20,669
Long-term debt		9,539			4,617			632			4,737			14,473			55,847			51,732		53,041
Stockholders’ (deficit) equity		(63,892	)		5,682			(46,158	)		19,355			(20,355	)		(93,980	)		31,359		(21,773	)

(1) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as (loss) earnings before income taxes plus fixed charges. Fixed charges include interest expense on all indebtedness, non-cash financing expenses associated primarily with the amortization of financing costs and approximately 30% of rental expense on operating leases representing that portion of rental expense deemed to be attributable to interest.

(2) The ratio of earnings to fixed charges was less than one for the nine months ended December 28, 2003 and December 1, 2002, the seven months ended March 31, 2003, the fiscal year ended August 31, 2002 and August 31, 2000 due to the (loss) earnings before income taxes in those periods.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this prospectus, 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 prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “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 “Risk Factors.”

In January 2003, our Board of Directors approved a plan to change our fiscal year end from August 31 to March 31. Our fiscal year 2003 period consists of seven months commencing September 1, 2002 and ending March 31, 2003 and is not comparable to our fiscal years ended August 31, 2002, 2001, 2000, 1999 and 1998 which were all twelve month periods. 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 included herein include our results of operations for the nine month period ended December 28, 2003, and the most comparable reported period of the prior year, the nine month period ended December 1, 2002. We have presented the nine month period ended December 1, 2002 as a prior year comparative to the current year period 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.

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 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

26

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 unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

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 unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein, 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. 104, “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 title transfers to the retail customers. Because we generally 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 generally 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. For product shipped on consignment, we recognize revenue when the customer provides persuasive evidence that the product has been resold and the customer pays for the product that has been resold.

Allowances for Price Concessions and Returns

We are generally not contractually obligated and generally do not accept returns, except for defective product. However, we grant price concessions to our customers who primarily are major retailers that control

27

market access to the consumer when those concessions are necessary to maintain our relationships with the retailers and gain 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 generally will provide a price concession or credit to spur further sales by the retailer to maintain the customer relationship. In circumstances when, a price concession cannot be agreed upon, we generally will accept a product return. 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.

The level of consumer market acceptance a software title enjoys is the most important indicator of the level of price concessions and returns we will grant retail customers for that title. When consumer market acceptance decreases for a title, evidenced by lower unit retail sell-through, the potential for price concessions and returns for that title increases. As retail sell-through is the most important indicator of consumer market acceptance, we use monthly retail sell-through statistics as a primary factor in estimating the allowance for price concessions and returns. In addition to sell-through rates, the price at which a software title was sold to customers and the number of units remaining in the retail channel have a significant impact on our estimate of future price concessions and returns. 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 nine months ended December 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

28

actual future sales and those projected may result in the amount and timing of royalty expense to vary. For example, if the non-refundable prepaid royalty balance to a licensor was $3.0 million, the royalty rate as a percentage of net revenue was 10% and projected net revenue of the software title utilizing the license was $30.0 million, we would deem the non-refundable royalty advance fully recoverable and record no expense to write down the prepaid royalty to net realizable value. If the projected net revenue of the software title were $20.0 million, we would write-off as an expense $1.0 million of the non-refundable prepaid royalty balance. We classify royalty advances as current or noncurrent assets based on the portion of estimated future net product sales that are expected to occur within the next fiscal year.

Capitalized Software Development Costs

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

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

Operating Results

Summarized below are our operating results for the nine months ended December 28, 2003 and December 1, 2002, the seven months ended March 31, 2003 and March 31, 2002, the fiscal years ended August 31, 2002, 2001, and 2000, and the related changes in operating results between those periods. You should read the tables below together with the consolidated financial statements and the related notes to the consolidated financial statements included herein.

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Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

	Nine Months Ended						Changes 2003 Versus 2002
	December 28, 2003			December 1, 2002			$			%
	(Unaudited)			(Unaudited)
	(Dollars in thousands)
Net revenue	$	113,688		$	180,060		$	(66,372	)	-36.9	%
Cost of revenue		60,320			92,614			(32,294	)	-34.9	%
Gross profit		53,368			87,446			(34,078	)	-39.0	%
Operating expenses
Marketing and selling		21,908			52,045			(30,137	)	-57.9	%
General and administrative(1)		26,503			32,258			(5,755	)	-17.8	%
Research and development		27,492			36,994			(9,502	)	-25.7	%
Stock-based compensation		945			—			945		NA
Restructuring charges		227			—			227		NA
Total operating expenses		77,075			121,297			(44,222	)	-36.5	%
Loss from operations		(23,707	)		(33,851	)		10,144		-30.0	%
Other income (expense)
Interest expense, net		(3,516	)		(3,592	)		76		-2.1	%
Non-cash financing expense		(3,085	)		(579	)		(2,506	)	432.8	%
Other expense		(740	)		(1,423	)		683		-48.0	%
Total other expense		(7,341	)		(5,594	)		(1,747	)	31.2	%
Loss before income taxes		(31,048	)		(39,445	)		8,397		-21.3	%
Income tax provision		—			121			(121	)	-100.0	%
Net loss	$	(31,048	)	$	(39,566	)	$	8,518		-21.5	%

(1) Excludes stock-based compensation of $945.

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

	Seven Months Ended						Changes Fiscal 2003 Versus Fiscal 2002
	March 31,			March 31,
	2003			2002			$			%
				(Unaudited)
	(Dollars in thousands)
Net revenue	$	101,589		$	160,188		$	(58,599	)	-36.6	%
Cost of revenue		76,507			62,891			13,616		21.7	%
Gross profit		25,082			97,297			(72,215	)	-74.2	%
Operating expenses
Marketing and selling		32,295			30,132			2,163		7.2	%
General and administrative		24,549			25,165			(616	)	-2.4	%
Research and development		25,392			23,133			2,259		9.8	%
Restructuring charges		4,824			—			4,824		NA
Impairment on building held for sale		2,146			—			2,146		NA
Total operating expenses		89,206			78,430			10,776		13.7	%
(Loss) earnings from operations		(64,124	)		18,867			(82,991	)	-439.9	%
Other income (expense)
Interest expense, net		(3,317	)		(4,119	)		802		-19.5	%
Non-cash financing expense		(756	)		(1,182	)		426		-36.0	%
Loss on early retirement of debt		—			(1,221	)		1,221		-100.0	%
Other income (expense)		201			(843	)		1,044		-123.8	%
Total other expense		(3,872	)		(7,365	)		3,493		-47.4	%
(Loss) earnings before income taxes		(67,996	)		11,502			(79,498	)	-691.2	%
Income tax benefit		(191	)		(944	)		753		-79.8	%
Net (loss) earnings	$	(67,805	)	$	12,446		$	(80,251	)	-644.8	%

Fiscal 2002 Compared to Fiscal 2001

	Fiscal Years Ended August 31,						Changes Fiscal 2002 Versus Fiscal 2001
	2002			2001			$			%
	(Dollars in thousands)
Net revenue	$	268,688		$	197,568		$	71,120		36.0	%
Cost of revenue		118,386			62,023			56,363		90.9	%
Gross profit		150,302			135,545			14,757		10.9	%
Operating expenses
Marketing and selling		57,892			31,631			26,261		83.0	%
General and administrative		43,374			40,839			2,535		6.2	%
Research and development		44,139			39,860			4,279		10.7	%
Total operating expenses		145,405			112,330			33,075		29.4	%
Earnings from operations		4,897			23,215			(18,318	)	-78.9	%
Other income (expense)
Interest expense, net		(5,765	)		(10,172	)		4,407		-43.3	%
Non-cash financing expense		(1,504	)		(350	)		(1,154	)	329.7	%
(Loss) gain on early retirement of debt		(1,221	)		2,795			(4,016	)	-143.7	%
Other (expense) income		(1,660	)		1,699			(3,359	)	-197.7	%
Total other expense		(10,150	)		(6,028	)		(4,122	)	68.4	%
(Loss) earnings before income taxes		(5,253	)		17,187			(22,440	)	-130.6	%
Income tax benefit		(720	)		(106	)		(614	)	579.2	%
Net (loss) earnings	$	(4,533	)	$	17,293		$	(21,826	)	-126.2	%

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Fiscal 2001 Compared to Fiscal 2000

	Fiscal Years Ended August 31,						Changes Fiscal 2001 Versus Fiscal 2000
	2001			2000			$			%
	(Dollars in thousands)
Net revenue	$	197,568		$	188,626		$	8,942		4.7	%
Cost of revenue		62,023			105,396			(43,373	)	-41.2	%
Gross profit		135,545			83,230			52,315		62.9	%
Operating expenses
Marketing and selling		31,631			71,632			(40,001	)	-55.8	%
General and administrative		40,839			56,378			(15,539	)	-27.6	%
Research and development		39,860			57,410			(17,550	)	-30.6	%
Goodwill writedown		—			17,870			(17,870	)	-100.0	%
Total operating expenses		112,330			203,290			(90,960	)	-44.7	%
Earnings (loss) from operations		23,215			(120,060	)		143,275		-119.3	%
Other income (expense)
Interest expense, net		(10,172	)		(7,691	)		(2,481	)	32.3	%
Non-cash financing expense		(350	)		—			(350	)	NA
Gain on early retirement of debt		2,795			—			2,795		NA
Other income (expense)		1,699			(3,902	)		5,601		-143.5	%
Total other expense		(6,028	)		(11,593	)		5,565		-48.0	%
Earnings (loss) before income taxes		17,187			(131,653	)		148,840		-113.1	%
Income tax (benefit) provision		(106	)		91			(197	)	-216.5	%
Net earnings (loss)	$	17,293		$	(131,744	)	$	149,037		-113.1	%

Net Revenue

Net revenue is derived primarily from shipping interactive entertainment software to customers. Our software functions on dedicated game platforms, including Sony’s PlayStation 2 and PlayStation 1, Microsoft’s Xbox, as well as Nintendo’s GameCube, 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 nine months ended December 28, 2003 and December 1, 2002, the seven months ended March 31, 2003 and March 31, 2002, and the fiscal years ended August 31, 2002, 2001, and 2000. Please note that the numbers in the schedule below do not include the effect of provisions for price concessions and returns because we do not track them by game console. Accordingly, the numbers presented may vary materially from those that we would disclose were we able to present the information net of provisions for price concessions and returns.

	Nine Months Ended				Seven Months Ended				Fiscal Years Ended
	December 28, 2003		December 1, 2002		March 31, 2003		March 31, 2002		August 31, 2002		August 31, 2001		August 31, 2000
	(Unaudited)		(Unaudited)				(Unaudited)
Cartridge-based software:
Nintendo Game Boy	2	%	6	%	4	%	8	%	7	%	11	%	9	%
Nintendo 64	—		—		—		—		—		2	%	31	%
Subtotal for cartridge-based software	2	%	6	%	4	%	8	%	7	%	13	%	40	%
Disc-based software:
Sony PlayStation 2: 128-bit	55	%	51	%	64	%	57	%	52	%	33	%	—
Sony PlayStation 1: 32-bit	4	%	2	%	3	%	7	%	4	%	41	%	32	%
Microsoft Xbox: 128-bit	24	%	18	%	15	%	8	%	13	%	—		—
Nintendo GameCube: 128-bit	12	%	21	%	13	%	19	%	22	%	—		—
Sega Dreamcast: 128-bit	—		—		—		—		—		9	%	21	%
Subtotal for disc-based software	95	%	92	%	95	%	91	%	91	%	83	%	53	%
PC software	3	%	2	%	1	%	1	%	2	%	4	%	7	%
Total	100	%	100	%	100	%	100	%	100	%	100	%	100	%

Summarized below is information about our software franchises, all released on multiple platforms, that represented 5% or more of gross revenue for the nine months ended December 28, 2003 and December 1, 2002, the seven months ended March 31, 2003 and March 31, 2002 and the fiscal years ended August 31, 2002, 2001, and 2000:

	Nine Months Ended				Seven Months Ended				Fiscal Years Ended
Software Franchise	December 28, 2003		December 1, 2002		March 31, 2003		March 31, 2002		August 31, 2002		August 31, 2001		August 31, 2000
	(Unaudited)		(Unaudited)				(Unaudited)
Burnout	20	%	16	%	20	%	12	%	11	%	—		—
ATV	10	%	1	%	7	%	2	%	2	%	3	%	—
NBA Jam	8	%	—		—		1	%	1	%	1	%	2	%
Gladiator	7	%	—		—		—		—		—		—
Vexx	5	%	—		5	%	—		—		—		—
Crazy Taxi	4	%	4	%	4	%	8	%	6	%	10	%	—
Mary Kate & Ashley	3	%	4	%	5	%	5	%	3	%	13	%	3	%
Turok	3	%	30	%	8	%	—		20	%	—		10	%
All Star Baseball	3	%	4	%	8	%	15	%	11	%	5	%	3	%
Extreme G	3	%	1	%	1	%	5	%	3	%	4	%	—
Supercross	3	%	1	%	1	%	5	%	3	%	4	%	7	%
BMX	2	%	4	%	2	%	17	%	11	%	25	%	—
BMX XXX	—		4	%	9	%	—		—		—		—
Legends of Wrestling	1	%	9	%	11	%	8	%	8	%	—		—
18 Wheeler	1	%	1	%	1	%	5	%	3	%	—		—
Aggressive Inline	—		8	%	2	%	—		6	%	—		—
Shadowman	—		—		—		4	%	2	%	—		5	%
World Wrestling Federation	—		—		—		—		—		—		11	%
Extreme Championship Wrestling	—		—		—		—		—		—		10	%
South Park	—		—		—		—		—		—		20	%

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Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, net revenue of $113.7 million decreased by $66.4 million, or 37%, from $180.1 million for the nine months ended December 1, 2002. The decrease was caused by a $120.1 million decrease in gross revenue, partially offset by a $53.7 million decrease in the net provision for price concessions and returns.

The $120.1 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 62% of revenue for the first nine months of fiscal 2004 compared to approximately 37% in the comparable period of the prior year. The $53.7 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 $17.6 million recorded in the fourth quarter of fiscal 2002 and the first quarter of fiscal 2003 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 91% of gross revenue for the nine months ended December 28, 2003 compared to 90% for the nine months ended December 1, 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.

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

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

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

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

34

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

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

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

Fiscal 2002 Compared to Fiscal 2001

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

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

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

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

Fiscal 2001 Compared to Fiscal 2000

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

The decrease in the net provision for price concessions and returns for fiscal 2001 resulted primarily from an improved market reception and increased rates of retail sell-through for a majority of the software titles we released in fiscal 2001, the shift in titles released for the Nintendo-64 platform to the then newly introduced

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PlayStation 2 platform and less quantities per title shipped into the retail channel, all of which resulted in significantly lower price concessions and returns related to products shipped in fiscal 2001. In addition, the fiscal 2001 provision was favorably impacted by a change in the fiscal 2000 estimate of the provision for price concessions and returns. In fiscal 2000, we expected particularly low rates of retail channel sell-through of 64-bit product because of:

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

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

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

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

Gross Profit

Gross profit is derived from net revenue after deducting cost of revenue. Cost of revenue primarily consists of product manufacturing costs (primarily disc and manufacturing royalty costs), amortization of capitalized software development costs and fees paid to third-party distributors for 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”),

• 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.

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, gross profit of $53.4 million (47% of net revenue) decreased by $34.1 million from $87.4 million (49% of net revenue) for the nine months ended December 1, 2002. The decreased gross profit was primarily caused by a:

• $50.4 million decrease due to a lower number of units sold and lower average selling prices per unit sold (please see “Net Revenue”), partially offset by a

• $13.4 million increase in gross profit associated with slightly lower per unit costs of software sold and a

• $2.9 million decrease in amortization of capitalized software development costs due primarily to the releases of the sequels Burnout 2, Legends of Wrestling 2, BMX3, All Star Baseball 2003 and Turok: Evolution during the prior year period.

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For the nine months ended December 28, 2003, amortization of capitalized software development costs amounted to $7.4 million as compared to $10.3 million for the nine months ended December 1, 2002 due to the higher capitalized costs associated with the titles released in fiscal 2003.

Capitalized software development costs, net, amounted to $0.1 million as of December 28, 2003 and $6.9 million as of March 31, 2003.

Gross profit in the final quarter of fiscal 2004 and fiscal 2005 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 “Risk Factors: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of Our Primary Lender and Vendors and Our Ability to Achieve Our Projected Revenue Levels and Reduced Operating Expenses.”

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

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

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

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

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

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

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

Gross profit in fiscal 2004 will depend in large part on the rate of growth of the software market for 128-bit game consoles (Sony’s PlayStation 2, Nintendo’s GameCube and Microsoft’s Xbox) and our ability to identify, develop and timely publish, in accordance with our product release schedule, software that sells through at projected levels at retail.

Fiscal 2002 Compared to Fiscal 2001

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

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

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

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

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

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

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

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

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

Fiscal 2001 Compared to Fiscal 2000

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

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

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

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

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

Operating Expenses

For the nine months ended December 28, 2003, operating expenses of $77.1 million (68% of net revenue) decreased by $44.2 million, or 37%, from $121.3 million (67% of net revenue) for the nine months ended December 1, 2002. For the seven months ended March 31, 2003, operating expenses of $89.2 million (88% of net revenue) increased by $10.8 million, or 14%, from $78.4 million (49% of net revenue) for the seven months ended March 31, 2002. For fiscal 2002, operating expenses of $145.4 million (54% of net revenue) increased by $ 33.1 million, or 29%, from $112.3 million (57% of net revenue) for fiscal 2001. For fiscal 2001, operating expenses of $112.3 million decreased by $91.0 million, or 45%, from $203.3 million (108% of net revenue) for fiscal 2000.

Marketing and Selling

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

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Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, marketing and selling expenses of $21.9 million (19% of net revenue) decreased by $30.1 million, or 58%, from $52.0 million (29% of net revenue) for the nine months ended December 1, 2002. The decrease in the nine month period relative to the comparative prior year period resulted primarily from lower variable marketing expenditures on lower revenues and management’s decision to curtail marketing and advertising expenditures in order to preserve short-term liquidity (please see discussion under “Liquidity and Capital Resources”), as well as lower sales commissions related to the decreases in net revenue.

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

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

Fiscal 2002 Compared to Fiscal 2001

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

• $13.1 million in advertising and trade show expenses,

• $11.5 million in licensing costs,

• $5.7 million in cooperative advertising expenses and

• $2.4 million in sales commissions.

These increases were partially offset by a:

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

• $1.1 million recovery of previously expensed licensing fees.

Fiscal 2001 Compared to Fiscal 2000

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

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.

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Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, general and administrative expenses of $26.5 million (23% of net revenue) decreased by $5.8 million, or 18%, from $32.3 million (18% of net revenue) for the nine months ended December 1, 2002. The decrease resulted primarily from a decrease in employee related costs of $1.4 million, occupancy costs of $2.1 million, depreciation of $2.1 million, technology costs of $0.6 million and distribution costs of $0.8 million partially offset by higher professional fees of $1.3 million.

Occupancy costs decreased from lower communication costs. Depreciation expense decreased due to the reclassification of our UK building to held-for-sale in March 2003, at which time we ceased depreciating the building. As of December 28, 2003, we had received a deposit for the sale and leaseback of the building. Please see Note 6 (Building Held for Sale) of the notes to the unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

Administrative employee headcount decreased slightly to 148 as of December 28, 2003 as compared to 160 as of March 31, 2003, but was significantly reduced from the December 1, 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 unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

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

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

Administrative employee headcount was approximately 160 as of March 31, 2003 as compared to 230 as of August 31, 2002 reflecting an approximate 30% reduction. The decrease in headcount resulted from the business restructuring we implemented during the seven months ended March 31, 2003 in order to lower our operating expenses and increase our future operating cash flows.

Fiscal 2002 Compared to Fiscal 2001

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

Fiscal 2001 Compared to Fiscal 2000

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

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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.

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, research and development expenses of $27.5 million (24% of net revenue) decreased by $9.5 million, or 26%, from $37.0 million (21% of net revenue) for the nine months ended December 1, 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 $10.4 million. More than offsetting these additional costs are savings of:

• $5.2 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

• $14.7 million from lower external development costs due to the reduced number of titles under development.

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

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

The increase was primarily due to a:

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

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

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

The above noted increases were partially offset by a:

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

• $0.3 million decrease in external development costs.

Fiscal 2002 Compared to Fiscal 2001

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

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

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

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These expense increases were partially offset by a

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

Fiscal 2001 Compared to Fiscal 2000

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

Stock-based Compensation

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

Stock-based compensation amounted to $0.9 million for the nine months ended December 28, 2003 representing the $0.63 per share market value 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 an executive officer, for his appointment as CEO. The associated expense fluctuated with the market value of our common stock until January 20, 2004, when our stockholders approved the issuance of the 1.5 million shares.

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 $4.8 million 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. During the nine months ended December 28, 2003, restructuring charges of $0.2 million were recorded due to the change in net present value of accrued restructuring costs as well as an adjustment to our forecast of sub-lease rental income and additional lease costs. The development studio lease commitment expires in May 2007 and the employee severance agreements expire over various periods through April 2004.

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The following table presents the components of the change in the balance of accrued restructuring charges for the nine months ended December 28, 2003 and the seven months ended March 31, 2003:

	Nine Months Ended December 28, 2003			Seven Months Ended March 31, 2003
	(in thousands)
Accrued restructuring costs, beginning of period	$	2,299		$	—
Severance and other employee termination benefits		—			3,783
Lease commitment, net of estimated sub-lease rental income		—			567
Asset write-offs		—			436
Other costs		—			38
Adjustments to employee termination costs, lease costs
and estimated sub-lease rental income		227			—
Restructuring charges incurred and expensed		227			4,824
Less: costs paid		(1,597	)		(2,525	)
Accrued restructuring costs, end of period	$	929		$	2,299

Impairment on Building Held for Sale

In February 2003, we recorded an impairment charge of $2.1 million for a building which is being held for sale in the United Kingdom, to adjust its net carrying value to its fair value of $5.4 million, net of expected selling costs. On November 28, 2003, we entered into an agreement for the sale and leaseback of the building. Under the terms of the agreement, the buyer purchased the building for $8.6 million (£4.9 million) and we contracted to lease the building for 15.5 years at an annual rent of $0.8 million (£0.5 million), subject to adjustment.

Goodwill Writedown

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

Other Income and Expense

Interest Expense, Net

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

Interest expense, net, was $3.5 million for the nine months ended December 28, 2003 (3% of net revenue) as compared to $3.6 million for the nine months ended December 1, 2002 (2% of net revenue).

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

For the seven months ended March 31, 2003, interest expense, net, of $3.3 million (3% of net revenue) decreased by $0.8 million, or 20%, from $4.1 million (3% of net revenue) for the seven months ended March 31, 2002. The decrease was primarily due to reduced interest expense relating to our 10% convertible subordinated notes, which were repaid in March 2002.

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Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, interest expense, net of $5.8 million (2% of net revenue) decreased by $4.4 million, or 43%, from $10.2 million (5% of net revenue) for fiscal 2001. The decrease was primarily due to reduced interest expense relating to our 10% convertible subordinated notes, which were repaid in March 2002. Please see discussion under “Liquidity and Capital Resources.”

Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, interest expense, net of $10.2 million (5% of net revenue) increased by $2.5 million, or 32%, from $7.7 million (4% of net revenue) for fiscal 2000. The increase was primarily due to reduced interest income from lower average cash balances in fiscal 2001.

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.

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, non-cash financing expense amounted to $3.1 million (3% of net revenue) as compared to $0.6 million (0.3% of net revenue) for the nine months ended December 1, 2002. The increase relates primarily to the costs associated with the warrants to purchase 1.0 million shares of our common stock at an exercise price of $0.50 per share issued and the 4.0 million 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 $2.0 million with our primary lender. The cash deposit was provided as a limited guarantee of our obligations. The 4.0 million shares of common stock proposed to be issued are being revalued on a quarterly basis, pending stockholder approval of the share issuance. The $0.9 million increase in market value of the shares as of December 28, 2003 as compared to their market value as of March 31, 2003 as well as the amortization of the original $1.6 million market value were the primary contributors to the $3.1 million non-cash financing expense for the nine month period ended December 28, 2003 . 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 unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

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

For the seven months ended March 31, 2003, non-cash financing expense of $0.8 million decreased by $0.4 million, or 36%, from $1.2 million for the seven months ended March 31, 2002. The decrease was due to a reduction of amortization associated with the fair value of warrants granted to our co-chairmen in connection with providing our primary lender collateral for a supplemental discretionary loan our primary lender provided to us in fiscal 2002. Please see note 14C (Debt) and 14E (Debt) of the notes to the audited consolidated financial statements for the seven months ended March 31, 2003 and 2002 and the fiscal years ended August 31, 2002, 2001 and 2000 included herein.

Fiscal 2002 Compared to Fiscal 2001

For fiscal 2002, non-cash financing expense of $1.5 million increased by $1.2 million, or 330%, from $0.4 million for fiscal 2001. The increase was due to amortization associated with the fair value of warrants granted to our co-chairmen in connection with providing our primary lender collateral for a supplemental discretionary loan our primary lender provided to us in October 2001 as well as amortization associated with the fair value of warrants granted to investors in connection with a junior participation financing in March 2001.

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Fiscal 2001 Compared to Fiscal 2000

For fiscal 2001, non-cash financing expense amounted to $0.4 million due primarily to the amortization of the fair value of warrants granted to investors in connection with a junior participation financing in March 2001. Please see note 14C (Debt) and 14E (Debt) of the notes to the audited consolidated financial statements for the seven months ended March 31, 2003 and 2002 and the fiscal years ended August 31, 2002, 2001 and 2000.

(Loss) Gain on Early Retirement of Debt

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

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

Other Income (Expense)

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, other income (expense) amounted to expense of $0.7 million as compared to expense of $1.4 million for the nine months ended December 1, 2002. The changes for the nine month period relative to the comparable prior year periods relates primarily to changes in net foreign currency transaction losses associated with the greater change in the purchase power of the British Pound Sterling versus the Euro.

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

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

Fiscal 2002 Compared to Fiscal 2001

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

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

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

Fiscal 2001 Compared to Fiscal 2000

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

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

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

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Please see “Related Party Transactions” below and Note 21B (Related Party Transactions) of the notes to the audited consolidated financial statements for the seven months ended March 31, 2003 and 2002 and the fiscal years ended August 31, 2002, 2001 and 2000 included herein.

Income Taxes

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

Income tax provision decreased to zero for the nine months ended December 28, 2003 as compared to a provision of $0.1 million for the nine months ended December 1, 2002. Although as of December 28, 2003 we had a significant U.S. tax net operating loss carryforward, we were not able to recognize a benefit during the nine months ended December 28, 2003 because of the uncertainty of whether we will be able to utilize the loss carryforward in the future.

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

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

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

Fiscal 2002 Compared to Fiscal 2001

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

Fiscal 2001 Compared to Fiscal 2000

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

Net Loss

Nine months Ended December 28, 2003 Compared to Nine months Ended December 1, 2002

For the nine months ended December 28, 2003, we reported a net loss of $31.0 million, or $0.30 per diluted share (based on weighted average diluted shares outstanding of 105.2 million), as compared to a net loss of $39.6 million, or $0.43 per diluted share (based on weighted average diluted shares outstanding of 92.2 million) for the nine months ended December 1, 2002.

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

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

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Fiscal 2002 Compared to Fiscal 2001

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

Fiscal 2001 Compared to Fiscal 2000

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

Seasonality

Our business is highly seasonal. We typically experience our highest revenue and profits in the calendar year end holiday season, our third fiscal quarter and a seasonal low in revenue and profits in our first fiscal quarter. The timing of when we deliver software titles and release new products can cause material fluctuations in quarterly revenue and earnings, which can cause operating results to vary from the seasonal patterns of the industry as a whole. Please see “Risk Factors: 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 December 28, 2003, cash and cash equivalents were $5,833. During the nine months ended December 28, 2003, cash and cash equivalents increased by $1,338 compared to a net decrease of $34,040 for the nine months ended December 1, 2002. Primary contributors to the difference in the change in cash and cash equivalents in the nine months ended December 28, 2003 as compared to the nine months ended December 1, 2002 were positive impacts of the differences in cash flows of $37,617 related to net cash provided by financing activities and $9,866 related to net cash provided by investing activities, partially offset by a negative impact of $11,860 from additional cash used in operating activities in fiscal 2004. Operating activities used $11,860 more cash for the nine months ended December 28, 2003 as compared to the nine months ended December 1, 2002 due primarily to a $53,704 decrease in the provision for price concessions and returns and an increased use of cash to pay accrued expense balances, partially offset by reduced cash used in connection with accounts receivable. Financing activities provided $37,617 more cash for the nine months ended December 28, 2003 as compared to the nine months ended December 1, 2002, due primarily to a decrease in net short-term loan repayments of $15,342, repayments of notes receivable received from our Co-Chairmen of $6,947, net proceeds from our June 2003 private placement of $8,314 and net proceeds from our September/October 2003 sale of 16% convertible subordinated notes of $11,329, partially offset by an increase in mortgage repayments of $4,121.

As of December 28, 2003, the working capital deficit of $68,903 increased by $5,407 from the $63,496 working capital deficit as of March 31, 2003. The increase in the working capital deficit during the nine months ended December 28, 2003 resulted primarily from the $31,048 net loss in the period, partially offset by the gross proceeds of $11,863 received from purchases of our 16% 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 “Risk Factors: 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.”

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

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operating activities. For the nine months ended December 28, 2003, we had a net loss of $31,048 and used $16,085 of cash in operating activities. As of December 28, 2003, we had a stockholders’ deficit of $63,892, a working capital deficit of $68,903 and cash and cash equivalents of $5,833. 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 included herein 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. In February 2004, we completed the sale of our 9% senior convertible subordinated notes from which we raised gross proceeds of $15,000. In September and October 2003, we completed the sale of our 16% convertible subordinated notes, resulting in gross proceeds of $11,863. As of December 28, 2003, our primary lender had advanced to us a supplemental discretionary loan of $4,000. 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. 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.

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, (3) continue to enjoy the support of our primary lender and vendors and (4) register with the SEC the shares underlying the September/October 2003 and the February 2004 convertible notes financings. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, and continue to realize additional benefits from the expense reductions we have implemented, 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 register with the SEC the shares underlying the September/October 2003 and February 2004 convertible notes financings, 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

On February 17, 2004, (the “Initial Closing Date”) we raised gross proceeds of $15,000 in connection with the sale of 9% Senior Subordinated Convertible Notes (the “9% Notes”), due in February 2007, to an investor. The 9% Notes are convertible into shares of our common stock, at a conversion price of $0.65 per share. Additionally, the investor received warrants to purchase 4,615 shares of our common stock with an exercise price equal to $0.65 per share. The warrants are exercisable for five years from the Initial Closing Date. The conversion price of the 9% Notes and the exercise price of the warrants are subject to adjustment.

Interest due on the 9% Notes is payable semi-annually commencing October 1, 2004. Upon conversion of the 9% Notes the related accrued and unpaid interest, if any, shall be paid in cash to the investor. The 9% Notes are collateralized by a second mortgage on our headquarters building, subject to our primary lender’s (GMAC Commercial Credit LLP) consent and an inter-creditor agreement to be entered into post-closing. The terms of the 9% Notes limit our incurrence of additional indebtedness and payment of cash dividends.

Commencing August 18, 2004, if the market value of our common stock equals at least $1.625, which is periodically reduced to $0.975 by February 19, 2006, and other specific criteria are met, we have the right to redeem all or a portion of the 9% Notes at the outstanding principal balance of the 9% Notes plus any related accrued interest. The investor has the right to require us to repurchase the 9% Notes in the event of a change in control of the Company, as defined in the agreement. The 9% Notes are subordinate to all our bank debt with our primary lender.

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 securities within 45 days following the Initial Closing Date. If a registration statement covering the shares of common stock underlying the 9% Notes and related warrants has not been declared effective within six months of the Initial Closing Date, then the conversion price shall be reset to $0.60 per share.

If the registration statement is not effective within 120 days of the Initial Closing Date in the case of an SEC review or 90 days in the case of no SEC review, then liquidated damages of 1% of the investment shall be paid to the investor per month by Acclaim.

We have a first option, for a nine month period from February 17, 2004 (the “First Option Period”), to require the investor to purchase $5,000 of additional 9% Notes (the “First Additional 9% Notes”) at a conversion price of $0.65 per share, if during that period the closing bid price of our common stock exceeds $0.8125 per share for twenty consecutive trading days, the registration statement covering the shares underlying the 9% Notes and related warrants is effective and our common stock continues to be listed on a qualified securities exchange. In the event that we do not exercise our First Option, the investor likewise has the option, during the First Option Period, to purchase the First Additional 9% Notes from us for $5,000.

We have a second option, for a six month period commencing one year following the Initial Closing Date (the “Second Option Period”), to require the investor to purchase $5,000 of additional 9% Notes (the “Second Additional 9% Notes”) at a conversion price of $0.65 per share, if during the three month period commencing February 17, 2005, the closing bid price of our common stock exceeds $1.30 per share for twenty consecutive trading days or if during the three month period commencing May 17, 2005, the closing bid price of our common stock exceeds $0.975 per share for twenty consecutive trading days and our common stock continues to be listed on a qualified securities exchange. The investor has the option, for an 18 month period commencing February 17, 2004, to purchase the Second Additional 9% Notes from us for $5,000.

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In connection with any purchase of First Additional 9% Notes or Second Additional 9% Notes, the investor would receive additional warrants to purchase a number of shares of our common stock equal to 20% of the number of shares underlying those additional notes, with an exercise price equal to $0.65 per share.

We incurred fees of $907 in connection with the 9% Notes transaction for placement agent and investment advisory services, comprised of warrants to purchase 300 shares of our common stock at an exercise price of $0.65 per share with a fair value of $157, and cash payments totaling $750. We will amortize these fees on a straight-line basis over the term of the 9% Notes or, upon their conversion to common stock.

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 convertible subordinated notes (the “Notes”), due in 2010. 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). The Note offering was structured in a manner we believe complied with Nasdaq’s published rules. However, based upon discussions and agreement with Nasdaq and the holders of the Notes, in December 2003, we amended the terms of the Notes to secure Nasdaq’s agreement that the structure of the Notes complied with their rules.

The amended Notes were initially convertible into 13,262 shares of our common stock, based upon a conversion price of $0.8945 per share. The conversion price is based upon the closing price of our common stock that Nasdaq advised us complied with its interpretation of “market price” as of the time of the Note offering. The terms of the Note agreements provided for an adjustment to the conversion rate, subject to stockholder approval. On January 20, 2004, our stockholders voted to authorize an adjustment of the conversion price to $0.57 per share, a 36% discount from the $0.8945 conversion price. Accordingly, the Notes are now convertible into 20,812 shares of our common stock. The interest rate on the Notes is 16% per annum, due semi-annually on each of April 15 and October 15, commencing April 15, 2004. The purchasers of the Notes have also received warrants to purchase approximately 8,193 shares of our common stock, at an exercise price of $0.8945 per share, which exercise price was adjusted to $0.57 when stockholder approval was obtained on January 20, 2004.

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.

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 SEC under the Securities Act of 1933, or an applicable exception therefrom. We agreed to file a registration statement to register the shares of our common stock underlying the Notes and warrants by December 19, 2003 and that the shares would be registered by January 26, 2004. As the registration statement was not filed by December 19, 2003, we paid liquidated damages to the purchasers of 1% of the proceeds of the Notes or $119, which amount was included in other expense for the nine months ended December 28, 2003. We will incur additional 1% penalties for each month that passes where the shares underlying the Notes and warrants are not registered.

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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 at issuance the conversion option was 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 put option, until the Notes are converted to common stock or repaid, 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 December 28, 2003, the proceeds allocated to the conversion feature of the Notes was $305, to the warrants was $2,495 and to the Notes was $9,063. The fair values of the conversion feature of the Notes and the warrants was included in accrued expenses as of December 28, 2003. The put option held by the purchasers of the Notes had no value as of December 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 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 December 28, 2003, the unamortized debt discount related to the conversion feature of the Notes was $298 and the debt discount related to the warrants was $2,401. Amortization of the debt discounts amounted to $101 for the nine months ended December 28, 2003 and is included in non-cash financing expense in the statement of operations and increased the balance of the Notes.

We incurred placement agent fees of $714 in connection with the Notes transaction, comprised of warrants to purchase 267 shares of our common stock at an exercise price of $0.8945 per share with a fair value of $180, and a cash payment of $534. We are amortizing these fees on a straight-line basis over the term of the Notes or, 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. Amortization of these fees amounted to $28 for the nine months ended December 28, 2003. The unamortized portion of these fees is included in other assets as of December 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 then 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 nine months ended December 28, 2003 and accrued expenses as of December 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. Of such warrants, 150 were exercised in October 2003. In addition, as a result of the private placement and anti-dilution provisions included in certain warrants then outstanding, the

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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
Issuance Purpose	Number	Exercise Price		Number	Exercise Price		Expiration Date
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 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.

On January 21, 2004, we received a letter from Nasdaq indicating that the Company had been granted an extension, until January 24, 2005, within which to regain compliance with the minimum $1.00 bid price per share requirement of The Nasdaq SmallCap Market. In the notice, the Nasdaq staff noted that since the Company meets the initial inclusion criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c), it is eligible for this additional compliance period. However, if prior to January 24, 2005, the bid price of the Company’s common stock does not close at $1.00 per share or more for a minimum of 10 consecutive trading days, then the Company is required to (1) seek shareholder approval for a reverse stock split at or before its next shareholder meeting and (2) promptly thereafter effectuate the reverse stock split. The Company has committed in writing to Nasdaq to effectuate those measures in the event compliance is not achieved prior to January 24, 2005. If at any time before January 24, 2005, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Nasdaq staff will provide notification that the Company complies with Marketplace Rule 4310(c)(8)(D). The Company cannot provide any assurance that it will receive an affirmative vote of its stockholders authorizing a reverse stock split, if required, nor that the Company will regain compliance with the minimum bid price requirement.

Please see discussion regarding our North American credit agreement below as well as in Note 13 (Debt) of the notes to the unaudited consolidated financial statements for the nine months ended December 28, 2003 included herein. Please also see “Risk Factors: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary Lender and Vendors and Our Ability to Achieve Our Projected Revenue Levels and Reduce Operating Expenses.”

Credit Agreements

We established a relationship with our primary lender in 1989 when we entered into our North American credit agreement. The North American credit agreement expires on August 31, 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.

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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 December 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, which is adjusted for any returns, discounts and other customer credits or allowances. Please see Note 2 (Accounts Receivable) of the notes to the unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

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 December 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 December 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

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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 2,000 shares of our common stock with a then aggregate market value of $1,560 ($2,520 as of December 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 unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

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 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 nine month period ended December 28, 2003 we increased accrued stock-based expenses by $960 to the market value of the common shares of $2,520 as of December 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 $2,520 for the nine months ended December 28, 2003.

In December 2003, our North American credit agreement was amended to allow for a supplemental discretionary loan of up to $4,000 from December 16, 2003 thru December 31, 2003, up to $5,000 from January 1, 2004 through January 31, 2004, up to $3,000 from February 1, 2004 through February 29, 2004, up to $2,000 from March 1, 2004 through March 31, 2004 and up to $1,000 from April 1, 2004 through April 30, 2004, on which date the outstanding supplemental loan balance is due to be repaid.

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. 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 the remainder of fiscal 2004 or fiscal 2005 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 $1,766 as of December 28, 2003 and $4,154 as of March 31, 2003. A supplemental discretionary loan of $4,000 was outstanding as of December 28, 2003 and $11,000 was outstanding as of March 31, 2003.

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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, were 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. On November 28, 2003, we entered into an agreement for the sale and leaseback of the building. Under the terms of the agreement, the buyer purchased the building for $8,636 (£4,888) and we contracted to lease the building for 15.5 years at an annual rent of $813 (£460), subject to adjustment. As of December 28, 2003, we classified the cash we received from the buyer of $6,799 (£3,848) as a deposit payable in accrued expenses. Of the deposit received, $4,917 (£2,783) was used to repay the outstanding balance of the mortgage payable and related interest associated with the building. As of December 28, 2003, the net carrying value of the building was $6,186 (£3,448). Please see Note 6 (Building Held for Sale) of the notes to the unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

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 $18,000 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 (4.95% as of December 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 $4,615 as of December 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 have been and will be applied to repay the outstanding loan. As of December 28, 2003, the remaining amount outstanding was $228. 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 (2.1% as of December 28, 2003).

Commitments

We generally purchase our inventory of Nintendo software by opening letters of credit when placing the purchase order. As of December 28, 2003, we had $1,990 outstanding under letters of credit. Approximately $175 as of December 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 December 28, 2003, we did not have any significant operating or capital expenditure commitments.

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

	Payments Due Within								More than 5 years
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years
Debt	$	29,396	$	20,232	$	—	$	—	$	9,164
Capital lease obligations		833		458		375		—		—
Operating leases		19,002		3,561		5,176		1,865		8,400
Developer/Licensor commitments (1)		43,663		36,345		7,318		—		—
Total contractual cash obligations	$	92,894	$	60,596	$	12,869	$	1,865	$	17,564

(1) Of total developer/licensor commitments, $15,050 was included in current liabilities as of December 28, 2003.

New Accounting Pronouncements

In December 2003, the FASB issued a revised version of FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FIN 46, “Consolidation of Variable Interest Entities,” which was issued in January 2003. We will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For our variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on March 31, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. We do not currently have any variable interest entities.

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.

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.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), which updates the previously issued revenue recognition guidance in SAB 101, based on the Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” According to EITF 00-21, if the deliverables in a sales arrangement constitute separate units of accounting, as defined, the revenue-recognition policy must be determined for each identified unit. If the arrangement is a single unit of accounting under the separation criteria, as defined, the revenue-recognition policy must be determined for the entire arrangement. The application of SAB 104 did not have any impact on our financial statements.

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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 $(10) for the nine months ended December 28, 2003, $392 for the nine months ended December 1, 2002, $279 for the seven months ended March 31, 2003, $315 for the seven months ended March 31, 2002, $535 for the fiscal year ended August 31, 2002, $330 for the fiscal year ended August 31, 2001 and $341 for the fiscal year ended August 31, 2000. We owed the firm $247 as of December 28, 2003, $498 as of March 31, 2003, $385 as of August 31, 2002 and $18 as of August 31, 2001.

During previous fiscal years we received legal services from two 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 $630 for the nine months ended December 28, 2003, and $528 for the seven months ended March 31, 2003. We incurred fees from both firms of $549 for the nine months ended December 1, 2002, $318 for the seven months ended March 31, 2002, $644 for fiscal 2002, $665 for fiscal 2001 and $987 for fiscal 2000, periods when both firms represented us. We owed the firm that continues to represent us, legal fees of $365 as of December 28, 2003, $353 as of March 31, 2003 and $200 as of August 31, 2002. We owed total fees of $154 as of August 31, 2001 to both firms.

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

Notes receivable

In October 2002, we loaned a senior executive $300 under a promissory note for the purpose of purchasing a new residence. Our Compensation Committee approved the terms and provisions of the loan in April 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 nine months ended December 28, 2003, we expensed $134 and during the seven months ended March 31, 2003, we expensed $133 of the unpaid principal balance. The unamortized principal balance under the loan, included in other receivables, was $33 as of December 28, 2003 and $167 as of March 31, 2003.

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

In October 2001, we issued a total of 1,125 shares of our common stock to two of our executive officers when they exercised their warrants with an exercise price of $3.00 per share. For the shares we issued, we received cash of $23 for their par value and two promissory notes totaling $3,352 for the unpaid portion of the

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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 bore no interest and was required to be repaid on the earlier to occur of the sale or transfer of the former officer’s personal residence or August 11, 2003. In December 2003, we collected $150 of the outstanding note and, as a result of our forgiving repayment of the balance, expensed the remaining $100. As of March 31, 2003, $250 was outstanding under the note.

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.

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

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 2,000 shares of our common stock with a then aggregate market value of $1,560 ($2,520 as of

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December 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 21 (Related Party Transactions) of the notes to the unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 included herein.

Warrant Grants and Other Equity Transactions

In October 2001, we issued to the Affiliates 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 Affiliates 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.

In March 2001, relating to a loan participation between our primary lender and junior participants, we issued investors in the junior participation five-year warrants to purchase an aggregate of 2,375 shares of our common stock exercisable at a price of $1.25 per share, which included a total of 1,375 warrants we issued to some of our executive officers and to one of the directors of our Board. For information regarding the junior participation, please see Note 14 (Debt) of the notes to the audited consolidated financial statements for the seven months ended March 31, 2003 and 2002 and the fiscal years ended August 31, 2002, 2001 and 2000 included herein. The fair value of the warrants of $1,751, based on the Black-Scholes option pricing model, was recorded as a deferred financing cost. We amortized the balance as a non-cash financing expense evenly over two and one-half years through August 31, 2003, the date on which the North American credit agreement was to terminate. The agreement has since been renewed and will automatically renew again on August 31, 2004 unless terminated within 90 days of such date by either our primary lender or us.

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DESCRIPTION OF SECURITIES

Common Stock

The Company is authorized to issue 300,000,000 shares of Common Stock. As of March 3, 2004, we had 113,403,810 shares of common stock issued and outstanding (including 4,000,000 shares of our common stock issued in equal amounts to our co-chairmen, which shares are being held by us 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 March 3, 2004, 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 March 3, 2004, a total of 20,285,124 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 December 28, 2003, options to purchase a total of 13,148,684 shares of common stock were outstanding under the 1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which 4,776,886 were exercisable.

The holders of Common Stock are entitled to one vote per share for the election of directors and with respect to all other matters submitted to a vote of stockholders. Shares of Common Stock do not have cumulative voting rights, which means that the holders of more than 50% of such shares voting for the election of directors can elect 100% of the directors if they choose to do so and, in such event, the holders of the remaining shares so voting will not be able to elect any directors. The holders of Common Stock are entitled to receive such dividends as may lawfully be declared from time to time by the Board of Directors at its discretion, subject to the priorities accorded any class of preferred stock which may be issued, and to the restrictions under the Indenture (described below). The holders of Common Stock have no preemptive or conversion rights, nor are there any redemption or sinking fund rights with respect to the Common Stock. Upon any liquidation, dissolution, or winding up of the Company, the holders of Common Stock are entitled to receive all assets remaining after the payment of corporate debts and liabilities, including the 9% Notes and any liquidation preferences of, and unpaid dividends on, any class of preferred stock which then may be outstanding.

Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.01 per share, none of which are currently outstanding. The Board of Directors is empowered, without further action by the stockholders, to issue from time to time one or more series of preferred stock (up to an aggregate of 1,000,000 shares), to fix the dividend rights, dividend rate, conversion rights, rights and terms of redemption (including sinking fund provisions), redemption prices, liquidation preferences, voting rights and other terms of any wholly unissued series of preferred stock and to determine the designation of and (subject to the aggregate limit of 1,000,000 shares) the number of shares constituting any such unissued series. Such blanket power to issue preferred stock could be viewed as an anti-takeover device, and might have an adverse effect on the public stockholders.’

Series A Preferred Stock—The Company’s Board of Directors has adopted resolutions designating 200,000 shares of Series A Preferred Stock, no par value per share, stated value $10 per share, none of which is currently issued and outstanding.

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Series B Preferred Stock—On June 5, 2000, the Company’s Board of Directors declared a dividend distribution of one Right for each outstanding share of Company Common Stock to shareholders of record at the close of business on June 21, 2000 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share (a “Unit”) of Series B Junior Participating Preferred Stock, $0.01 par value (the “Series B Preferred Stock”), at a purchase price of $30 per Unit, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of June 5, 2000, between the Company and American Securities Transfer and Trust, Inc., as Rights Agent.

Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and a Distribution Date will occur upon the earliest to occur of (i) the tenth business day following the date (the “Stock Acquisition Date”) of the first public announcement by the Company that any person or group has become the beneficial owner of 10% or more of the Common Stock then outstanding (other than the Company, any subsidiary of the Company, and any employee benefit plan of the Company or any subsidiary, persons who are eligible to report their ownership on Schedule 13G and who beneficially own less than 15% of the Common Stock and certain other persons or groups, including Gregory Fischbach and related parties and James Scoroposki and related parties (provided each of such person and its related parties beneficially own less than 20% of the Common Stock)), (ii) the tenth business day following the commencement of a tender or exchange offer if, upon its consummation, the offeror would become the beneficial owner of 10% or more of the Common Stock then outstanding, or (iii) a merger or other business combination transaction involving the Company.

Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates issued after the Record Date will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. Pursuant to the Rights Agreement, the Company reserves the right to require prior to the occurrence of a Triggering Event (as defined below) that, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock will be issued. The Rights are not exercisable until the Distribution Date and will expire at 5:00 P.M. (Delaware time) on June 7, 2010, unless earlier redeemed, exchanged, extended or terminated by the Company as described below. At no time will the Rights have any voting power. As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the Rights. Except as otherwise determined by the Board of Directors, only shares of Common Stock issued prior to the Distribution Date will be issued with Rights.

In the event that a Person becomes an Acquiring Person, except pursuant to an offer for all outstanding shares of Common Stock which the independent directors determine to be fair and not inadequate and to otherwise be in the best interests of the Company and its shareholders, after receiving advice from one or more investment banking firms (a “Qualifying Offer”), each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following the occurrence of the event set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. However, Rights are not exercisable following the occurrence of the event set forth above until such time as the Rights are no longer redeemable by the Company as set forth below.

For example, at an exercise price of $30 per Right, each Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $60 worth of Common Stock (or other consideration, as noted above) for $30. Assuming that the Common Stock had a per share value of $6 at such time, the holder of each valid Right would be entitled to purchase ten (10) shares of Common Stock for $30.

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In the event that (i) the Company is acquired in a merger (other than a “clean-up” merger which follows a Qualifying Offer) or other business combination transaction (x) in which the Company is not the surviving entity, (y) in which the Company is the surviving entity and the Common Stock is changed or exchanged or the Common Stock remains outstanding but constitutes less than 50% of the shares outstanding immediately following the merger, or (ii) 50% or more of the Company’s assets or earning power is transferred, each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The events set forth in this paragraph and in the second preceding paragraph are referred to as the “Triggering Events.”

At any time after a person becomes an Acquiring Person and prior to the acquisition by such person or group of fifty percent (50%) or more of the outstanding Common Stock, the Board may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one share of Common Stock, or one one-thousandth of a share of Preferred Stock (or of a share of a class or series of the Company’s preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).

At any time until ten business days following the Stock Acquisition Date, the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (payable in cash, Common Stock or other consideration deemed appropriate by the Board of Directors). Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $0.01 redemption price.

Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to shareholders or to the Company, shareholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Common Stock (or other consideration) of the Company or for common stock of the acquiring company or in the event of the redemption of the Rights as set forth above.

Any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company prior to the Distribution Date. After the Distribution Date, the provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Rights, or to shorten or lengthen any time period under the Rights Agreement. The foregoing notwithstanding, no amendment may be made at such time as the Rights are not redeemable.

A copy of the Rights Agreement is on file with the Securities and Exchange Commission as an Exhibit to the Registration Statement on Form 8-A filed on June 12, 2000. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference.

In addition, following the Distribution Date and prior to the expiration or redemption of the Rights, the Company may issue Rights when it issues Common Stock only if the Board deems it to be necessary or appropriate, or in connection with the issuance of shares of Common Stock pursuant to the exercise of stock options or under employee plans or upon the exercise, conversion or exchange of certain securities of the Company. 100,000 shares of Preferred Stock are initially reserved for issuance upon exercise of the Rights. The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company in a manner which causes the Rights to become discount rights unless the offer is conditional on a substantial number of Rights being acquired. The Rights, however, should not affect any prospective offeror willing to make an offer at a price that is fair and not inadequate and otherwise in the best interests of the Company and its shareholders. The Rights should not interfere with any merger or other business combination approved by the Board since the Board may, at its option at any time until ten (10) business days following the Stock Acquisition Date, redeem all but not less than all of the then outstanding Rights at the Redemption Price.

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DESCRIPTION OF THE 9% NOTES

We will issue the 9% Notes under an indenture, as modified by a first supplemental indenture, between us and U.S. Bank Trust National Association, as trustee. When we refer to the indenture the terms of the 9% Notes include those stated in the indenture, the supplemental indenture thereto and those made part of the indenture by reference to the Trust Indenture Act of 1939. The provisions of the indenture referred to below under the subcaption “Security” also define the terms of the pledges that will secure the 9% Notes.

The following description is a summary of the material provisions of the indenture. It does not restate the indenture in its entirety. We urge you to read the indenture because it, and not this description, defines your rights as holders of these 9% Notes. We have filed a copy of the indentures as exhibits to the registration statement which includes this prospectus. Certain defined terms used in this description but not defined below have the meaning assigned to them in the indenture.

The registered holder of a 9% Note will be treated as the owner of it for all purposes. Only registered holders will have rights under the indenture.

Brief Description of the 9% Notes

These 9% Notes:

• are convertible into shares of our common stock;

• are subordinated to all indebtedness held by GMAC Commercial Finance LLC (“GMAC”), our primary lender;

• will be secured by a second mortgage on our real property and a second priority security interest in our assets (both of which are junior to the mortgage and security interests held by GMAC); and

• are our general obligations.

Principal, Maturity and Interest

We may issue 9% Notes with a maximum aggregate principal amount of up to $25,000,000. We have issued to date $15,000,000 in principal amount of the 9% Notes. We will issue 9% Notes in denominations of $1,000 and integral multiples of $1,000. The 9% Notes will mature on February 17, 2007.

Interest on the 9% Notes will accrue at the rate of 9% per annum and will be payable semi-annually in arrears on April 1 and October 1, commencing on October 1, 2004. We will make each interest payment to the holders of record at the close of business on the fifth business day preceding such interest payment dates.

Interest on the 9% Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.

Methods of Receiving Payments on the 9% Notes

All payments of principal and interest on the 9% Notes will be made at the office or agency of the paying agent and registrar for the 9% Notes within the City and State of New York.

Paying Agent and Registrar for the 9% Notes

The trustee will initially act as paying agent and registrar. We may change the paying agent or registrar without prior notice to the holders of the 9% Notes, and we or any of our subsidiaries may act as paying agent or registrar.

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Transfer and Exchange

A holder may transfer or exchange 9% Notes in accordance with the indenture, subject to any limitations imposed by the Securities Act of 1933 until the effectiveness of the registration statement of which this prospectus forms a part. The registrar and the trustee may require a holder to furnish appropriate endorsements and transfer documents in connection with a transfer of 9% Notes. Holders will be required to pay all taxes due on transfer.

Conversion

The holder of any note will have the right, exercisable at any time following the date of original issuance thereof and prior to repurchase or maturity, to convert the principal amount thereof, or any portion of such principal amount that is at least $1,000 (or such lesser principal amount thereof as shall be outstanding at such time), into shares of our common stock at a conversion price of $0.65 per share, subject to adjustment as described below, which we refer to as the “Conversion Price”. If we do not have available for issuance upon conversion of the 9% Notes shares of common stock sufficient for issuance upon such conversion, the holders will have the right to receive cash in an amount equal to the number of shares of our common stock which we are unable to issue multiplied by the average market price of our common stock for the five consecutive trading days immediately prior to the applicable conversion date.

In connection with conversion of a note or portion thereof, the holder will generally be entitled to payment of accrued and unpaid interest on such note or portion thereof converted. No fractional shares will be issued upon conversion, but a cash adjustment will be made for any fractional shares.

Adjustment

The Conversion Price is subject to adjustment upon the occurrence of certain events, including:

(1) the payment of a dividend or the making of a distribution to all holders of the outstanding common stock in shares of common stock;

(2) the issuance of rights or warrants (other than any rights or warrants referred to clause (4) below) to all holders of our outstanding shares of common stock entitling them (for a period expiring within 45 days after the date fixed for the determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of common stock at a price per share less than the current market price on the record date fixed for the determination of stockholders entitled to receive such rights or warrants;

(3) the subdivision of the outstanding shares of common stock into a greater number of shares of common stock or the combination of the outstanding shares of common stock into a smaller number of shares of common stock;

(4) the distribution to all holders of our common stock of shares of any class of our capital stock (other than any dividends or distributions to which clause (1) above applies) or evidences of our indebtedness, cash or other assets (including securities, but excluding any rights or warrants referred to in clause (2) above, dividends and distributions paid exclusively in cash and distributions made upon a merger or consolidation);

(5) the issuance of shares of our common stock or common stock equivalents by us, other than an issuance pro rata to all holders of our outstanding common stock, at a price below the greater of (i) the specified market value of such common stock or (ii) the conversion price at the time of such issuance, except:

(A) the issuance by us 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 by the indenture is made and (ii) we shall have given notice of such issuance thereof to the Holders pursuant to the indenture;

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(B) the issuance by us of the 9% Notes and the Warrants pursuant to the Note Purchase Agreement dated February 17, 2004 between us and the Holder and the issuance by us of shares of common stock upon conversion of the 9% Notes or upon exercise of the Warrants in accordance with the terms of the indenture and Note Purchase Agreement; and

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

(6) the failure to obtain effectiveness of the registration statement of which this prospectus forms a part by August 18, 2004.

We have amended the warrant and have agreed with the Holder to amend the Indenture and the First Supplement Indenture, in order to provide that the total number of shares issuable upon conversion of the 9% Notes (and the exercise of the warrants issued in conjunction with any 9% Notes issued pursuant to the indenture) shall not exceed 49,999,999 shares, and the Conversion Price shall not be less than $0.4875, in accordance with the terms approved by our stockholders. See “Selling Stockholders”.

If we reclassify or change our outstanding common stock or consolidate, merge or combine with another person or sell or convey substantially all of our assets to any person, in either case, as a result of which holders of our common stock become entitled to receive stock, security or other property or assets with respect to their shares of common stock, we, the successor person or purchasing person, as the case may be, shall enter into an agreement with the trustee providing that the 9% Notes will become convertible into the kind and amount of stock, securities, property or assets which the holders of the 9% Notes would have owned immediately after the transaction if the holders had converted their 9% Notes immediately before the effective date of the transaction.

The indenture also provides that if the Conversion Price is adjusted as a result of the issuance of rights, warrants or options and some or all of those rights, warrants or options expire unexercised, the Conversion Price shall be readjusted to take into account the actual number of such rights, warrants or options, which were exercised.

We will not be required to adjust the Conversion Price unless such adjustment would require an increase or decrease of at least 1% in such price; provided that any non-adjustment is carried forward and taken into consideration in any subsequent adjustment.

We will be permitted to make such reductions in the Conversion Price as we, in our discretion, determine to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities or distribution of securities convertible into or exchangeable for stock which we make to our stockholders will not be taxable to the recipients.

Reservation of Shares

We will reserve and keep available, free of pre-emptive rights a sufficient number of authorized but unissued shares of our common stock to allow for conversion of all outstanding 9% Notes. Failure by us to maintain such shares would constitute a breach of the indenture.

Repurchase at the Option of Holders

If a repurchase event occurs, each holder of 9% Notes will have the right, but not the obligation, to require us to repurchase the portion of such holder’s 9% Notes, or any portion thereof on the applicable repurchase date. The repurchase price to be paid by us is 100% of the principal amount of a 9% Note plus accrued and unpaid interest (including default interest, if any). Within 5 business days following any repurchase event, we will mail a notice to the trustee and each holder stating the transaction or transactions that constitute the repurchase event, the date by which the repurchase right must be exercised and the procedures which a holder must follow to exercise the repurchase right. To exercise the repurchase right, a holder shall deliver to us, with a copy to the

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trustee, on or before the twentieth day after our notice (or if no such notice is given, within 40 days after such holder first learns of the repurchase event) a notice setting forth the name of such holder and the principal amount of 9% Notes to be repurchased from such holder.

On the applicable repurchase date, we will, to the extent lawful:

(1) accept for payment all 9% Notes or portions of 9% Notes properly tendered pursuant to our notice;

(2) deposit with the paying agent an amount equal to the repurchase price in respect of all 9% Notes or portions of 9% Notes properly tendered; and

(3) deliver or cause to be delivered to the trustee the 9% Notes so accepted together with a certificate stating the aggregate principal amount of 9% Notes or portions of 9% Notes being purchased by us.

The trustee will promptly pay, in immediately available funds, to each holder of 9% Notes properly tendered the repurchase price for such 9% Notes to such account as specified by such holder in writing to us at least one business day prior to the applicable repurchase date, and the trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new note equal in principal amount to any unpurchased portion of the 9% Notes surrendered, if any; provided that each new note will be in a principal amount of $1,000 or an integral multiple of $1,000.

The provisions described above that require us to repurchase the 9% Notes following a repurchase event will be applicable whether or not any other provisions of the indenture are applicable. Except as described above with respect to a repurchase event, the indenture does not contain provisions that permit the holders of the 9% Notes to require that we repurchase or redeem the 9% Notes in the event of a takeover, recapitalization or similar transaction.

Future credit agreements or other agreements relating to indebtedness to which we become a party may contain restrictions and provisions that prohibit us from purchasing any 9% Notes, or that provide that certain change of control events with respect to us would constitute a default under the agreements governing such indebtedness. In the event a repurchase event occurs at a time when we are prohibited from purchasing 9% Notes, we could seek the consent of our senior lenders to purchase the 9% Notes or could attempt to refinance the borrowings that contain such prohibition. If we do not obtain such consent or repay such borrowings, we will remain prohibited from purchasing the 9% Notes. In that case, our failure to purchase tendered 9% Notes would constitute an event of default under the indenture which would, in turn, constitute a default under such indebtedness.

Subordination

The 9% Notes are subordinated in right of payment to the prior indefeasible payment in full in cash of all indebtedness held by GMAC. However, so long as no Event of Default exists under the Company’s Credit Agreement with GMAC, the Company may make regularly scheduled bi-annual interest payments on the 9% Notes and may pay accrued interest upon any conversion of 9% Notes.

Certain Covenants

Asset Sales

We shall not, and shall not permit any of our subsidiaries to:

(1) sell, convey or otherwise dispose of (including, without limitation, by way of lease or license) any assets which are material to our business, properties, operations, condition (financial or other), results of operations or prospects or those of our subsidiaries, taken as a whole, in a single transaction or a series of related transactions (including, without limitation, in a transaction between us and any subsidiary or other affiliate);

(2) sell, convey, pledge, transfer or otherwise dispose of any of the pledged securities we own, except in each such case as permitted by the indenture; or

(3) liquidate, dissolve or otherwise wind up our affairs.

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Incurrence of Indebtedness

We will not, and will not permit any subsidiary to, create, assume, incur or in any manner become liable in respect of, including, without limitation, by reason of any business combination transaction (all of which are referred to herein as “incurring”), any indebtedness other than permitted indebtedness. “Permitted indebtedness” includes, among other things, indebtedness held by GMAC, debts incurred in the ordinary course of business, 9% Notes issued pursuant to the indenture, and debt incurred to refinance existing indebtedness, within certain parameters.

Liens

We will not, and will not permit any of our subsidiaries to, create, assume or suffer to exist any lien upon all or any part of our property of any character, whether owned at the time the supplemental indenture is executed or thereafter acquired, except permitted liens. Permitted liens include, among other things, liens securing permitted indebtedness, liens for taxes and governmental levies, and liens related to certain letters of credit.

Limitation on Issuances of Securities

We shall not, and shall not permit any of our subsidiaries to (a) issue any common stock equivalent that directly or indirectly is convertible into, exchangeable for, or otherwise entitles the holder to acquire, shares of common stock at a price that varies based on changes in the market price of the common stock, (b) directly or indirectly issue any common stock or common stock equivalent under any agreement or arrangement that provides for re-pricing or adjusting the price at which common stock is issued in connection therewith or which adjusts the number of shares of common stock issued in connection therewith, (c) enter into any agreement for the issuance of shares of our common stock under an arrangement for us to draw down from a commitment by any person to issue shares of our common stock or which allows us or such subsidiary to exercise any put right with respect to shares of common stock or any similar transaction.

Investment Company Status

We will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended.

Nasdaq Listing

In the event that our common stock is delisted from the Nasdaq Small Cap Market, and is not listed on the Nasdaq, New York Stock Exchange or American Stock Exchange, the interest rate on the 9% Notes will be increased to 13%.

Records

We will keep and maintain at our own cost and expense satisfactory and complete records of the collateral, including, without limitation, a record of all payments received and all credits granted with respect to the accounts that constitute part of the collateral. For the further security of the trustee for the ratable benefit of the holders, we will grant to the trustee, for the ratable benefit of the holders, a security interest in all of our books and records pertaining to the collateral, and we shall turn over any such books and records for inspection at our office to the trustee or any holder or to their respective representatives during normal business hours at the request of the trustee upon reasonable prior notice from the trustee or such holder to us.

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Events of Default and Remedies

Each of the following is an event of default:

(1) we fail to pay any installment of interest on any note when due and such failure continues for a period of five business days after the due date thereof;\

(2) we fail to pay the principal of the 9% Notes on the maturity date of the 9% Notes;

(3) we fail to issue or cause to be issued shares of common stock to any holder upon exercise by such holder of such holders’ conversion rights within ten trading days after the date therefor;

(4) we default in our performance of, or breach, any covenant or warranty in the indenture concerning asset sales, the incurrence of indebtedness, the creation of liens, our continued corporate existence, and other specified covenants;

(5) we default in the performance, or breach, of any covenant or warranty in the indenture (other than a default pursuant to clause (4) or which has expressly been included in the indenture solely for the benefit of a series of securities other than the 9% Notes), and continuance of such default or breach for a period of fifteen business days after there has been given, by registered or certified mail, to us by the trustee or to us and the trustee by the holders of at least 25% in principal amount of the 9% Notes of this series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder;

(6) any of our representations or warranties made herein or in any agreement, statement or certificate given in writing pursuant thereto or in connection therewith (including, without limitation, the transaction documents) shall be false or misleading in any material respect when made and, there has been given, by facsimile transmission or registered or certified mail, to us by the trustee or to us and the trustee by the holders of at least 25% in principal amount of the 9% Notes a written notice specifying such default or breach and stating that such notice is a “Notice of Default” hereunder;

(7) any court of competent jurisdiction shall enter one or more final judgments against us or any of our subsidiaries or any of their respective properties or other assets in an aggregate amount in excess of $2,000,000, which is not vacated, bonded, stayed, discharged, satisfied or waived for a period of 45 consecutive days;

(8) we or any of our subsidiaries shall default in any payment with respect to any indebtedness for borrowed money (other than the 9% Notes) which indebtedness has an outstanding principal amount in excess of $5,000,000, individually or $10,000,000 in the aggregate, for us and our subsidiaries, and such indebtedness shall then be declared due and payable;

(9) the entry by a court having jurisdiction in the premises of (a) a decree or order for relief in respect of us in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (b) a decree or order adjudging us bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of us under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator, or other similar official for us or for any substantial part of our property, or ordering the winding up or liquidation of our affairs, and the continuance of any such decree or order for relief of any such other decree or order unstayed and in effect for a period of 90 consecutive days;

(10) a voluntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or we consent to the entry of a decree or order for relief in respect of us in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against us, or the filing by us of a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, or we consent to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of us or

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of any substantial part of its property, or we make an assignment for the benefit of creditors, or we admit in writing of our inability to pay our debts generally as they become due, or we take corporate action in furtherance of any such action; or

(11) the trustee shall fail to have a second priority perfected security interest for the benefit of the holders in certain of the collateral, other than collateral that has been released from the lien of the indenture in accordance with the terms of the indenture; or any of the pledged securities shall not be duly and validly authorized, fully paid and non-assessable shares of capital stock of the issuer thereof.

In the case of an event of default arising from certain events of bankruptcy or insolvency, with respect to us, all outstanding 9% Notes will become due and payable immediately without further action or notice. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding 9% Notes may declare all the 9% Notes to be due and payable immediately. Holders of the 9% Notes may not enforce the indenture or the 9% Notes except as provided in the indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding 9% Notes may direct the trustee in its exercise of any trust or power.

The holders of a majority in aggregate principal amount of the 9% Notes then outstanding by notice to us and the trustee may on behalf of the holders of all of the 9% Notes waive any existing event of default and its consequences under the indenture except a continuing event of default in the payment of interest on, or the principal of, the 9% Notes. We are required to deliver to the trustee annually a statement regarding compliance with the indenture. Upon becoming aware of any event of default, we are required to deliver to the trustee a statement specifying such event of default.

No Personal Liability of Directors, Officers, Employees and Stockholders

None of our directors, officers, employees, incorporators or stockholders, as such, shall have any liability for any of our obligations under the 9% Notes, the indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of 9% Notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the 9% Notes. The waiver may not be effective to waive liabilities under the federal securities laws.

Legal Defeasance and Covenant Defeasance

We may, at our option and at any time, elect to have all of our obligations discharged with respect to the outstanding 9% Notes, which we refer to as “Legal Defeasance,” except for:

(1) the rights of holders of outstanding 9% Notes to receive payments in respect of the principal of and interest on such 9% Notes when such payments are due from the trust referred to below;

(2) our obligations with respect to the 9% Notes concerning (a) issuing temporary 9% Notes, (b) registration and transfer of 9% Notes, (c) mutilated, destroyed, lost or stolen 9% Notes, (d) the maintenance of an office or agency for payment, (e) money for security payments held in trust, and (f) the right of holders to convert their 9% Notes and our obligation to deliver shares of common stock upon such conversion;

(3) the rights, powers, trusts, duties and immunities of the trustee, and our obligations in connection therewith; and

(4) the Legal Defeasance provisions of the indenture.

In addition, we may, at our option and at any time, elect to have the our obligations released with respect to certain covenants that are described in the indenture, which we refer to as “Covenant Defeasance,” and thereafter any omission to comply with those covenants shall not constitute an event of default with respect to the 9% Notes. In the event a Covenant Defeasance occurs, certain events (except, among other things, non-payment of principal and interest, bankruptcy, receivership, rehabilitation and insolvency events) described under “Events of Default” will no longer constitute an event of default with respect to the 9% Notes.

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In order to exercise either Legal Defeasance or Covenant Defeasance:

(1) we must irrevocably deposit with the trustee, in trust, for the benefit of the holders of the 9% Notes, cash in U.S. dollars, government obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding 9% Notes on the stated maturity, and we must specify whether the 9% Notes are being defeased to maturity or to a particular redemption date;

(2) in the case of Legal Defeasance, we shall have delivered to the trustee an opinion of counsel confirming that (a) we have received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the outstanding 9% Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred;

(3) in the case of Covenant Defeasance, we shall have delivered to the trustee an opinion of counsel confirming that the holders of the outstanding 9% Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred;

(4) we must deliver to the trustee a certificate stating that neither the 9% Notes nor any other securities of the same series, if then listed on any securities exchange, will be delisted as a result of such Legal Defeasance or Covenant Defeasance;

(5) no event of default shall have occurred and be continuing either: (a) on the date of such deposit or (b) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit;

(6) such Legal Defeasance or Covenant Defeasance shall not cause the trustee to have a conflicting interest within the meaning of the Trust Indenture Act of 1939, as amended (assuming all 9% Notes are in default within the meaning of such act);

(7) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any agreement or instrument to which we are a party or by which we are bound;

(8) such Legal Defeasance or Covenant Defeasance will not result in the trust constituting an investment company within the meaning of the Investment Company Act of 1940, as amended, unless such trust shall be registered under such act or exempt from registration thereunder; and

(9) we must deliver to the trustee a certificate and an opinion of counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with.

Amendment, Supplement and Waiver

Without the consent of each holder affected, an amendment or waiver may not (with respect to any 9% Notes held by a non-consenting holder):

(1) reduce the principal of or change the fixed maturity of any note or change our obligations with respect to the repurchase of the 9% Notes;

(2) reduce the rate of or change the time for payment of interest on any note;

(3) make any note payable in money other than that stated in the 9% Notes or change the place of payment where the 9% Notes are payable;

(4) modify the provisions of the indenture relating to subordination of the 9% Notes and warrants in a manner adverse to the holders of 9% Notes;

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(5) reduce the percentage in principal amount of 9% Notes whose holders must consent to an amendment, supplement or waiver;

(6) make any change adverse to the holders of the 9% Notes in the amendment and waiver provisions in the indenture; or

(7) make any change that adversely affects the right of holders to convert any security given for the 9% Notes pursuant to the indenture or decrease the conversion rate or increase the Conversion Price of any note.

Notwithstanding the preceding, without the consent of any holder of 9% Notes, we and the trustee may amend or supplement the indenture or the 9% Notes to, among other things:

(1) cure any ambiguity, defect or inconsistency;

(2) provide for uncertificated 9% Notes in addition to or in place of certificated 9% Notes;

(3) provide for the assumption of our obligations to holders of 9% Notes in the case of a merger or consolidation or sale of all or substantially all of our assets;

(4) make any change that would provide any additional rights or benefits to the holders of 9% Notes or that does not adversely affect the legal rights under the indenture of any such holder; or

(5) comply with requirements of the Securities and Exchange Commission in order to effect or maintain the qualification of the indenture under the Trust Indenture Act.

Concerning the Trustee

If the trustee becomes one of our creditors, the indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict, apply to the Securities and Exchange Commission for permission to continue or resign to the extent and in the manner provided by the Trust Indenture Act.

The holders of a majority in principal amount of the then outstanding 9% Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an event of default shall occur and be continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of 9% Notes.

Section 203 of the Delaware General Corporation Law

Section 203 of the Delaware General Corporation Law generally restricts a corporation from entering into certain business combinations with an interested stockholder (defined as any person or entity that is the beneficial owner of at least 15% of a corporation’s voting stock) or its affiliates for a period of three years after the date of the transactions in which the person became an interested stockholder unless (i) the transaction is approved by the board of directors of the corporation prior to such business combination, (ii) the interested stockholder acquires 85% of the corporation’s voting stock in the same transaction in which it exceeds 15%, or (iii) the business combination is approved by the board of directors and by a vote of two-thirds of the outstanding voting stock not owned by the interested stockholder. The Delaware General Corporation Law provides that a corporation may elect not to be governed by Section 203. At present, the Company does not intend to make such an election. Section 203 may render more difficult a change in control of the Company or the removal of incumbent management.

Transfer Agent and Registrar Computershare Trust Company, Denver, Colorado, is Transfer Agent and Registrar for the Common Stock and the Warrants.

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PRINCIPAL AND SELLING STOCKHOLDERS

Beneficial Ownership and Other Information

The following sets forth information with respect to the 9% Notes and the shares of common stock beneficially held by selling stockholders:

Name	Beneficial Ownership of 9% Notes Prior to Offering			Aggregate Principal Amount of 9% Notes being Offered		Beneficial Ownership Prior to an Offering**		Shares Being Offered(38)		Shares Beneficially Owned After the Offering(1)**		Percent Owned Before Offering		Percent Owned After Offering
Alexandra Global Master Fund Ltd(2)	$	15,000,000	(39)	$	15,000,000
Alexandra Global Master Fund Ltd(2)						12,338,447	(36)(40)	42,117,771	(3)	16,920,903	(41)(42)	9.9	%(36)	9.9	%(41)(42)
Brightleaf Partners LP(4)(5)						611,248		611,248		—		*		*
Crescent International(6)(7)						1,593,158		1,593,158		—		1.4		*
Edward S. Gutman(8)						183,375		183,375		—			*	*
JMG Triton Offshore Fund, Ltd.(9)(10)						1,222,497		1,222,497		—		1.1		*
JMG Capital Partners, L.P.(9)(10)						1,222,497		1,222,497		—		1.1		*
JRSquared LLC(11)(12)						733,498		733,498		—		*		*
Mark Mathes/Teri Mathes(13)						855,748		855,748		—		*		*
Truk Opportunity Fund, LLC(14)(15)						88,509		88,509		—		*		*
OTAPE Investments, LLC(16)(17)						488,999		488,999		—		*		*
Silverman Partners(18)(19)						366,749		366,749		—		*		*
Societe Bancaire Privee S.A.(20)(21)						1,222,497		1,222,497		—		1.1		*
Yomi Rodrig(22)						1,222,497		1,222,497		—		1.1		*
Trisun Offshore Fund Ltd(23)(24)						1,393,647		1,393,647		—		1.2		*
Trisun Capital Fund LP(25)(26)						1,723,721		1,723,721		—		*		*
Trisun Partners LP(27)(28)						550,124		550,124		—		*		*
Wardenclyffe Micro-Cap Fund, LP(29)(30)						488,999		488,999		—		*		*
Platinum Partners Value Arbitrage Fund LP(31)(32)						611,248		611,248		—		*		*
Rodney P. Cousens(33)						3,244,668		1,500,000		1,744,668		2.8		1.5
Gregory Fischbach(34)						12,184,563		500,000		11,684,563		10.4		10.0
James Scoroposki(35)						13,346,055		500,000		12,846,055		11.4		11.0
HCFP/Brenner Securities(37)						566,580		566,580		—		*		*

* Less than one percent.

** Beneficial ownership calculated as of March 3, 2004 in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934 and is based on 113,403,810 shares of common stock outstanding.

(1) Assumes that all of the shares covered by this prospectus are sold by the selling stockholders pursuant to this prospectus. The selling stockholders may choose to dispose of none or only a portion of the shares held by them pursuant to this prospectus.

(2) We have been advised that Alexandra Investment Management, LLC, a Delaware limited liability company (“Alexandra”), serves as investment adviser to Alexandra Global Master Fund Ltd., a British

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Virgin Islands company (“Master Fund”). By reason of such relationship, Alexandra may be deemed to share dispositive power over the 9% Notes and the shares of common stock stated as beneficially owned by Master Fund. Alexandra disclaims beneficial ownership of such shares of common stock. Messrs. Mikhail A. Filimonov (“Filimonov”) and Dimitri Sogoloff (“Sogoloff”) are managing members of Alexandra. By reason of such relationships, Filimonov and Sogoloff may be deemed to share dispositive power over the 9% Notes and the shares of common stock stated as beneficially owned by Master Fund. Filimonov and Sogoloff disclaim beneficial ownership of such 9% Notes and shares of common stock.

(3) Includes 33,427,800 shares issuable upon the conversion of notes and 8,689,971 shares issuable upon the exercise of warrants. This prospectus covers the resale by Master Fund of up to (i) 23,076,923 shares issuable upon the conversion of the 9% Notes and 4,615,385 shares issuable upon exercise of related warrants and (ii) 10,350,877 shares issuable upon the conversion of notes and 4,074,586 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(4) We have been advised that John J. Pinto, managing partner, has voting and dispositive control over the shares held by Brightleaf Partners LP.

(5) Includes 438,596 shares issuable upon the conversion of notes and 172,652 shares issuable upon the exercise of warrants. This prospectus covers the resale by Brightleaf Partners LP of up to (i) 438,596 shares issuable upon the conversion of Notes and (ii) 172,652 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(6) We have been advised that Mel Craw, Manager of DMI Trust, has voting and dispositive control over the shares held by Crescent International.

(7) Includes 1,143,158 shares issuable upon the conversion of notes and 450,000 shares issuable upon the exercise of warrants. This prospectus covers the resale by Crescent International of up to (i) 1,143,158 shares issuable upon the conversion of Notes and (ii) 450,000 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(8) Includes 131,579 shares issuable upon the conversion of notes and 51,796 shares issuable upon the exercise of warrants. This prospectus covers the resale by Edward S. Gutman of up to (i) 131,579 shares issuable upon the conversion of Notes and (ii) 51,796 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(9) We have been advised that Jonathan Glaser, Roger Richter and Daniel David are the principals of Pacific Asset Management, LLC, the investment adviser to JMG Triton Offshore Fund, Ltd. We are also advised that Jonathan Glaser is the principal of JMG Capital Management, LLC, the general partner to JMG Capital Partners, L.P.

(10) Includes 1,754,386 shares issuable upon the conversion of notes and 690,608 shares issuable upon the exercise of warrants. This prospectus covers the resale by JMG Triton Offshore Fund, Ltd. and JMG Capital Partners, L.P. of up to (i) 1,754,386 shares issuable upon the conversion of notes and (ii) 690,608 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(11) We have been advised that Jeff Markowitz is the managing member of JR Squared LLC and has voting and dispositive control over the shares held by JRSquared LLC.

(12) Includes 526,316 shares issuable upon the conversion of notes and 207,182 shares issuable upon the exercise of warrants. This prospectus covers the resale by JRSquared LLC of up to (i) 526,316 shares issuable upon the conversion of notes and (ii) 207,182 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(13) Includes 614,035 shares issuable upon the conversion of notes and 241,713 shares issuable upon the exercise of warrants. This prospectus covers the resale by Mark Mathes/ Teri Mathes of up to (i) 614,035 shares issuable upon the conversion of notes and (ii) 241,713 shares issuable upon exercise of warrants which were received as part of the Note Offering.

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(14) We have been advised that Michael E. Fein and Stephen E. Saltzstein, as principals of Atoll Asset Management, LLC, the managing member of Truk Opportunity Fund, LLC, exercise investment and voting control over the shares held by Truk Opportunity Fund, LLC. Both Mr. Fein and Mr. Saltzstein disclaim beneficial ownership of the common stock owned by this selling shareholder.

(15) Includes 63,509 shares issuable upon the conversion of notes and 25,000 shares issuable upon the exercise of warrants. This prospectus covers the resale by Truk Opportunity Fund, LLC of up to (i) 63,509 shares issuable upon the conversion of notes and (ii) 25,000 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(16) We have been advised that Ira Leventhal, a U.S. Citizen, may be deemed to have sole voting and dispositive power over the shares held by OTAPE Investments, LLC. Mr. Leventhal disclaims beneficial ownership of the common stock owned by this selling stockholder.

(17) Includes 350,877 shares issuable upon the conversion of notes and 138,122 shares issuable upon the exercise of warrants. This prospectus covers the resale by OTAPE Investments, LLC of up to (i) 350,877 shares issuable upon the conversion of notes and (ii) 138,122 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(18) We have been advised that Harry Silverman, general partner of Silverman Partners, has voting and dispositive control over the shares held by Silverman Partners.

(19) Includes 263,158 issuable upon the conversion of notes and 103,591 shares issuable upon the exercise of warrants. This prospectus covers the resale by Silverman Partners of up to (i) 263,158 shares issuable upon the conversion of notes and (ii) 103,591 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(20) We have been advised that Alexander Heuss is a senior vice president of Societe Bancaire Privee S.A.

(21) Includes 877,193 shares issuable upon the conversion of notes and 345,304 shares issuable upon the exercise of warrants. This prospectus covers the resale by Societe Bancaire Privee S.A. of up to (i) 877,193 shares issuable upon the conversion of notes and (ii) 345,304 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(22) Includes 877,193 shares issuable upon the conversion of notes and 345,304 shares issuable upon the exercise of warrants. This prospectus covers the resale by Yomi Rodrig of up to (i) 877,193 shares issuable upon the conversion of notes and (ii) 345,304 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(23) TriSun Asset Management, L.L.C. is the investment manager of the named selling shareholder and has the power to direct the voting and disposition of these shares. Mr. Michael Bunyaner is the Managing Member of TriSun Asset Management, L.L.C. TriSun Asset Management, L.L.C and Mr. Bunyaner each disclaim beneficial ownership of these shares.

(24) Includes 1,000,000 shares issuable upon the conversion of notes and 393,647 shares issuable upon the exercise of warrants. This prospectus covers the resale by Trisun Offshore Fund Ltd of up to (i) 1,000,000 shares issuable upon the conversion of notes and (ii) 393,647 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(25) TriSun Capital Management, L.L.C. is the general partner of the named selling shareholder and has the power to direct the voting and disposition of these shares. Mr. Michael Bunyaner is the Managing Member of TriSun Capital Management, L.L.C. Mr. Bunyaner disclaims beneficial ownership of these shares.

(26) Includes 1,236,842 shares issuable upon the conversion of notes and 486,879 shares issuable upon the exercise of warrants. This prospectus covers the resale by Trisun Capital Fund LP of up to (i) 1,236,842 shares issuable upon the conversion of notes and (ii) 486,879 shares issuable upon exercise of warrants which were received as part of the Note Offering.

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(27) TriSun Capital Management, L.L.C. is the general partner of the named selling shareholder and has the power to direct the voting and disposition of these shares. Mr. Michael Bunyaner is the Managing Member of TriSun Capital Management, L.L.C. Mr. Bunyaner disclaims beneficial ownership of these shares.

(28) Includes 394,737 shares issuable upon the conversion of notes and 155,387 shares issuable upon the exercise of warrants. This prospectus covers the resale by Trisun Partners LP of up to (i) 394,737 shares issuable upon the conversion of Notes and (ii) 155,387 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(29) We have been advised that Mark Shapiro is the general partner of Wardenclyffe Micro-Cap Fund, LP, and has voting and dispositive control over the shares held by Wardenclyffe Micro-Cap Fund, LP.

(30) Includes 350,877 shares issuable upon the conversion of notes and 138,122 shares issuable upon the exercise of warrants. This prospectus covers the resale by Wardenclyffe Micro-Cap Fund, LP of up to (i) 350,877 shares issuable upon the conversion of Notes and (ii) 138,122 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(31) We have been advised that Michael Nordlicht is a general partner of the Platinum Partners Value Arbitrage Fund, LP and has voting and dispositive control over the shares held by Platinum Partners Value Arbitrage Fund LP.

(32) Includes 438,596 shares issuable upon the conversion of notes and 172,652 shares issuable upon the exercise of warrants. This prospectus covers the resale by Platinum Partners Value Arbitrage Fund LP of up to (i) 438,596 shares issuable upon the conversion of Notes and (ii) 172,652 shares issuable upon exercise of warrants which were received as part of the Note Offering.

(33) Mr. Cousens is the Chief Executive Officer of the Company.

(34) Mr. Fischbach is Co-Chairman of the Board of Directors of the Company. The shares being offered hereby are issuable upon exercise of a warrant issued by the Company to Mr. Fischbach.

(35) Mr. Scoroposki is Co-Chairman of the Board of Directors of the Company. The shares being offered hereby are issuable upon exercise of a warrant issued by the Company to Mr. Scoroposki.

(36) The notes and warrants issued to this selling stockholder contain limitations on the conversion or exercise thereof which make the notes inconvertible and the warrants unexercisable to the extent the holder and its related persons would, upon conversion or exercise, beneficially own more than 9.9% of the common stock as determined in accordance with Section 13(d) and Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The amount shown as beneficially owned is based on such limitations. In the absence of such limitations the number of shares of common stock which this selling stockholder would have the right to acquire upon conversion of the notes and exercise of the warrants issued to this selling stockholder would be 42,117,771. Accordingly, the number of shares of common stock being offered hereby over time (during the period this registration statement remains effective) may exceed the actual number of shares of common stock that this selling stockholder could own beneficially at any one point in time through its ownership of notes and warrants.

(37) HCFP/Brenner Securities acted as placement agent in the September/October 2003 and February 2004 note offerings and received as partial compensation for such services a warrant to purchase 266,580 shares at $.57 per share for the September/October offering and a warrant to purchase 300,000 shares at $.65 per share for the February 2004 offering.

(38) Does not reflect the Company’s good faith estimate of additional shares of common stock issuable pursuant to anti-dilution provisions contained in the 16% Notes, the 9% Notes and the warrants held by the selling stockholders, this only reflects the actual number of shares which may be acquired upon conversion of the notes and/or exercise of the warrants, not giving effect to any potential adjustments.

(39) This amount does not include an aggregate of $10,000,000.00 of additional 9% Notes which Master Fund has the right to acquire pursuant to the terms of the Note Purchase Agreement, dated as of February 17, 2004, by and between the Company and Master Fund (the “9% Note Purchase Agreement”).

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(40) This amount does not include 15,384,615 shares issuable upon conversion of additional 9% Notes and 3,076,923 shares issuable upon exercise of additional warrants which Master Fund has the right to acquire pursuant to the terms of the 9% Note Purchase Agreement. The 9% Notes and warrants contain limitations on the conversion or exercise thereof which makes such notes inconvertible and such warrants unexercisable to the extent the holder and its related persons would, upon conversion or exercise, beneficially own more than 9.9% of the Common Stock or determined in accordance with Section 13(d) and Section 16(a) of the Exchange Act.

(41) Amount represents shares issuable upon conversion of additional 9% Notes and exercise of additional warrants which Master Fund has the right to acquire pursuant to the 9% Note Purchase Agreement. Such notes and warrants contain limitations on the conversion or exercise thereof which make the notes inconvertible and the warrants unexercisable to the extent the holder and its related persons would, upon conversion or exercise, beneficially own more than 9.9% of the common stock as determined in accordance with Section 13(d) and Section 16(a) of the Exchange Act. The amount shown as beneficially owned after the Offering is based on such limitations. In the absence of such limitations the number of shares of common stock which this selling stockholder would have the right to acquire upon conversion of the Notes and exercise of the warrants after the Offering would be 18,461,538 shares and the percentage of shares of common stock owned after the Offering would be 10.8%.

(42) Amount shown assumes the sale by Master Fund of all shares issuable upon conversion of the notes and exercise of the warrants which are included in this prospectus.

September/October 2003 Note Offering

At the end of September 2003 and beginning of October 2003, the Company raised gross proceeds of $11,862,800 in connection with the Note Offering in which a limited group of private investors, purchased 16% Convertible Subordinated Notes (the “Notes”) due in 2010.

The Original Terms of the 16% Note Offering (Originally 10%)

The Notes issued in the Note Offering were initially convertible into 16,385,083 shares of the Company’s common stock, based upon a conversion price of $0.724 per share, and provided that if the Company obtained the authorization from its stockholders, then the conversion price for the Notes would be adjusted to $0.57 per share, a 21% discount from the $0.724 initial conversion price (the Notes would then be convertible into 20,811,930 shares of the Company’s common stock). The initial conversion price was based upon the 10 day trailing average of the Company’s common stock ending on September 23, 2003. The purchasers of the Notes also received warrants (the “Initial Warrants”) to purchase an aggregate of 4,096,271 shares of the Company’s common stock, at an initial exercise price of $0.724 per share, which exercise price would also be adjusted to $0.57 if stockholder approval of the Note Offering were to be obtained. If the Company did not receive stockholder approval, then additional warrants (the “Additional Warrants”) were required to be issued to the purchasers of the Notes, providing them with the right to purchase an additional 4,096,271 shares at the market price at the time of issuance. The proceeds from this financing have been added to the Company’s working capital and were used for general corporate purposes. 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 SEC under the Securities Act of 1933, or an applicable exception therefrom. The Company agreed to register the shares of its common stock underlying the Notes and Initial Warrants within 120 days following the closing. In consummating the Note Offering, the Company relied upon the exemption from registration afforded in Regulation D of the Securities Act of 1933. Accordingly, the purchasers in that offering were all accredited investors and each made representations to the Company that they were accredited. The purchasers also provided customary representations and warranties to the Company in connection with the offering.

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On November 12, 2003, the Company received notification from The Nasdaq Stock Market, Inc. that, in Nasdaq’s opinion, the structure of the Note Offering was not in compliance with NASD Marketplace Rule 4350(i)(1)(D). The Note Offering was structured in a manner which the Company believes complied with Nasdaq’s rules. Also, Nasdaq has advised the Company that it views our June 2003 sale of approximately 16,383,000 shares of common stock as part of the same transaction as the Note Offering for purposes of compliance with Nasdaq Rule 4350(i)(1)(D), and therefore the terms of the Note Offering were required to be amended in order to comply with such rule. NASDAQ Marketplace Rule 4350(i)(1)(D) requires stockholder approval prior to the sale or issuance or potential issuance of shares, or securities convertible into or exercisable for shares, equal to twenty percent (20%) or more of the Company’s common stock or twenty percent (20%) or more of the voting power of the Company outstanding before the issuance, if the effective sale price of the common stock is less than the greater of the book or market value of the common stock. Shares of the Company’s common stock issuable upon the exercise or conversion of warrants, options, debt instruments, preferred stock or other equity securities issued or granted in such capital raising transaction are considered shares issued in such transaction in determining whether the 20% limit has been reached. Management believed the delay required to arrange for a meeting of stockholders to approve a specific transaction would have jeopardized the Company’s ability to complete the financing transactions.

Nasdaq Approved Amended Terms of the 16% Note Offering (Originally 10%)

The Company amended the terms of the Notes and the Initial Warrants in order to comply with Nasdaq’s interpretation of Marketplace Rule 4350(i)(1)(D) in the following ways.

(A) The conversion or exercise price of both the Notes and the Initial Warrants was changed to $0.8945 per share, which price Nasdaq advised the Company complied with its interpretation of “market price” as of the time of the Note Offering,

(B) Each investor in the Note Offering received additional warrants (the “Amendment Warrants”) to purchase a number of shares (4,096,271 shares in the aggregate) equal to those underlying the Initial Warrant issued to such investor, at an exercise price of $0.8945 per share, on substantially the same terms as contained in the Initial Warrants,

(C) The provisions in the Note Purchase Agreements regarding the possible issuance of Additional Warrants, as discussed above, were eliminated, thereby negating the potential issuance of the Additional Warrants,

(D) The exercise price of the Notes, the Initial Warrants and the Amendment Warrants would be adjusted to $0.57 per share in the event stockholder approval of the Note Offering was obtained,

(E) The investors may not convert or exercise the Notes, the Initial Warrants or the Amendment Warrants until stockholder approval is obtained for the Note Offering, or January 31, 2004, whichever is earlier, and

(F) The interest rate on the Notes was increased from 10% to 16%;

(a) the Notes, the Initial Warrants and the Amendment Warrants contain limitations on conversion or exercise such that no holder may beneficially own more than 9.9% of the Company’s stock at any time; and

(b) in the event of a merger, or other transaction in which the Company’s stockholders are entitled to receive securities or other property with respect to their common stock, the Company or successor entity must agree that the Notes are convertible into such securities or other property and, if necessary, to register or qualify such securities or property for resale.

In connection with the aforementioned terms of the Note amendments, the consent of our primary lender was obtained for the adjustment of the interest rate on the Notes, and definitive amendment documentation was executed by all parties. Additionally, the Company’s co-Chairmen, Gregory Fischbach and James Scoroposki, agreed to vote their stock in the Company in favor of the Note Offering. NASDAQ has approved the amended terms of the Note Offering, subject to stockholder approval, which was obtained on January 20, 2004.

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February 2004 9% Note Offering

On February 17, 2004, the Company raised gross proceeds of $15,000,000 in connection with the private placement of its 9% Senior Subordinated Convertible Notes (the “9% Notes”), due in 2007, to an investor. The 9% Notes are convertible into shares of the Company’s common stock, at a conversion price equal to $0.65 per share (the “Initial Conversion Price”). Additionally, the investor received warrants to purchase 4,615,385 shares of the Company’s common stock, with an exercise price of $0.65 per share. The warrants are exercisable for five years from February 17, 2004 (the “Initial Closing Date”). Interest due on the 9% Notes is payable semi-annually commencing October 1, 2004. The 9% Notes will be collateralized by a second mortgage on Acclaim’s headquarters building in Glen Cove, New York, and other assets, subject to the Company’s primary lender’s (GMAC Commercial Finance LLC) consent and subordinate to any indebtedness held by GMAC and an inter-creditor agreement to be entered into post-closing. The terms of the 9% Notes limit Acclaim’s incurrence of additional indebtedness or payment of cash dividends.

Commencing August 18, 2004, if the market value of the Company’s common stock equals at least $1.625, which is periodically reduced to $0.975 by February 19, 2006, and other specified criteria are met, the Company has the right to redeem all or a portion of the 9% Notes at the outstanding principal balance of the 9% Notes plus any related accrued interest. The investor has the right to require the Company to repurchase the 9% Notes in the event of a change in control of the Company, as defined in the agreement. The 9% Notes are subordinated to all the Company’s bank debt with GMAC.

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 SEC under the Securities Act of 1933, or an applicable exception there from. Acclaim has agreed to file a registration statement for the Notes and register the shares of its common stock underlying the 9% Notes and the warrants within 45 days following the Initial Closing Date.

The Company has a first option, for a nine month period following the Initial Closing Date relating to the 9% Notes (the “First Option Period”), to require the investor to purchase $5,000,000 of additional 9% Notes (the “First Additional 9% Notes”) at a conversion price of $0.65 per share, if during that period the closing bid price of its common stock exceeds $0.8125 per share for twenty consecutive trading days, the registration statement covering the shares underlying the 9% Notes is effective and its common stock continues to be listed on a qualified securities exchange. The investor also has the option, during the First Option Period, to purchase the First Additional 9% Notes from the Company for $5,000,000. The Company has a second option, for a six month period commencing February 17, 2005 (the “Second Option Period”), to require the investor to purchase $5,000,000 of additional 9% Notes (the “Second Additional 9% Notes”) at a conversion price of $0.65 per share, if during the three month period commencing February 17, 2005, the closing bid price of its common stock exceeds $1.30 per share for twenty consecutive trading days or, if during the three month period commencing May 17, 2005, the closing bid price of its common stock exceeds $0.975 for twenty consecutive trading days and its common stock continues to be listed on a qualified securities exchange. The investor also has the option, for an 18 month period commencing on the Initial Closing Date, to purchase the Second Additional 9% Notes from the Company for $5,000,000. In connection with any purchase of First Additional 9% Notes or Second Additional 9% Notes, the investor would receive additional warrants to purchase a number of shares of Acclaim’s common stock equal to 20% of the number of shares underlying those additional notes, with an exercise price of $0.65 per share.

We incurred fees of $907,000 in connection with the 9% Notes transaction for placement agent and investment advisory services, comprised of warrants to purchase 300,000 shares of our common stock at an exercise price of $0.65 per share with a fair value of $157,000, and cash payments totaling $750,000. We will amortize these fees on a straight-line basis over the term of the 9% Notes or, upon their conversion to common stock.

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Any proceeds from the exercise of the warrants described above will be added to Acclaim’s working capital.

The shares issued to each of the selling stockholders are restricted securities within the meaning of the Securities Act and cannot be offered for sale without an effective registration statement covering such offer and sale or pursuant to an applicable exemption from the registration requirements of the Securities Act. Pursuant to the terms of the various agreements, Acclaim filed the registration statement (of which this prospectus is a part) and will use its best efforts to keep the registration statement effective until all of the shares issued to the selling stockholders are disposed of by them or until such shares are generally eligible for resale without volume restrictions pursuant to applicable exemptions from registration under the Securities Act.

Except for (i) the participation of Alexandra Global Master Fund Ltd., Crescent International Ltd, Edward S. Gutman, JRSquared LLC, Truk Opportunity Fund, LLC, Silverman Partners LLC and Wardenclyffe Micro-Cap Fund, LP in Acclaim’s June 2003 private placement and their subsequent inclusion in a separate effective registration statement currently on file with the SEC and (ii) the participation of affiliates of Alexandra Global Master Fund Ltd. in private placements in July 2001 and February 2002, and an exchange pursuant to Section 3(a)(9) of the Securities Act of 1933 in March 2001, and the inclusion of such affiliates in separate effective registration statements currently on file with the SEC, neither Acclaim nor any of its affiliates has had any material relationship with any of the selling stockholders within the past three years.

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USE OF PROCEEDS

Acclaim will not receive any proceeds from the conversion of notes or the sale of any of the shares of its common stock by the selling stockholders. Any proceeds from the exercise of warrants will be added to Acclaim’s working capital.

PLAN OF DISTRIBUTION

The selling stockholders have not employed an underwriter for the sale of shares by the selling stockholders. Each selling stockholder may offer the 9% Notes and/or shares, as appropriate to the selling stockholders holdings, directly or through pledgees, donees, transferees or other successors in interest at various times:

• on The Nasdaq SmallCap Market or in any other securities market on which Acclaim’s common stock or the 9% Notes is then listed or traded,

• in negotiated transactions,

• in a combination of any of the above transactions, or

• through any other available market transaction.

The selling stockholders may offer the 9% Notes and/or the shares at (1) fixed prices which may be changed, (2) prices prevailing at the time of sale, (3) prices related to such prevailing market prices, or (4) at negotiated prices. Sales on or through The Nasdaq SmallCap Market will be effected at such prices as may be obtainable and as may be satisfactory to the selling stockholders. No sales or distributions other than as disclosed in this prospectus will be effected until after this prospectus shall have been appropriately amended or supplemented, if required, to set forth the terms of the sale or distribution. The shares and/or the 9% Notes held by the selling stockholders may be sold directly or through brokers or dealers, or in a distribution by one or more underwriters on a firm commitment or best efforts basis. The methods by which the selling stockholders’ shares or 9% Notes, as applicable, may be sold include:

• a block trade (which may involve crosses) in which the broker or dealer so engaged will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;

• purchases by a broker or dealer as principal and resale by that broker or dealer for its account under this prospectus;

• exchange distributions and/or secondary distributions in accordance with the rules of The Nasdaq SmallCap Market;

• ordinary brokerage transactions in which the broker solicits purchasers; and

• privately negotiated transactions.

In addition, any shares of common stock that qualify for sale under Rule 144 or Rule 144A under the Securities Act may be sold under any such rules rather than under this prospectus.

The selling stockholders may enter into hedging and/or monetization transactions. For example, a selling stockholder may:

• enter into transactions with a broker-dealer or affiliate of a broker-dealer or other third party in connection with which that other party will become a selling stockholder and engage in short sales or other sales of our Common Stock under this prospectus, in which case the other party may use shares of our Common Stock received or borrowed from, or pledged by, the selling stockholder or others to settle

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those sales or to close out any related open borrowings of Common Stock, and may use securities received from the selling stockholder in settlement of those derivatives to close out any related borrowings of Common Stock;

• itself sell short our Common Stock under this prospectus and use shares of our Common Stock held by it to close out any short position;

• enter into options, forwards or other transactions that require a selling stockholder to deliver, in a transaction exempt from registration under the Securities Act, our Common Stock to a broker-dealer or an affiliate of a broker-dealer or other third party who may then become a selling stockholder and publicly resell or otherwise transfer our Common Stock under this prospectus; or

• loan or pledge our Common Stock to a broker-dealer or affiliate of a broker-dealer or other third party who may then become a selling stockholder and sell the loaned shares or, in an event of default in the case of a pledge, become a selling stockholder and sell the pledged shares under this prospectus.

The selling stockholders may sell any or all of the 9% Notes and/or the shares of our Common Stock, as applicable, offered by them pursuant to this prospectus.

Brokers or dealers may receive commission or discounts from the selling stockholders in amounts to be negotiated immediately prior to the sale. Commission expenses and brokerage fees will be paid by the selling stockholders.

The selling stockholders and any underwriters, dealers or agents that participate in the distribution of its shares of Acclaim’s common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any profit on the resale of those shares by them or any discounts, commissions or adjustments received by any such underwriters, dealers or agents may be deemed to be underwriting discounts and commissions under the Securities Act.

Acclaim has agreed to indemnify the selling stockholders, their officers, directors, shareholders, employees, agents, counsel, and each person who controls each selling stockholder, as determined under applicable securities laws, against certain kinds of liability relating to this offering. Types of liability include liability arising from any untrue statement or alleged untrue statement in this prospectus or the registration statement of which it is a part, any omission or alleged omission to state a material fact within this prospectus or the registration statement of which it is a part, and any violation under the Securities Act or any federal or state securities law or regulation. The selling stockholders have also agreed to indemnify Acclaim and its officers, directors, shareholders, partners, employees, agents, counsel, and each person who controls Acclaim, as determined under applicable securities laws, against certain kinds of liability relating to this offering. Types of liability include liability arising from any untrue statement or alleged untrue statement in this prospectus or the registration statement of which it is a part, any omission or alleged omission to state a material fact within this prospectus or the registration statement of which it is a part, and any violation under the Securities Act or any federal or state securities law or regulation, to the extent any of the violations occur in connection with written information furnished by a selling stockholder in connection with this prospectus or the registration statement of which it is a part. However, the total amount payable in indemnity by any selling stockholder shall not exceed net proceeds received by the selling stockholder in the registered offering out of which the violation arises. The parties have also agreed to make contribution in respect of any claims or damages for which indemnification is unavailable.

Expenses of this offering related to this registration statement, estimated at $200,000, will be borne in full by Acclaim. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling Acclaim pursuant to the foregoing provisions, Acclaim has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

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PROPERTIES

Our corporate headquarters is located in a 70,000 square foot office building in Glen Cove, New York, which we purchased in fiscal 1994. We also lease a 22,000 square foot facility and a separate 5,000 square foot facility, both in the U.K., where our international operations are headquartered. Please see Note 14 (Debt) on page F-50 and Note 15 (Obligations under Capital and Operating Leases) of the notes to the Consolidated Financial Statements on page F-54 of this prospectus.

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

Financial Information about Foreign and Domestic Operations and Export Sales

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 25 of this prospectus and Note 22 (Segment Information) of the notes to the Consolidated Financial Statements included on page F-66 of this prospectus.

DIRECTORS AND EXECUTIVE OFFICERS

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

Name	Position	Age
Gregory E. Fischbach	Co-Chairman of the Board	61
James Scoroposki	Co-Chairman of the Board, Senior Executive Vice President, Secretary and Treasurer	55
Rodney Cousens	Global President and Chief Executive Officer	52
Kenneth L. Coleman	Director	61
Bernard Fischbach	Director	58
Michael Tannen	Director	63
Robert Groman	Director	61
James Scibelli	Director	53
Gerard F. Agoglia	Executive Vice President and Chief Financial Officer	53

Gregory E. Fischbach, a founder of our Company, served as our President from our formation until October 1996 and then again from January 1999 through December 2001. Mr. Fischbach also served as our Chief Executive Officer from our formation through June 1, 2003. Mr. Fischbach has been a member of our Board of Directors since 1987 and our Co-Chairman of our Board of Directors since March 1989. Mr. Fischbach remains as Co-Chairman of our Board of Directors.

James Scoroposki, a founder of our Company, has been our Senior Executive Vice President since December 1993, a member of our Board of Directors since 1987, Co-Chairman of our Board of Directors since March 1989 and our Secretary and Treasurer since our formation. Mr. Scoroposki was also our Chief Financial Officer from April 1988 to May 1990, Executive Vice President from our formation to November 1993 and acting Chief Financial and Accounting Officer from November 1997 to August 1999. Since December 1979, he has also been the President and sole shareholder of Jaymar Marketing Inc., a sales representative organization.

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

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Kenneth L. Coleman has been a member of the Board of Directors since July 1997. Mr. Coleman was Executive Vice President of Global Sales, Service and Marketing for Silicon Graphics, Inc. (SGI), a $2.3 billion computer systems company. In his 14-year career at SGI, Mr. Coleman held several senior management positions including Senior Vice President of Global Services and Senior Vice President of Administration and Business Development. Since 2002, Mr. Coleman was the founder of ITM Software and serves as its Chairman and CEO. Since January 1998, Mr. Coleman has served as a director of MIPS Technologies, Inc., a licensor of microprocessor architecture, in Mountain View, California. Since 2001, he has served as a director of United Online, Inc. a provider of value-priced Internet access through its NetZero, Juno and BlueLight Internet consumer brands, in Westlake Village, California. Since 2003, he served as a director of City National Bank, which provides banking, trust and investment services in Southern California, the San Francisco Bay Area and New York City.

Bernard J. Fischbach has been a member of our Board of Directors since 1987 and has, for more than the preceding five years, been a partner in the law firm of Fischbach, Perlstein & Lieberman LLP (and its predecessor firms) in Los Angeles, California.

Robert H. Groman has been a member of our Board of Directors since 1989 and has, for more than the preceding five years, been a partner in the law firm of Groman, Ross & Tisman, P.C. (and its predecessor firms) in Long Island, New York.

James Scibelli has been a member of our Board of Directors since 1993 and has, since March 1986, served as president of Roberts & Green, Inc., a New York financial consulting firm offering a variety of financial and investment consulting services. Mr. Scibelli is also a member of RG Securities LLC, a licensed broker-dealer in New York.

Michael Tannen has been a member of our Board of Directors since 1989 and has, for more than the preceding five years been the Managing Partner of Tannen Media Investment Fund LLC, an investment company specializing in early stage investments in media, entertainment and telecommunications companies. Acting on his own and through Tannen Media Ventures, Inc., a media investment company, he has been a business advisor, consultant and producer representing various media companies.

Gerard F. Agoglia became an executive officer of Acclaim in August 2000, when he joined Acclaim as Executive Vice President and Chief Financial Officer. Formerly, Mr. Agoglia was Senior Vice President, Chief Financial Officer of Lantis Eyewear Corporation, responsible for strategic initiatives including several successful acquisitions. Prior to such time, Mr. Agoglia served as Corporate Controller of Calvin Klein, Inc. Mr. Agoglia has over 20 years of corporate financial management experience in the apparel and accessories industries. Mr. Agoglia is a Certified Public Accountant and has a Masters of Business Administration degree.

Committees of the Board of Directors

The Audit Committee of the Board of Directors (the “Audit Committee”) is comprised of four non-employee Directors, Messrs. Scibelli (chair), Coleman, Groman and Tannen. Each Director is independent under the applicable Nasdaq rules, with the exception of Mr. Scibelli (who received compensation from the Company in connection with his investment banking services in several financing transactions during our 2001 fiscal year, but who pursuant to Nasdaq rules was authorized by the Board of Directors to serve on the Audit Committee given his extensive knowledge of our operations and our industry as well as his extensive background in finance). See “Certain Relationships and Related Transactions.” Mr. Scibelli has been determined by the Board of Directors to be an “audit committee financial expert” as defined by Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder; under such rules, Mr. Scibelli may be deemed independent of management. The Audit Committee functions pursuant to a written charter which was adopted by the Board of Directors during our 2000 fiscal year, and which was amended by the Audit Committee and adopted by the

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Board of Directors in November of 2002. The Audit Committee has such powers as may be assigned to it by the Board of Directors from time to time. It is currently charged with, among other things:

• recommending to the Board of Directors the engagement or discharge of our independent public accountants, including pre-approving all audit and non-audit related services;

• the appointment, compensation, retention and oversight of the work of the independent auditor engaged by the Company for the purpose of preparing or issuing an audit report or performing other audit review or attest services for the Company;

• establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters;

• approving the scope of the financial audit;

• requiring the rotation of the lead audit partner;

• consulting regarding the completeness of our financial statements;

• reviewing changes in accounting principles;

• reviewing the audit plan and results of the auditing engagement with our independent auditors and with the officers of Acclaim;

• reviewing with the officers of Acclaim, the scope and nature and adequacy of Acclaim’s internal accounting and other internal controls and procedures;

• reviewing the adequacy of the Audit Committee Charter at least annually;

• meeting with our Internal Auditor, when the position is filled, on a regular basis;

• establishing and maintaining procedures regarding complaints related to accounting, internal accounting controls or auditing matters from Acclaim personnel;

• performing an internal evaluation of the Audit Committee on an annual basis; and

• reporting, in writing, to the Board of Directors on the Audit Committee’s activities, conclusions and recommendations.

During our 2003 fiscal year (a seven month period), the Audit Committee met on three occasions and acted by written consent on one occasion.

The Compensation Committee of the Board of Directors (the “Compensation Committee”) is comprised of three non-employee Directors, Messrs. Coleman (chair), Tannen and Scibelli. The Compensation Committee functions pursuant to a written charter which was adopted by the Board of Directors in November of 2002. The Compensation Committee has such powers as may be assigned to it by the Board of Directors from time to time. It is currently charged with, among other things, reviewing and approving corporate goals and objectives relevant to our Chief Executive Officer’s compensation, determining compensation packages for our Chief Executive Officer and our Senior Executive Vice President, establishing salaries, bonuses and other compensation for our executive officers and administering our Company’s 1998 Stock Incentive Plan, 1988 Stock Option Plan, 1998 Employee Stock Purchase Plan, and 1995 Restricted Stock Plan, performing an internal evaluation of the performance of the Compensation Committee at least annually, and recommending to the Board changes to the plans, as necessary. During our 2003 fiscal year, the Compensation Committee met on two occasions and acted by written consent on five occasions.

The Executive Committee of the Board of Directors (the “Executive Committee”), is comprised of one employee Director and two non-employee Directors, Messrs. Scoroposki (chair), Coleman and Scibelli. The Executive Committee has such powers as may be assigned to it by the Board from time to time. It is currently charged with, among other things, recommending to the Board the criteria for candidates to the Board of Directors, the size of the Board of Directors, the number of committees of the Board of Directors and their sizes

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and functions, and the nomination and selection of candidates for positions as Board and committee members and the rotation of committee members. In addition, the Executive Committee is responsible for establishing and implementing an evaluation process for the Chief Executive Officer and the Board of Directors and periodically assessing the overall composition of the Board of Directors to ensure an effective membership mix and, when appropriate, recommending to the Board of Directors a chief executive officer succession plan and succession process. The Executive Committee did not meet during fiscal 2003.

In accordance with Nasdaq rules, the independent directors of the Board of Directors are charged with approving nominations for candidates for director, including determining the appropriate qualifications and experience required of such candidates.

Acclaim will consider for election to its Board of Directors a nominee recommended by a stockholder if the recommendation is made in writing and includes (i) the qualifications of the proposed nominee to serve on the Board of Directors, (ii) the principal occupations and employment of the proposed nominee during the past five years, (iii) directorships currently held by the proposed nominee and (iv) a statement that the proposed nominee has consented to the nomination. The recommendation should be addressed to our Secretary.

During fiscal 2003, the Board of Directors met on seven occasions and acted by written consent on one occasion. Each of the directors attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the committees of the Board of Directors of which such director is a member.

Messrs. Gregory E. Fischbach and Bernard J. Fischbach are brothers. There is no family relationship among any of our other directors or executive officers.

Directors’ Compensation

Messrs. G. Fischbach and Scoroposki are not paid additional compensation for their services as Directors. Non-employee Directors receive (i) a $16,000 annual fee, (ii) reimbursement of their expenses for attending meetings of the Board of Directors and its committees and (iii) an automatic annual grant of options to purchase 18,750 shares of common stock under our 1998 Stock Incentive Plan. In addition, non-employee directors receive a per diem in the amount of $1,000 for each of the following: (a) attendance (in person or by phone) at regularly scheduled board and committee meetings, (b) chairing a committee meeting, and (c) attendance (and/or chairing, as applicable) in person of a special board or special committee meetings and the attendance by telephone at such special meetings, if such meetings last one hour or more. Also, members of the Executive Committee who are non-employee directors and who conduct certain services in connection with leading the search for board and/or officer candidates are entitled to receive $1,000 for each full day (or significant portion thereof) such services are rendered to Acclaim. In addition, options may be granted under our 1998 Stock Incentive Plan to non-employee directors who render services to Acclaim and who are not also members of the Compensation Committee or the Audit Committee; however, we did not issue such options during our 2003 fiscal year, nor do we have any present intention to do so in the future.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires Acclaim’s Directors and executives officers, and persons who own more than ten percent (10%) of a registered class of Acclaim’s equity securities, to file reports of ownership and changes in ownership of our common stock and other equity securities of Acclaim. We have adopted procedures to assist our Directors and executive officers in complying with these requirements, which procedures include assisting Directors and executive officers in preparing forms for filing.

To Acclaim’s knowledge, based solely upon a review to such reports furnished to us and written representations that no other reports were required, we believe that during our fiscal year ended March 31, 2003, all Section 16(a) filing requirements applicable to our Directors and executive officers were completed in a timely manner.

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes all plan and non-plan compensation awarded to, earned by or paid to (i) our Chief Executive Officer and (ii) our most highly paid executive officers, other than our Chief Executive Officer, who in each case were serving as executive officers during and at the end of the last completed fiscal year ended March 31, 2003 (together, the “Named Executive Officers”). Please note that during our 2003 fiscal year, we changed our fiscal year end from August 31 to March 31. Accordingly, the compensation amounts contained in this table reflect the seven month period from September 1 to March 31 for fiscal 2003. In each case, the compensation was for the services rendered in all capacities to Acclaim and its subsidiaries for each of Acclaim’s last four fiscal years:

Name and Principal Position	Year	Salary			Bonus			No. of Securities Underlying Options	All Other Compensation*
Gregory E. Fischbach	2003	$	452,083		$	—		—	$	27,553
Co-Chairman	2002		775,000			—		200,000		56,247
	2001		775,000			497,633		—		54,804
	2000		775,000			—		100,000		51,758
James R. Scoroposki	2003	$	291,667		$	—		—	$	21,133
Co-Chairman, Senior Executive	2002		500,000			—		200,000		35,272
Vice President, Secretary and Treasurer	2001		500,000			421,074		—		34,332
	2000		500,000			—		100,000		12,256
Rodney Cousens	2003	$	410,121	(1)	$	800,000		400,000	$	95,292	(2)
President and Chief Executive Officer	2002		674,064	(1)		492,770	(3)	175,000		154,027	(2)
	2001		643,210	(1)		215,550		300,000		146,075	(2)
	2000		628,400	(1)		—		50,000		144,825	(2)
Gerard F. Agoglia(4)	2003	$	216,417		$	—		425,000	$	7,000
Executive Vice President and	2002		371,000			120,000		135,000		12,000
Chief Financial Officer	2001		350,000			87,500		100,000		12,000
	2000		—	(4)		137,500	(4)	250,000		—

 * Includes dollar values of insurance premiums paid by Acclaim during the fiscal year with respect to term life insurance for the benefit of the Named Executive Officers.

(1) Of such amount $132,299 in Fiscal 2003, $217,443 in fiscal 2002, $207,490 in fiscal 2001 and $176,302 in fiscal 2000 represents a contribution by Acclaim to the Acclaim Entertainment Employee Benefits Trust (the “Trust”), which was established for the benefit of the employees at AEL. The Trust is directed by a trustee who has the sole discretion to deliver all payments made into the Trust to one or more employees of AEL. Acclaim may request, but does not have the power to direct the Trust to deliver payments to any particular employee. Acclaim has delivered a letter to the trustee requesting that payment of the indicated amount be made to Mr. Cousens. The trustee may choose the method of payment and may not necessarily comply with Acclaim’s request. No individual employee of AEL has any entitlement to amounts held by the Trust until the trustee designates a payment to an individual employee. At this time, no such payments have been designated by the trustee to any employee of AEL.

(2) Of such amount, $60,565 in Fiscal 2003, $99,543 in fiscal 2002 and $94,987 in fiscal 2001 represent contributions made by Acclaim on behalf of Mr. Cousens under a statutory U.K. pension plan.

(3) Such amount was paid to the Trust. See footnote 1 above.

(4) The named executive officer was appointed an executive officer of Acclaim in August 2000 when he joined us as Executive Vice President and Chief Financial Officer. During fiscal 2000, Mr. Agoglia’s compensation consisted of $50,000 representing a signing bonus, and $87,500 representing one-half of his guaranteed bonus. No salary was earned by or paid to Mr. Agoglia in fiscal 2000 as he commenced employment with us on August 28, 2000. See “Employment Contracts, Termination or Employment and Change in Control Arrangements.”

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No other annual compensation, other compensation, stock appreciation rights or long-term incentive plan awards (all as defined in the proxy regulations promulgated by the Securities and Exchange Commission) were awarded to, earned by, or paid to the Named Executive Officers during any of Acclaim’s last four fiscal years.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information with respect to grants of options to purchase shares of common stock pursuant to the 1998 Plan to our Named Executive Officers during fiscal year 2003:

	Individual Grants Number of Securities Underlying Options Granted		Percentage of Total Options Granted to Employees in Fiscal Year		Per Share Exercise Price		Market Price on the Date of Grant		Expiration Date	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(3)
										5%		10%
Gregory E. Fischbach	—		0	%	$	—	—		—	$	—	$	—
James R. Scoroposki	—		0	%		—	—		—		—		—
Rodney Cousens	400,000	(1)	9.20	%		0.43	0.49	(5)	03/17/13		80,708		231,224
Gerard F. Agoglia	150,000	(2)	3.45	%		1.19	1.19		03/03/12		—		—
	275,000	(4)	6.32	%		0.43	0.49	(5)	03/17/13		55,486		158,966

(1) Options to purchase 400,000 shares of common stock were granted to Mr. Cousens under the 1998 Plan in March 2003. Such options are currently exercisable in full.

(2) An option to purchase 150,000 shares of common stock was granted to Mr. Agoglia under the 1998 Plan in November 2002. Such options become exercisable in three installments, with the first installment occurring six months after the date of grant and then the other two installments becoming exercisable on the second and third anniversaries of the date of the grant.

(3) These figures were calculated assuming the price of the common stock increased from $0.39 per share (the closing sale price of a share of our common stock on March 31, 2003) at compound rates of 5% and 10% per year for ten years.

(4) An option to purchase 275,000 shares of common stock was granted to Mr. Agoglia under the 1998 Plan in March of 2003. Such options are currently exercisable in full.

(5) These options were granted at an exercise price of 85% of the closing price of our common stock on the date of the option grant.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values

The following table sets forth information with respect to each exercise of stock options during fiscal 2003 by our named executive officers and the value as of March 31, 2003 of unexercised stock options held by our named executive officers:

Name	Number Shares Acquired on Exercise	Value Realized		No. of Securities Underlying Unexercised Options at Fiscal Year-End		Value of Unexercised In-the-Money Options at Fiscal Year-End*
				Exercisable	Unexercisable	Exercisable		Unexercisable
Gregory E. Fischbach	—	$	—	800,000	200,000	$	—	$	—
James R. Scoroposki	—		—	800,000	200,000		—		—
Rodney Cousens	—		—	1,450,834	316,666		—		—
Gerard F. Agoglia	—		—	506,333	390,000		—		—

* Fair market value of securities underlying the options at fiscal year end minus the exercise price of the options.

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Employment Contracts, Termination of Employment and Change-In-Control Arrangements

Acclaim has employment agreements with each of Gregory E. Fischbach and James R. Scoroposki, for terms that expired in August 2003. The Company’s Board of Directors approved and each of them have agreed to an extension of the term of these agreements for a period of two (2) years to August 2005.

The agreements with Messrs. G. Fischbach and Scoroposki provide for annual base salaries of $775,000 and $500,000, respectively, for the term of the agreements. In addition, each of the agreements provides for annual bonus payments to Mr. G. Fischbach in an amount equal to 3.25%, and to Mr. Scoroposki in an amount equal to 2.75%, of the Company’s net pre-tax profits for each fiscal year. The agreement with Mr. Scoroposki specifically allows him to devote that amount of his business time to the business of a sales representative organization controlled by him as does not interfere with the services to be rendered by him to Acclaim. The sales representative organization under his control has officers and employees who oversee its operations. Mr. Scoroposki attends board meetings of such organization but has no active involvement in its day-to-day operations. Under the agreements, Acclaim provides each of Messrs. Fischbach and Scoroposki with $2 million term life insurance and disability insurance.

If the employment agreement of either of Messrs. G. Fischbach or Scoroposki is terminated within one year after the occurrence of a change in control of the Company (other than a termination for cause) or if either of Messrs. G. Fischbach or Scoroposki terminates his employment agreement upon the occurrence of both a change in control of the Company and a change in the circumstances of his employment, he would be entitled to receive severance benefits in an amount equal to the total of (i) three years’ base salary and (ii) three times the largest bonus paid to him for the three fiscal years immediately preceding any such termination of his employment.

Each of the agreements with Messrs. G. Fischbach and Scoroposki provides that, in the event of a change in control of the Company and a change in the circumstances of his employment, all options previously granted to each of them shall vest and become immediately exercisable and Acclaim has agreed to indemnify each of them against any excise taxes imposed on such executive by section 4999(a) of the Internal Revenue Code of 1986, as amended, including all applicable taxes on such indemnification payment.

In addition, at the end of their respective terms, if the agreements with each of Messrs. G. Fischbach and Scoroposki are not renewed on substantially similar terms, the executive would be entitled to receive severance benefits in an amount equal to the total cash compensation paid to him during the 12-month period immediately preceding such termination of his employment.

AEL has an employment agreement with Rodney Cousens providing for Mr. Cousens’ employment as AEL’s President and Chief Operating Executive. Pursuant to Mr. Cousens’ agreement, AEL or Mr. Cousens may terminate the agreement by giving the other not less than six months’ prior written notice after January 2002, unless terminated earlier by AEL for cause. The agreement with Mr. Cousens provides for an annual base salary of UK£366,000 for the term of the agreement, subject to annual increases of not less than 10%. The Company is currently revising Mr. Cousens’ employment agreement to reflect his new role with the Company as Chief Executive Officer and President.

If Mr. Cousens’ employment is terminated (other than a termination for cause) within one year after the occurrence of a change in control of the Company or if Mr. Cousens terminates his employment agreement upon the occurrence of both a change in control of the Company and a change in the circumstances of his employment, he would be entitled to receive severance benefits in an amount equal to the total of (i) three years’ base salary and (ii) three times the largest bonus paid to him for the three fiscal years immediately preceding any such termination of his employment. In the event Mr. Cousens’ employment is terminated by him after the occurrence of a change in control of the Company and a change in the circumstances of his employment, all options previously granted to Mr. Cousens shall vest and become immediately exercisable.

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In January 2003, the employment agreement between the Company and Edmond Sanctis, the Company’s then President of its North American Operations, was terminated. In connection with this employment agreement, we had loaned Mr. Sanctis $300,000 under a promissory note for the purpose of purchasing a new residence. The promissory note bore interest at a rate of 6.00% per annum, which was due by December 31st of each year the promissory note remained outstanding. In January 2003, in connection with terminating the employment agreement, we forgave the unpaid principal balance of the note and the related accrued interest thereon of $302,000. Furthermore, at the time of terminating the employment agreement, we entered into a termination and release agreement that provides for, among other things, the continuation of Mr. Sanctis’ salary and benefits for a period of one (1) year from the date of the termination of his employment.

In February 2003, the employment agreement between the Company and John Ma, the Company’s then head of Strategic Planning, was terminated. At that time, we entered into a termination and release agreement with Mr. Ma that provides for, among other things, the continuation of Mr. Ma’s salary and benefits for a period of one (1) year from date of termination.

Acclaim has entered into an employment agreement with Gerard F. Agoglia providing for Mr. Agoglia’s continued employment as Executive Vice President and Chief Financial Officer for a term expiring in June 2006 (but which renews annually without written notice by the Company or Mr. Agoglia, as the case may be). The agreement with Mr. Agoglia provides for an annual base salary of $371,000 for the term of the agreement. In addition, the agreement provides for annual bonuses in an amount up to 100% of Mr. Agoglia’s then base salary subject to the achievement by Acclaim and Mr. Agoglia of certain financial goals established by Acclaim.

If Mr. Agoglia’s employment is terminated (i) by him after the occurrence of a change in control of the Company and within one year thereafter there is a change in the circumstances of his employment, (ii) by him if Acclaim breaches a material term of the agreement, or (iii) by Acclaim other than for cause, Mr. Agoglia would be entitled to receive severance benefits in an amount equal to one year’s base salary, as well as any unpaid salary or benefits accrued through the date of termination. In addition, if Mr. Agoglia’s employment is terminated for one of the reasons set forth above, options previously granted to him would become immediately vested and exercisable for a period of 180 days from termination.

Each of the employment agreements described above prohibits disclosure of proprietary and confidential information regarding Acclaim (including AEL in the case of Mr. Cousens) and its business to anyone outside Acclaim both during and subsequent to employment. In addition, the employees agree, for the duration of their employment with Acclaim and for one year thereafter, not to engage in any competitive business activity (in the case of Mr. Cousens, for three months thereafter), nor to persuade or attempt to persuade any customer, software developer, licensor, employee or other party with whom Acclaim has a business relationship to sever its ties with the Company or reduce the extent of its relationship with Acclaim (in the case of Mr. Cousens, for six months thereafter).

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SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT

The following table sets forth certain information as of March 3, 2004 with respect to the number of shares of common stock beneficially owned by each of the Company’s directors and executive officers, each named executive officer of the Company, and all current executive officers and directors of the Company as a group. Except as otherwise indicated, each such stockholder has sole voting and investment power with respect to the shares beneficially owned by such stockholder.

Name and Address of Beneficial Owner	Amount Beneficially Owned(1)		Percent of Common Stock Outstanding
Directors and Executive Officers:
Gregory E. Fischbach One Acclaim Plaza Glen Cove, NY 11542	12,184,563	(2)(12)	10.4	%
James R. Scoroposki One Acclaim Plaza Glen Cove, NY 11542	13,346,055	(3)(12)	11.4	%
Rodney Cousens 112-120 Brompton Road London, England SW3 1JJ	3,244,668	(4)	2.8	%
Gerard F. Agoglia 135 Meadowview Drive Trumbull, CT 06611	769,852	(5)	*
Kenneth L. Coleman 2011 North Shoreline Blvd. Mountain View, CA 94043	103,750	(6)	*
Bernard J. Fischbach 1875 Century Park East, Suite 850 Los Angeles, CA 90067	675,026	(7)	*
Robert Groman 196 Peachtree Lane Roslyn Heights, NY 11577	245,000	(8)	*
James Scibelli One Hollow Lane, Suite 208 Lake Success, NY 11042	182,000	(9)	*
Michael Tannen 90 Riverside Drive, Apt. 5B New York, NY 10024	159,000	(10)	*
All current executive officers and directors as a group (9 persons)	30,494,810	(11)	24.1	%

* Less than 1% of class.

⁽¹⁾ Includes shares issuable upon the exercise of warrants and options which are exercisable within the next 60 days.

⁽²⁾ Includes 3,974,828 shares issuable upon the exercise of warrants and options, 72,552 shares held as co-trustee of trusts for the benefit of Mr. Scoroposki’s children and 156,276 shares held by Mr. G. Fischbach in trust for the benefit of his children. Shares held in trust are only included once in the computation of shares beneficially owned by current executive officers and directors as a group.

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⁽³⁾ Includes 3,974,828 shares issuable upon the exercise of warrants and options, 156,276 shares held as co-trustee of trusts for the benefit of Mr. G. Fischbach’s children and 72,552 shares held by Mr. Scoroposki in trust for the benefit of his children. Shares held in trust are only included once in the computation of shares beneficially owned by current executive officers and directors as a group.

⁽⁴⁾ Includes 1,609,167 shares issuable upon the exercise of options.

⁽⁵⁾ Includes 751,333 shares issuable upon the exercise of options

⁽⁶⁾ Includes 93,750 shares issuable upon the exercise of options.

⁽⁷⁾ Represents 518,750 shares issuable upon the exercise of options and 156,276 shares held as co-trustee of trusts for the benefit of Mr. G. Fischbach’s children. Shares held in trust are only included once in the computation of shares beneficially owned by current executive officers and directors as a group.

⁽⁸⁾ Represents shares issuable upon the exercise of options.

⁽⁹⁾ Represents shares issuable upon the exercise of warrants and options.

⁽¹⁰⁾ Includes 125,000 shares issuable upon the exercise of options.

⁽¹¹⁾ Includes 11,674,656 shares issuable upon the exercise of warrants and options. Shares held in trust are only included once in the computation of shares beneficially owned by current executive officers and directors as a group.

⁽¹²⁾ Includes 2,000,000 shares issued to each of Mr. Fischbach and Mr. Scoroposki which are being included herein for beneficial ownership purposes, but which are being held in escrow by the Company and which neither Mr. Fischbach nor Mr. Scoroposki have the right to vote, sell, hypothecate or otherwise transfer in any manner.

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MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price

Our common stock was traded on The Nasdaq National Market until July 31, 2000 when it was delisted and transferred to the Nasdaq Small Cap Market. Our trading symbol remains unchanged as AKLM. As of March 3, 2004, the closing sale price of our common stock was $0.59 per share. As of this date, there were approximately 1,711 holders of record of our common stock.

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

	Price
	High		Low
Fiscal Year 2004
First Quarter	$	1.11	$	0.37
Second Quarter		1.10		0.41
Third Quarter		0.94		0.57
Fiscal Year 2003
September 30, 2002 through December 29, 2002	$	1.49	$	0.60
December 30, 2002 through March 31, 2003		0.90		0.37
Fiscal Year 2002
First Quarter	$	6.25	$	2.08
Second Quarter		5.84		3.25
Third Quarter		5.90		4.00
Fourth Quarter		5.27		1.47
Fiscal Year 2001
First Quarter	$	2.47	$	0.84
Second Quarter		2.03		0.31
Third Quarter		4.00		0.72
Fourth Quarter		5.50		3.30

As of March 3, 2004, we had 113,403,810 shares of common stock issued and outstanding (including 4,000,000 shares of our common stock issued in equal amounts to our co-chairmen, which our co-chairmen 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 March 3, 2004, 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 March 3, 2004, a total of 20,285,124 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 December 28, 2003, options to purchase a total of 13,148,684 shares of common stock were outstanding under the 1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which 4,776,886 were exercisable.

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Dividend Policy

We have never declared or paid any cash dividends on our common stock and have no present intention to declare or pay cash dividends on our common stock in the foreseeable future. We are subject to various financial covenants with our primary lender that could limit our ability and/or prohibit us to pay dividends in the future. Please see discussion regarding our primary lender under “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 25 of this prospectus and see Note 13 (Debt) of the notes to the unaudited consolidated financial statements as of and for the nine months ended December 28, 2003 on page F-18 of this prospectus. We intend to retain earnings, if any, which we may realize in the foreseeable future to finance our operations.

Equity Instruments

Summarized below are our equity compensation plans as of December 28, 2003.

Plan Category	Number of securities to be issued upon exercise of outstanding options and warrants(a)	Weighted-average exercise price of outstanding options and warrants(b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))
Equity compensation plans approved by stockholders	13,148,684	$	3.15	14,776,886
Equity compensation plans not approved by stockholders	15,369,739	$	0.58	—
Total	28,518,423	$	1.76	14,776,886

93

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.

In 2003, 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. On December 3, 2003 the Company moved to dismiss the Consolidated Complaint. Plaintiffs opposed the motion to dismiss on January 20, 2004, and the Company submitted its reply papers on February 20, 2004. We are defending this action vigorously.

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.

LEGAL MATTERS

Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022 has passed upon the validity of the Notes and the shares offered by this prospectus for Acclaim.

94

EXPERTS

The consolidated financial statements and schedule of Acclaim Entertainment, Inc. and Subsidiaries as of March 31, 2003, August 31, 2002 and August 31, 2001 and for the seven months ended March 31, 2003 and each of the years in the three-year period ended August 31, 2002, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The audit report of KPMG LLP, dated May 20, 2003 and covering the March 31, 2003 consolidated financial statements contains an explanatory paragraph that states that the Company has working capital and stockholders’ deficits at March 31, 2003 and a recurring use of cash in operating activities that raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

95

FORWARD-LOOKING STATEMENTS

This prospectus includes discussions of future expectations and contains projections of results of operations or financial condition or other “forward-looking” information. Those statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by the statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see “Risk Factors.” Given the significant risks and uncertainties inherent in the forward-looking statements included in this prospectus, the inclusion of these statements is not a representation by us or any other person that our objectives and plans will be achieved.

WHERE YOU CAN FIND MORE INFORMATION

Acclaim is required to file periodic reports, proxy and information statements and other information with the SEC. You may read any materials filed by us at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. You may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Acclaim’s SEC filings are also available to the public on the SEC’s Internet website located at http://www.sec.gov.

Acclaim has filed with the SEC a registration statement on Form S-1 under the Securities Act covering the issuance of the common stock. This prospectus is part of that registration statement. For further information with respect to Acclaim and the securities offered by this prospectus, you should read the registration statement and the exhibits filed with the registration statement. You may obtain copies of the registration statement and exhibits from the SEC upon payment of a fee prescribed by the SEC or examine the documents, free of charge, at the public reference facilities referred to above. A summary in this prospectus of any document filed as an exhibit to the registration statement, although materially complete, does not summarize all of the information in that document. You should read the exhibit for a more complete understanding of the document or matter involved.

Acclaim has also filed the following documents with the SEC under the Securities Exchange Act:

(1) Acclaim’s Annual Report on Form 10-KT for the transitional fiscal year ended March 31, 2003 as amended on August 11, 2003;

(2) Current Report on Form 8-K, filed on April 10, 2003;

(3) Current Report on Form 8-K, filed on May 21, 2003;

(4) Current Report on Form 8-K, filed on June 2, 2003;

(5) Current Report on Form 8-K, filed June 10, 2003;

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

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

(8) Quarterly Report on Form 10-Q for the quarter ended June 29, 2003, filed on August 18, 2003;

(9) Current Report on Form 8-K, filed on August 19, 2003;

(10) Current Report on Form 8-K, filed on September 10, 2003;

(11) Current Report on Form 8-K, filed on October 1, 2003;

(12) Current Report on Form 8-K, filed on October 6, 2003;

96

(13) Quarterly Report on Form 10-Q for the quarter ended September 28, 2003, filed on November 17, 2003;

(14) Current Report on Form 8-K, filed on December 18, 2003;

(15) Current Report on Form 8-K, filed on January 22, 2004;

(16) Current Report on Form 8-K, filed on January 23, 2004;

(17) Quarterly Report on Form 10-Q for the quarter ended December 28, 2003, filed on February 17, 2004; and

(18) The information regarding Acclaim’s common stock contained in the Registration Statement on Form 8-A, filed on June 8, 1988, as amended by the Current Report on Form 8-K, filed on August 25, 1989, relating to the one-for-two reverse stock split effected by Acclaim.

Acclaim will provide to each person to whom this prospectus is delivered and who makes a written or oral request, free of charge, a copy of any document referred to above which has been incorporated into this prospectus by reference, except exhibits to the document. Requests for these documents should be sent to the Secretary, Acclaim Entertainment, Inc., One Acclaim Plaza, Glen Cove, New York 11542. Telephone requests for copies should be made to the Secretary at (516) 656-5000.

You should rely only on the information provided in this prospectus or incorporated by reference into this prospectus. No person has been authorized to provide you with different information and you should not rely on any information you receive or representations made that are not contained in, or incorporated by reference into, this prospectus. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The information in this prospectus is accurate as of the date on the front cover. You should not assume that the information contained in this prospectus is accurate after the date on the cover page.

97

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page No.
Unaudited consolidated financial statements for the nine months ended December 28, 2003 and December 1, 2002
Consolidated Balance Sheets—December 28, 2003 and March 31, 2003 (Audited)	F-1
Consolidated Statements of Operations—Nine months ended December 28, 2003 and December 1, 2002	F-2
Consolidated Statements of Stockholders’ Equity (Deficit)—Nine months ended December 28, 2003 and Seven months ended March 31, 2003 (Audited)	F-3
Consolidated Statements of Cash Flows—Nine months ended December 28, 2003 and December 1, 2002	F-5
Notes to consolidated financial statements	F-7
Audited consolidated financial statements for the seven months ended March 31, 2003 and March 31, 2002 (Unaudited) and the years ended August 31, 2002, 2001 and 2000	F-30
Consolidated Balance Sheets—March 31, 2003, August 31, 2002 and August 31, 2001	F-31
Consolidated Statements of Operations—Seven months ended March 31, 2003 and 2002 (Unaudited) and years ended August 31, 2002, 2001 and 2000	F-32
Consolidated Statements of Stockholders’ Equity (Deficit)—Seven months ended March 31, 2003 and years ended August 31, 2002, 2001, 2000 and 1999	F-33
Consolidated Statements of Cash Flows—Seven months ended March 31, 2003 and 2002 (Unaudited) and years ended August 31, 2002, 2001 and 2000	F-35
Notes to consolidated financial statements	F-37

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	December 28, 2003			March 31, 2003
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	5,833		$	4,495
Accounts receivable, net		17,072			24,303
Other receivables		386			3,360
Inventories		5,226			7,711
Prepaid expenses and other current assets		6,149			7,076
Capitalized software development costs, net		125			6,944
Building held for sale		6,186			5,424
Total Current Assets		40,977			59,313
Fixed assets, net		16,103			19,731
Other assets		1,101			893
Total Assets	$	58,181		$	79,937
Liabilities and Stockholders’ Deficit
Current Liabilities
Short-term borrowings	$	20,690		$	30,799
Trade accounts payable		31,459			28,477
Accrued expenses		33,180			28,751
Accrued selling expenses		18,941			26,649
Accrued stock-based expenses		3,465			—
Accrued restructuring costs		929			2,299
Mortgage payable		—			4,600
Income taxes payable		1,216			1,234
Total Current Liabilities		109,880			122,809
Long-Term Liabilities
Obligations under capital leases		375			632
Convertible notes		9,164			—
Other long-term liabilities		2,654			2,654
Total Liabilities		122,073			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; 109,404 and 96,621 shares issued and outstanding		2,188			1,932
Additional paid-in capital		327,272			313,616
Accumulated deficit		(390,959	)		(359,911	)
Accumulated other comprehensive loss		(2,393	)		(1,795	)
Total Stockholders’ Deficit		(63,892	)		(46,158	)
Total Liabilities and Stockholders’ Deficit	$	58,181		$	79,937

See notes to consolidated financial statements.

F-1

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Nine Months Ended
	December 28, 2003			December 1, 2002
Net revenue	$	113,688		$	180,060
Cost of revenue		60,320			92,614
Gross profit		53,368			87,446
Operating expenses
Marketing and selling		21,908			52,045
General and administrative		26,503			32,258
Research and development		27,492			36,994
Stock-based compensation		945			—
Restructuring		227			—
Total operating expenses		77,075			121,297
Loss from operations		(23,707	)		(33,851	)
Other income (expense)
Interest expense, net		(3,516	)		(3,592	)
Non-cash financing expense		(3,085	)		(579	)
Other expense		(740	)		(1,423	)
Total other expense		(7,341	)		(5,594	)
Loss before income taxes		(31,048	)		(39,445	)
Income tax provision		—			121
Net loss	$	(31,048	)	$	(39,566	)
Net loss per share data:
Basic	$	(0.30	)	$	(0.43	)
Diluted	$	(0.30	)	$	(0.43	)

See notes to consolidated financial statements.

F-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		—	—			—			—			—
Exercise of stock options and warrants		—	245			5			106			—
Issuance of common stock under employee stock purchase plan		—	155			3			97			—
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 December 28, 2003*	$	—	109,404		$	2,188		$	327,272		$	—

* Amounts as of and for the nine months ended December 28, 2003 are unaudited.

See notes to consolidated financial statements.

F-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		(31,048	)		—			(31,048	)		(31,048	)
Exercise of stock options and warrants		—			—			111			—
Issuance of common stock under employee stock purchase plan		—			—			100			—
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		—			(598	)		(598	)		(598	)
Balance at December 28, 2003*	$	(390,959	)	$	(2,393	)	$	(63,892	)	$	(31,646	)

* Amounts as of and for the nine months ended December 28, 2003 are unaudited.

See notes to consolidated financial statements.

F-4

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	December 28, 2003			December 1, 2002
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(31,048	)	$	(39,566	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,247			6,220
Non-cash financing expense		3,085			579
Provision for price concessions and returns, net		22,573			76,277
Amortization of capitalized software development costs		7,382			10,345
Write-off of capitalized software development costs		304			4,102
Non-cash compensation expense		945			—
Gain from recovery of paid royalties		(531	)		—
Loss on fixed asset disposals		39			—
Other non-cash items		30			503
Change in operating assets and liabilities:
Accounts receivable		(19,829	)		(52,467	)
Other receivables		4,301			3,129
Other assets		100			(238	)
Inventories		2,865			(5,770	)
Prepaid expenses		(1,556	)		1,868
Capitalized software development costs		(1,059	)		(21,031	)
Accounts payable		1,463			4,516
Accrued expenses		(9,972	)		7,087
Income taxes payable		576			564
Other long-term liabilities		—			(343	)
Net cash used in operating activities		(16,085	)		(4,225	)
Cash flows from investing activities:
Acquisition of fixed assets		(368	)		(3,866	)
Proceeds from disposal of fixed assets		67			10
Deposit on building held for sale		6,247			—
Other assets		66			2
Net cash provided by (used in) investing activities		6,012			(3,854	)

See notes to consolidated financial statements.

F-5

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(In thousands)

	Nine Months Ended
	December 28, 2003			December 1, 2002
	(Unaudited)
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net of expenses		11,329			—
Repayment of promissory notes		(614	)		—
Payment of mortgages		(4,748	)		(627	)
Proceeds from payment of notes receivable		6,947			—
Payment of short-term bank loans, net		(9,873	)		(25,216	)
Proceeds from exercises of stock options and warrants		111			1,537
Payment of obligations under capital leases		(722	)		(736	)
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		100			294
Net cash provided by (used in) financing activities		10,844			(26,773	)
Effect of exchange rate changes on cash		567			812
Net increase (decrease) in cash and cash equivalents		1,338			(34,040	)
Cash and cash equivalents: beginning of period		4,495			44,095
Cash and cash equivalents: end of period	$	5,833		$	10,055
Supplemental schedule of non-cash financing activities:
Acquisition of equipment under capital leases	$	172		$	947
Cash paid during the period for:
Interest	$	3,126		$	4,858
Income taxes	$	161		$	214

See notes to consolidated financial statements.

F-6

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 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 nine month period ended December 28, 2003, and the most comparable reported period of the prior year, the nine month period ended December 1, 2002. We have presented the nine month period ended December 1, 2002 as a prior year comparative to the current year period 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

F-7

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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.

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 nine months ended December 28, 2003, we had a net loss of $31,048 and used $16,085 of cash in operating activities. As of December 28, 2003, we had a stockholders’ deficit of $63,892, a working capital deficit of $68,903 and cash and cash equivalents of $5,833. 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. In February 2004, we completed the sale of our 9% senior convertible subordinated notes from which we raised gross proceeds of $15,000. In September and October 2003, we completed the sale of our 16% convertible subordinated notes, resulting in gross proceeds of $11,863. As of December 28, 2003, our primary lender had advanced to us a supplemental discretionary loan of $4,000. 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. 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.

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, (3) continue to enjoy the support of our primary lender and vendors and (4) register with the SEC the shares underlying the September/October 2003 and the February 2004 convertible notes financings. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, and continue to realize additional benefits from the expense reductions we have implemented, 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 register with the SEC the shares underlying the

F-8

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

September/October 2003 and February 2004 convertible notes financings, 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 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.

On January 21, 2004, we received a letter from Nasdaq indicating that the Company had been granted an extension, until January 24, 2005, within which to regain compliance with the minimum $1.00 bid price per share requirement of The Nasdaq SmallCap Market. In the notice, the Nasdaq staff noted that since the Company meets the initial inclusion criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c), it is eligible for this additional compliance period. However, if prior to January 24, 2005, the bid price of the Company’s common stock does not close at $1.00 per share or more for a minimum of 10 consecutive trading days, then the Company is required to (1) seek shareholder approval for a reverse stock split at or before its next shareholder meeting and (2) promptly thereafter effectuate the reverse stock split. The Company has committed in writing to Nasdaq to effectuate those measures in the event compliance is not achieved prior to January 24, 2005. If at any time before January 24, 2005, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Nasdaq staff will provide notification that the Company complies with Marketplace Rule 4310(c)(8)(D). The Company cannot provide any assurance that it will receive an affirmative vote of its stockholders authorizing a reverse stock split, if required, nor that the Company will regain compliance with the minimum bid price requirement.

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. 104, “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

F-9

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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. For product shipped on consignment, we recognize revenue when the customer provides persuasive evidence that the product has been resold and the customer pays for the product that has been resold.

We are generally not contractually obligated and generally do not 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 gain 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 generally will provide a price concession or credit to spur further sales by the retailer to maintain the customer relationship. In circumstances when, a price concession cannot be agreed upon, we generally will accept a product return. 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:

	December 28, 2003		March 31, 2003
Gross accounts receivable (please see note 2)	$	34,165	$	50,980
Allowances:
Accounts receivable allowance (please see note 2)	$	17,093	$	26,677
Accrued price concessions (please see note 10)		14,510		19,623
Accrued rebates (please see note 10)		809		2,010
Total allowances	$	32,412	$	48,310

E. Interest Expense, Net

Interest expense, net is comprised of:

	Nine Months Ended
	December 28, 2003			December 1, 2002
Interest income	$	155		$	1,209
Interest expense		(3,671	)		(4,801	)
	$	(3,516	)	$	(3,592	)

F-10

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 $3,305 for the nine months ended December 28, 2003 and $4,122 for the nine months ended December 1, 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 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. The FASB recently indicated that they will require stock-based employee compensation to be recorded as a charge to earnings beginning in calendar 2005. 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:

	Nine Months Ended
	December 28, 2003	December 1, 2002
Expected dividend yield	0%	0%
Risk free interest rate	2.1%	3.1%
Expected stock volatility	126%	76%
Expected option life	3 yrs	3 yrs

F-11

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:

	Nine Months Ended
	December 28, 2003			December 1, 2002
Net loss:
As reported	$	(31,048	)	$	(39,566	)
Add: Stock-based compensation expense included in net loss (please see note 11)		945			—
Deduct: Total stock-based employee compensation expense using fair value method		(3,280	)		(3,510	)
Pro forma	$	(33,383	)	$	(43,076	)
Diluted net loss per share:
As reported	$	(0.30	)	$	(0.43	)
Pro forma	$	(0.32	)	$	(0.47	)

Stock-based compensation of $945 for the nine months ended December 28, 2003 was excluded from general and administrative expenses and classified separately in the statements of operations.

I. New Accounting Pronouncements

In December 2003, the FASB issued a revised version of FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FIN 46, “Consolidation of Variable Interest Entities,” which was issued in January 2003. We will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For our variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on March 31, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. We do not currently have any variable interest entities.

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

F-12

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), which updates the previously issued revenue recognition guidance in SAB 101, based on the Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” According to EITF 00-21, if the deliverables in a sales arrangement constitute separate units of accounting, as defined, the revenue-recognition policy must be determined for each identified unit. If the arrangement is a single unit of accounting under the separation criteria, as defined, the revenue-recognition policy must be determined for the entire arrangement. The application of SAB 104 did not have any impact on our financial statements.

J. Comprehensive Loss

Comprehensive loss for the nine months ended December 28, 2003 is presented in the accompanying Consolidated Statement of Stockholders’ Equity (Deficit) and was $39,564 for the nine months ended December 1, 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:

	December 28, 2003			March 31, 2003
Assigned receivables due from factor	$	25,465		$	42,704
Unfactored accounts receivable		8,700			8,276
		34,165			50,980
Allowance for price concessions and returns		(17,093	)		(26,677	)
	$	17,072		$	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

F-13

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 December 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.

3. OTHER RECEIVABLES

Other receivables are comprised of:

	December 28, 2003		March 31, 2003
Foreign value added tax	$	268	$	—
Notes receivable and accrued interest due from officers (please see note 16)		33		1,469
Licensing fee recovery		—		1,415
Other		85		476
	$	386	$	3,360

4. INVENTORIES

Inventories are comprised of:

	December 28, 2003		March 31, 2003
Raw material and work-in-process	$	156	$	131
Finished goods		5,070		7,580
	$	5,226	$	7,711

F-14

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are comprised of:

	December 28, 2003		March 31, 2003
Prepaid advertising	$	248	$	414
Prepaid product		3,848		28
Prepaid insurance		590		3,122
Prepaid taxes		228		326
Royalty advances		619		754
Financing costs (please see note 13)		—		1,724
Other prepaid expenses		616		708
	$	6,149	$	7,076

6. BUILDING HELD FOR SALE

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. On November 28, 2003, we entered into an agreement for the sale and leaseback of the building. Under the terms of the agreement, the buyer purchased the building for $8,636 (£4,888) and we contracted to lease the building for 15.5 years at an annual rent of $813 (£460), subject to adjustment. According to the guidance in Statement of Financial Accounting Standard No. 66 “Accounting for Sales of Real Estate,” due to our continuing requirement to complete improvements to the building at our cost, which are necessary in order to make the building suitable for occupancy, and the buyer’s right under the terms of the agreement to defer the remaining payments due until the work is completed, the conditions required for sale recognition had not been met as of December 28, 2003. As of December 28, 2003, we classified the cash we received from the buyer of $6,799 (£3,848) as a deposit payable in accrued expenses. Of the deposit received, $4,917 (£2,783) was used to repay the outstanding balance of the mortgage payable and related interest associated with the building. All criteria for sale recognition are expected to be met and we will record the sale when we have fulfilled our obligation to complete improvements to the building which is expected to occur on or before June 30, 2004. Upon recognition of the sale, we will record a deferred gain of approximately $2,415 (£1,367), net of related transaction costs, which will be recognized on a straight line basis over the 15.5 year life of our lease as a reduction to rent expense. As of December 28, 2003, the net carrying value of the building was $6,186 (£3,448).

7. FIXED ASSETS

Fixed assets are comprised of:

	December 28, 2003			March 31, 2003
Buildings and improvements	$	20,162		$	20,155
Furniture, fixtures and equipment		41,055			43,405
Automotive equipment		420			394
		61,637			63,954
Accumulated depreciation		(45,534	)		(44,223	)
	$	16,103		$	19,731

F-15

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

8. OTHER ASSETS

Other assets are comprised of:

	December 28, 2003		March 31, 2003
Deferred financing costs	$	685	$	320
Deposits		416		473
Notes receivable due from officers (please see note 16)		—		100
	$	1,101	$	893

9. ACCRUED EXPENSES

Accrued expenses are comprised of:

	December 28, 2003		March 31, 2003
Accrued advertising and marketing	$	356	$	300
Accrued consulting and professional fees		1,563		1,201
Accrued excise and other taxes		3,812		1,197
Accrued deposit payable on building held for sale		6,799		—
Accrued liabilities for derivatives (please see note 13A)		2,800		—
Accrued fair value of convertible note placement agent warrants		180		—
Accrued duty and freight		932		887
Accrued litigation		1,378		1,535
Accrued payroll		4,011		4,002
Accrued purchases		2,839		4,893
Accrued royalties payable and licensing obligations		7,040		12,188
Other accrued expenses		1,470		2,548
	$	33,180	$	28,751

10. ACCRUED SELLING EXPENSES

Accrued selling expenses are comprised of:

	December 28, 2003		March 31, 2003
Accrued cooperative advertising	$	1,962	$	3,187
Accrued price concessions		14,510		19,623
Accrued sales commissions		1,660		1,829
Accrued rebates		809		2,010
	$	18,941	$	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, in the aggregate, to two executive officers and 1,500 shares

F-16

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

to another executive for his appointment as CEO), but which require stockholder approval prior to such issuances under NASD Rules. On January 20, 2004, our stockholders approved the issuance of the 1,500 shares to our CEO at which time the associated compensation was fixed at $1,140, based on the market value of our common stock on that date. The fair value of the 4,000 and 1,500 shares, reflected as accrued stock-based expenses as of December 28, 2003, were $2,520 and $945, respectively. The Compensation Committee and the Board of Directors have approved the issuance of the 1,500 common shares to an executive officer for his promotion to CEO in May 2003 and the 4,000 common shares to two other executive officers in March 2003 (please see note 13B). Until our stockholders vote on whether to approve the issuance of the 4,000 shares, the liabilities associated with those shares will fluctuate with the market value of the related common stock, which was $0.63 per share on December 28, 2003. For the nine months ended December 28, 2003, non-cash financing expense related to the 4,000 shares equals the excess of the market value of such shares as of December 28, 2003 over the portion of such market value that had been amortized in fiscal 2003, or $2,251. Stock-based compensation for the nine months ended December 28, 2003 reflects the $945 market value of the 1,500 shares as of December 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. During the nine months ended December 28, 2003, restructuring charges of $227 were recorded due to the change in net present value of accrued restructuring costs as well as an adjustment to our forecast of sub-lease rental income and additional lease costs. The development studio lease commitment expires in May 2007 and the employee severance agreements expire over various periods through April 2004. During the nine month period ended December 1, 2002, no restructuring charges were incurred.

The following table presents the components of the change in the balance of accrued restructuring charges for the nine months ended December 28, 2003:

	Nine Months Ended December 28, 2003
Accrued restructuring costs, beginning of period	$	2,299
Adjustments to employee termination costs, lease costs and estimated sub-lease rental income		227
Less: costs paid		(1,597	)
Ending balance as of December 28, 2003	$	929

F-17

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

13. DEBT

Debt is comprised of:

	December 28, 2003		March 31, 2003
Short term debt:
Obligations under capital leases	$	458	$	736
Supplemental bank loan (B)		4,000		11,000
Advances from International factors (C)		4,843		4,110
Advances from North American factor (B) (please see note 2)		1,766		4,154
Bank participation advance (D)		9,500		9,500
Promissory note (E)		123		737
Bank overdraft		—		562
		20,690		30,799
Long term debt:
16% convertible subordinated notes (A)		9,164		—
Obligations under capital leases		375		632
		9,539		632
	$	30,229	$	31,431

A. 16% 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 convertible subordinated notes (the “Notes”), due in 2010. 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). The Note offering was structured in a manner we believe complied with Nasdaq’s published rules. However, based upon discussions and agreement with Nasdaq and the holders of the Notes, in December 2003, we amended the terms of the Notes to secure Nasdaq’s agreement that the structure of the Notes complied with their rules.

The amended Notes were initially convertible into 13,262 shares of our common stock, based upon a conversion price of $0.8945 per share. The conversion price is based upon the closing price of our common stock that Nasdaq advised us complied with its interpretation of “market price” as of the time of the Note offering. The terms of the Note agreements provided for an adjustment to the conversion rate, subject to stockholder approval. On January 20, 2004, our stockholders voted to authorize an adjustment of the conversion price to $0.57 per share, a 36% discount from the $0.8945 conversion price. Accordingly, the Notes are now convertible into 20,812 shares of our common stock. The interest rate on the Notes is 16% per annum, due semi-annually on each of April 15 and October 15, commencing April 15, 2004. The purchasers of the Notes have also received warrants to purchase approximately 8,193 shares of our common stock, at an exercise price of $0.8945 per share, which exercise price was adjusted to $0.57 when stockholder approval was obtained on January 20, 2004.

F-18

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 of the forced exercise.

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 SEC under the Securities Act of 1933, or an applicable exception therefrom. We agreed to file a registration statement to register the shares of our common stock underlying the Notes and warrants by December 19, 2003 and that the shares would be registered by January 26, 2004. As the registration statement was not filed by December 19, 2003, we incurred a penalty to the purchasers of 1% of the proceeds of the Notes or $119, which amount was included in other expense for the three and nine month periods ended December 28, 2003. We will incur additional 1% penalties for each month that passes where the shares underlying the Notes and warrants are not registered.

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 at issuance the conversion option was 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 put option, until the Notes are converted to common stock or repaid, 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 December 28, 2003, the proceeds allocated to the conversion feature of the Notes was $305, to the warrants was $2,495 and to the Notes was $9,063. The fair values of the conversion feature of the Notes and the warrants was included in accrued expenses as of December 28, 2003. The put option held by the purchasers of the Notes had no value as of December 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 the shares underlying the Notes and warrants are registered with the SEC as long as our common stock remains listed on

F-19

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 December 28, 2003, the unamortized debt discount related to the conversion feature of the Notes was $298 and the debt discount related to the warrants was $2,401. Amortization of the debt discounts amounted to $101 for the nine months ended December 28, 2003 and is included in non-cash financing expense in the statement of operations and increased the balance of the Notes.

We incurred placement agent fees of $714 in connection with the Notes transaction, comprised of warrants to purchase 267 shares of our common stock at an exercise price of $0.8945 per share with a fair value of $180, and a cash payment of $534. We are amortizing these fees on a straight-line basis over the term of the Notes or, 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. Amortization of these fees amounted to $29 for the nine months ended December 28, 2003. The unamortized portion of these fees is included in other assets as of December 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 December 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 December 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 advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit

F-20

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Committee approved and the Board of Directors authorized the issuance to each Affiliate 2,000 shares of our common stock with a then aggregate market value of $1,560 ($2,520 as of December 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 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 nine month period ended December 28, 2003 we increased accrued stock-based expenses by $960 to the market value of the common shares of $2,520 as of December 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 $2,520 for the nine months ended December 28, 2003.

In December 2003, our North American credit agreement was amended to allow for a supplemental discretionary loan of up to $4,000 from December 16, 2003 thru December 31, 2003, up to $5,000 from January 1, 2004 through January 31, 2004, up to $3,000 from February 1, 2004 through February 29, 2004, up to $2,000 from March 1, 2004 through March 31, 2004 and up to $1,000 from April 1, 2004 through April 30, 2004, on which date the outstanding supplemental loan balance is due to be repaid.

There were advances outstanding within the standard borrowing formula under the North American credit agreement of $1,766 as of December 28, 2003 and $4,154 as of March 31, 2003. A supplemental discretionary loan of $4,000 was outstanding as of December 28, 2003 and $11,000 was outstanding 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. 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 (4.95% as of December 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

F-21

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 has secured the international facility with the accounts receivable and assets of our international subsidiaries that participate in the facility. We had an outstanding balance under the international facility of $4,615 as of December 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 have been and will be applied to repay the outstanding loan. As of December 28, 2003, the remaining amount outstanding was $228. 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 (2.1% as of December 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 $123 as of December 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 in February 2004.

F. Our debt matures as follows:

Fiscal years ending March 31,
2004	$	6,832
2005		13,935
2006		221
2007		77
2008		—
Thereafter		9,164
	$	30,229

F-22

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

14. LOSS PER SHARE

	Nine Months Ended
	December 28, 2003			December 1, 2002
Basic and Diluted EPS Computation:
Net loss	$	(31,048	)	$	(39,566	)
Weighted average common shares outstanding		105,161			92,167
Basic and Diluted net loss per share	$	(0.30	)	$	(0.43	)

We have excluded the effect of stock options, warrants and our outstanding 16% convertible notes in our calculation of diluted loss per share for the nine months ended December 28, 2003 and December 1, 2002 because their impact would have been antidilutive. Common stock equivalents excluded from loss per share amounted to 13,149 options and 15,370 warrants as of December 28, 2003 and 14,995 options and 3,945 warrants as of December 1, 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 then 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 nine months ended December 28, 2003 and accrued expenses as of December 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. Of such warrants, 150 were exercised in October 2003. 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

F-23

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 supplemental discretionary loan. The related non-cash financing expense amounted to $165 for the nine months ended December 28, 2003.

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

	December 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—June	328		0.50	—		—
2003 private placement of convertible notes	8,460		0.57	—		—
	15,370		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 $(10) for the nine months ended December 28, 2003 and $392 for the nine months ended December 1, 2002. We owed that firm $247 as of December 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 $630 for the nine months ended December 28, 2003 and $533 for the nine months ended December 1, 2002. For the firm that no longer represents us, we incurred fees of $16 for the nine months ended December 1, 2002. We owed the firm that continues to represent us, legal fees of $365 as of December 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

F-24

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 nine months ended December 28, 2003, we expensed $134 of the unamortized principal balance. The unamortized principal balance under the loan, included in other receivables, was $33 as of December 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.

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 bore no interest and was required to be repaid on the earlier to occur of the sale or transfer of the former officer’s personal residence or August 11, 2003. In December 2003, we collected $150 of the outstanding note and, as a result of our

F-25

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

forgiving repayment of the balance, expensed the remaining $100. As of March 31, 2003, $250 was outstanding under the note.

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 notes 13B and 15).

17. SEGMENT INFORMATION

Our chief operating decision-maker is our Chief Executive Officer. We have two reportable segments, North America and Europe/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 nine months ended December 28, 2003 and December 1, 2002 below:

	North America			Europe and Pacific Rim			Eliminations			Total
Nine Months Ended December 28, 2003
Net revenue from external customers	$	55,259		$	58,429		$	—		$	113,688
Intersegment revenue		6			—			(6	)		—
Total net revenue	$	55,265		$	58,429		$	(6	)	$	113,688
Interest income	$	107		$	48		$	—		$	155
Interest expense		3,116			555			—			3,671
Depreciation and amortization		3,524			723			—			4,247
Operating loss		(22,855	)		(852	)		—			(23,707	)
Identifiable assets as of December 28, 2003		28,879			29,302			—			58,181
Nine Months Ended December 01, 2002
Net revenue from external customers	$	100,376		$	79,684		$	—		$	180,060
Intersegment revenue		79			8,354			(8,433	)		—
Total net revenue	$	100,455		$	88,038		$	(8,433	)	$	180,060
Interest income	$	1,161		$	48		$	—		$	1,209
Interest expense		3,971			830			—			4,801
Depreciation and amortization		5,048			1,172			—			6,220
Operating (loss) profit		(33,944	)		93			—			(33,851	)
Identifiable assets as of December 1, 2002		74,660			52,941			—			127,601

F-26

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:

	Nine Months Ended
	December 28, 2003		December 1, 2002
Cartridge-based software:
Nintendo Game Boy	2	%	6	%
Subtotal for cartridge-based software	2	%	6	%
Disc-based software:
Sony PlayStation 2: 128-bit	55	%	51	%
Sony PlayStation 1: 32-bit	4	%	2	%
Microsoft Xbox: 128-bit	24	%	18	%
Nintendo GameCube: 128-bit	12	%	21	%
Subtotal for disc-based software	95	%	92	%
PC software	3	%	2	%
Total	100	%	100	%

18. COMMITMENTS AND INDEMNIFICATION

A. Legal Proceedings

On July 11, 2003, we were notified by the Securities and Exchange Commission (the “SEC”) that we have been included in a formal, non-public inquiry entitled “In the Matter of Certain Videogame Manufacturers” that the SEC 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.

In 2003, 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

F-27

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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. On December 3, 2003 the Company moved to dismiss the Consolidated Complaint. Plaintiffs opposed the motion to dismiss on January 20, 2004, and the Company submitted its reply papers on February 20, 2004. We are defending this action vigorously.

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.

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 December 28, 2003, there have not been any claims under such indemnification provisions.

19. SUBSEQUENT EVENTS

A. Issuance of Convertible Notes

On February 17, 2004, (the “Initial Closing Date”) we raised gross proceeds of $15,000 in connection with the sale of 9% Senior Subordinated Convertible Notes (the “9% Notes”), due in February 2007, to an investor. The 9% Notes are convertible into shares of our common stock, at a conversion price of $0.65 per share. Additionally, the investor received warrants to purchase 4,615 shares of our common stock with an exercise price equal to $0.65 per share. The warrants are exercisable for five years from the Initial Closing Date.

Interest due on the 9% Notes is payable semi-annually commencing October 1, 2004. Upon conversion of the 9% Notes the related accrued and unpaid interest, if any, shall be paid in cash to the investor. The 9% Notes are collateralized by a second mortgage on our headquarters building, subject to our primary lender’s (GMAC Commercial Credit LLP) consent and an inter-creditor agreement to be entered into post-closing. The terms of the 9% Notes preclude our incurrence of additional indebtedness and payment of cash dividends.

Commencing August 18, 2004, if the market value of our common stock equals at least $1.625, which is periodically reduced to $0.975 by February 19, 2006, and other specific criteria are met, we have the right to redeem all or a portion of the 9% Notes at the outstanding principal balance of the 9% Notes plus any related accrued interest. The investor has the right to require us to repurchase the 9% Notes in the event of a change in control of the Company, as defined in the agreement. The 9% Notes are subordinate to all our bank debt with our primary lender.

F-28

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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 securities within 45 days following the Initial Closing Date. If a registration statement covering the shares of common stock underlying the 9% Notes and related warrants has not been declared effective within six months of the Initial Closing Date, then the conversion price shall be reset to $0.60 per share.

If the registration statement is not effective within 120 days of the Initial Closing Date in the case of an SEC review or 90 days in the case of no SEC review, then liquidated damages of 1% of the investment shall be paid to the investor per month by Acclaim.

We have a first option, for a nine month period from February 17, 2004 (the “First Option Period”), to require the investor to purchase $5,000 of additional 9% Notes (the “First Additional 9% Notes”) at a conversion price of $0.65 per share, if during that period the closing bid price of our common stock exceeds $0.8125 per share for twenty consecutive trading days, the registration statement covering the shares underlying the 9% Notes and related warrants is effective and our common stock continues to be listed on a qualified securities exchange. In the event that we do not exercise our First Option, the investor likewise has the option, during the First Option Period, to purchase the First Additional 9% Notes from us for $5,000.

We have a second option, for a six month period commencing one year following the Initial Closing Date (the “Second Option Period”), to require the investor to purchase $5,000 of additional 9% Notes (the “Second Additional 9% Notes”) at a conversion price of $0.65 per share, if during the three month period commencing February 17, 2005, the closing bid price of our common stock exceeds $1.30 per share for twenty consecutive trading days or if during the three month period commencing May 17, 2005, the closing bid price of our common stock exceeds $0.975 per share for twenty consecutive trading days and our common stock continues to be listed on a qualified securities exchange. In the event that we do not exercise our second option, the investor also has the option, for an 18 month period commencing on the Initial Closing Date, to purchase the Second Additional 9% Notes from us for $5,000.

In connection with any purchase of First Additional 9% Notes or Second Additional 9% Notes, the investor would receive additional warrants to purchase a number of shares of our common stock equal to 20% of the number of shares underlying those additional notes, with an exercise price equal to $0.65 per share.

We incurred fees of $907 in connection with the 9% Notes transaction for placement agent and investment advisory services, comprised of warrants to purchase 300 shares of our common stock at an exercise price of $0.65 per share with a fair value of $157, and cash payments totaling $750. We will amortize these fees on a straight-line basis over the term of the 9% Notes or, upon their conversion to common stock.

B. Equity

On January 20, 2004, our stockholders approved an increase in our authorized shares of common stock to 300,000 and an amendment to our 1998 Stock Incentive Plan to increase the common shares available under the plan to 25,442.

F-29

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

Acclaim Entertainment, Inc.

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

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

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

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

	/s/    KPMG LLP
New York, New York May 20, 2003	KPMG LLP

F-30

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

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

See notes to consolidated financial statements.

F-31

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

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

See notes to consolidated financial statements.

F-32

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(In thousands)

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

See notes to consolidated financial statements.

F-33

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

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

(In thousands)

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

See notes to consolidated financial statements.

F-34

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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

See notes to consolidated financial statements.

F-35

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands)

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

See notes to consolidated financial statements.

F-36

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

A. Business and Liquidity

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

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

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

F-37

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

B. Change in Fiscal Year

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

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

C. Principles of Consolidation

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

D. Cash Equivalents

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

E. Financial Instruments

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

F. Net Revenue

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

F-38

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

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

G. Inventories

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

F-39

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

H. Prepaid Royalties

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

I. Software Development Costs

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

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

J. Long-Lived Assets

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

F-40

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

K. Fixed Assets

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

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

L. Goodwill

Our policy is to evaluate and recognize an impairment of goodwill if it is probable that the recorded amounts are in excess of projected undiscounted future cash flows. In the fourth quarter of fiscal 2000, we wrote off the remaining $17.9 million of goodwill related to our subsidiary, Acclaim Comics, because its value was impaired. We based our decision to write off the remaining goodwill of Acclaim Comics on the operating losses incurred by Acclaim Comics, the deterioration of Acclaim Comics’ core businesses, the state of the comic book industry and our projections for Acclaim Comics’ operations. We decided that we would continue to publish special edition comic book magazines only occasionally to support our software products, revised our forecasts of unit sales downward and the life of our software using properties licensed or created by Acclaim Comics and eliminated the projected development of some new titles using Acclaim Comics’ properties.

M. Interest Expense, Net

Interest expense, net is comprised of:

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

N. Income Taxes

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

F-41

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

O. Foreign Currency

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

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

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

P. Shipping and Handling Costs

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

Q. Comprehensive Income (Loss)

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

R. Earnings (Loss) Per Share

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

S. Estimates

To prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, management must make estimates and assumptions that affect the amounts of reported assets and liabilities, the disclosures for contingent assets and liabilities on the date of the financial statements and the amounts of revenue and expenses during the reporting period. Actual results could differ from our estimates. Among the more significant estimates we included in these financial statements is our allowance for price concessions and returns, valuation allowances for inventory and valuation allowances for the recoverability

F-42

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

of prepaid royalties. During the seven months ended March 31, 2003, net revenue decreased by $14,438 when we increased our August 31, 2002 allowance for price concessions and returns because actual product sell-through in the retail channel during the subsequent 2002 holiday season and through the end of March 2003, particularly for the Turok: Evolution software title released in the fourth quarter of fiscal 2002, demonstrated that additional allowances were required.

T. New Accounting Pronouncements

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

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

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

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, (SFAS 148), “Accounting for Stock-Based Compensation—Transition and Disclosure”, amending FASB Statement No. 123 (SFAS 123), “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002. We adopted the disclosure portion of this statement for the seven months ended March 31, 2003. The application of the disclosure portion of this standard will have no impact on our

F-43

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

consolidated financial position or results of operations. The FASB recently indicated that they will require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. We will continue to monitor their progress on the issuance of this standard as well as evaluate our position with respect to current guidelines.

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

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

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

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

F-44

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

U. Reclassifications

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

2. LICENSE AGREEMENTS

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

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

We and Microsoft have entered into an agreement pursuant to which we have a non-exclusive, non-transferable license to design, develop and distribute software for the Xbox system. Territories where Xbox software may be distributed by us are determined on a title-by-title basis by Microsoft when the concept of the applicable software title is approved by Microsoft. We pay Microsoft a royalty fee for each unit of finished products manufactured on our behalf by third-party manufacturers approved by Microsoft. Our agreement with Microsoft expires in 2004.

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

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

Under each of our platform license agreements, we bear the risk that the information and technology licensed from Sony, Microsoft and Nintendo, and incorporated in the software may infringe the rights of third parties. Further, we must indemnify Sony, Microsoft and Nintendo with respect to, among other things, any

F-45

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

claims for copyright or trademark infringement brought against them, as applicable, and arising from the development and distribution of the game programs incorporated in the software by us. To date, we have not received any material claims of infringement.

3. ACQUISITION

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

4. ACCOUNTS RECEIVABLE

Accounts receivable are comprised of:

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

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

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

F-46

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

5. OTHER RECEIVABLES

Other receivables are comprised of:

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

6. INVENTORIES

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

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are comprised of:

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

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

8. BUILDING HELD FOR SALE

Management committed itself to a plan to sell our building located in the United Kingdom. The building is not currently in use. In connection with the plan, we recorded an impairment charge of $2,146 to adjust the building’s net carrying value to its fair value of $5,424, which is based on an independent appraisal, net of expected selling costs. As of March 31, 2003, the carrying value of the building was reclassified from fixed

F-47

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

assets to current assets and its associated mortgage payable was reclassified from long-term debt to current liabilities as we expect to sell the building within a year.

9. FIXED ASSETS

Fixed assets are comprised of:

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

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

10. OTHER ASSETS

Other assets are comprised of:

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

11. ACCRUED EXPENSES

Accrued expenses are comprised of:

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

F-48

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

12. ACCRUED SELLING EXPENSES

Accrued selling expenses are comprised of:

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

13. ACCRUED RESTRUCTURING CHARGES

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

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

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

F-49

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

14. DEBT

Debt is comprised of:

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

A. 10% Convertible Subordinated Notes

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

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

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

In March and April 2001, we retired a total of $13,875 in principal amount of the notes for an aggregate purchase price of $6,751. Of the $6,751 purchase price, $3,934 was raised through a concurrent sale of 3,147 shares of our common stock to the same note holders, based on a purchase price of $1.25 per share. The purchase price of $1.25 per share was approximately $0.24 below the fair value of our common stock on the date the

F-50

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

shares were issued, which equated to a total discount of $754. The $6,751 purchase price we paid for the notes included cash of $5,997 and the discount of $754. As a result of the note retirement, we recorded a gain on early retirement of debt of $7,124 in the third quarter of fiscal 2001. In the fourth quarter of fiscal 2001, we reduced the gain by $2,798 in connection with the delayed effectiveness of our registration statement filed with the SEC covering the resale of the common stock purchased by the former note holders. The charge equates to the fair value of 750 shares of our common stock we issued to the note holders due to the delayed effectiveness. On December 12, 2001, the SEC declared our registration statement effective.

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

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

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

B. Mortgage Notes

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

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

C. North American Credit Agreement

Our primary lender and we are parties to a North American credit agreement, which expires on August 31, 2003. This agreement automatically renews for additional one-year periods, unless our primary lender or we terminate the agreement with 90 days’ prior notice. Under the agreement, our primary lender generally advances cash to us based on a borrowing formula that primarily takes into account the balance of our eligible U.S.

F-51

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

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

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

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

F-52

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

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

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

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

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

D. Advances from International Factor

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

F-53

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

E. Bank Participation Advance

In March 2001, our primary lender entered into junior participation agreements with some investors. As a result of the participation agreements, our primary lender advanced us $9,500 for working capital purposes. We are required to repay the $9,500 bank participation advance to our primary lender upon the earlier to occur of the termination of the North American credit agreement, currently August 31, 2003, or March 12, 2005. Our primary lender is required to purchase the participation agreements from the investors on the earlier to occur of March 12, 2005, or the date we repay all amounts outstanding under the North American credit agreement and the agreement is terminated. If we were not able to repay the bank participation advance, the junior participants would have subordinated rights assigned to them under the North American credit agreement for the unpaid balance.

F. Promissory Note

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

G. Our debt matures as follows:

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

15. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES

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

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

F-54

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

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

16. PROVISION FOR INCOME TAXES

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

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

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

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

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

F-55

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

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

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

F-56

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

17. EARNINGS (LOSS) PER SHARE

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

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

18. STOCK OPTION AND PURCHASE PLANS

A. Stock Option Plan

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

For the incentive stock options we granted to employees under the plans, the exercise price per share was equal to the market price of our common stock on the dates of grant, or 110% of the market price for certain employees. For non-incentive stock options granted to employees under the plans, the exercise price per share was not less than 85% of the market price of our common stock on the dates of grant. Generally, outstanding options become exercisable equally over a three-year period starting on the date of grant (although this may be accelerated due to retirement, disability or death). Normally, employees, directors and consultants must exercise their outstanding options within ten years from the date they were granted. Some employees who were granted

F-57

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

incentive options must exercise their outstanding options within five years from the date they were granted. As of March 31, 2003, option holders were able to purchase approximately 8,385 shares of our common stock from exercisable options at a weighted-average exercise price of $3.86 per share and we had available for future grant 3,188 options to purchase shares of our common stock. Other than 100 shares of our common stock we issued to an employee, through March 31, 2003, we have not issued any stock appreciation rights or shares of common stock under our 1998 stock incentive plan.

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

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

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

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

F-58

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

B. Employee Stock Purchase Plan

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

19. EQUITY

A. Private Placements

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

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

In February 2002, we issued 7,167 shares of our common stock in a private placement of our common stock at a purchase price of $3.00 per share, and raised net proceeds of $19,785. The purchase price per share

F-59

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

represented a 10% discount from the then-recent public trading price of our common stock. We filed a registration statement with the SEC covering the resale of all the shares issued to investors in the private placement, which registration statement became effective in May 2002.

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

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

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

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

Please see note 14A.

C. Warrants

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

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

In March 2001, we issued to investors in the junior participation (please see note 14E) five-year warrants to purchase an aggregate of 2,375 shares of our common stock exercisable at a price of $1.25 per share, which included a total of 1,375 warrants we issued to some of our executive officers and to one of the directors of our Board, who joined in the junior participation. The fair value of the warrants of $1,751, based on the Black-Scholes option pricing model, was recorded as a deferred financing cost. We are amortizing the balance as a non- cash financing expense evenly over two and one-half years through August 31, 2003, the date on which the related North American credit agreement terminates. In fiscal 2002, we issued 750 shares of our common stock to unrelated investors and 105 shares of our common stock to one of our director’s relating to the exercise of these warrants. In fiscal 2001, we issued 250 shares of our common stock to unrelated investors relating to the exercise of these warrants.

In October 2001, we issued to two of our executive officers warrants to purchase a total of 1,250 shares of our common stock at an exercise price of $2.88 per share, the fair market value of our common stock on the grant

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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

date. We issued the warrants to the officers in consideration for their services and personal pledge of 1,250 shares of our common stock to our primary lender, as additional security for our supplemental discretionary loans (please see note 14C).

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

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

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

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

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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

D. Other Equity Transactions

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

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

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

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

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

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

20. STOCKHOLDERS’ RIGHTS

In the fourth quarter of fiscal 2000, our Board of Directors declared a dividend distribution of one right for each outstanding share of our common stock to stockholders of record at the close of business on June 21, 2000.

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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

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

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

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

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

• a merger or other business combination transaction involving us.

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

21. MAJOR SUPPLIERS AND CUSTOMERS AND RELATED PARTY TRANSACTIONS

A. Major Suppliers and Customers

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

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

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

B. Related Party Transactions

Fees for services

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

F-63

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

and $341 for fiscal 2000. We owed the firm $498 as of March 31, 2003, $385 as of August 31, 2002 and $18 as of August 31, 2001.

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

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

Notes receivable

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

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

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

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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

In July 2001, 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 are due and payable on the earlier of (i) August 31, 2003 and (ii) to the extent of the proceeds of any warrant share sale, the third business day following the date upon which the respective executive sells any or all of the warrant shares. The terms and provisions of the notes will not be materially modified or amended, nor will the term be extended or renewed. The notes provide us full recourse against the officers’ assets. The notes bear interest at our primary lender’s prime rate plus 1.50% per annum. Other receivables includes accrued interest receivable on the notes of $426 as of March 31, 2003 and $294 as of August 31, 2002. The notes receivable have been classified as a contra-equity balance in additional paid-in capital.

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

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

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

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

Warrants

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

Please also see notes 14 and 19.

F-65

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

22. SEGMENT INFORMATION

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

	North America			Europe and Pacific Rim			Eliminations			Total
Seven Months Ended March 31, 2003
Net revenue from external customers	$	43,347		$	58,242		$	—		$	101,589
Intersegment sales		17			7,875			(7,892	)		—
Total net revenue	$	43,364		$	66,117		$	(7,892	)	$	101,589
Interest income	$	415		$	50		$	—		$	465
Interest expense		3,821			717			—			4,538
Depreciation and amortization		3,329			795			—			4,124
Operating loss		(61,059	)		(3,065	)		—			(64,124	)
Identifiable assets as of March 31, 2003		49,474			30,463			—			79,937
Seven Months Ended March 31, 2002 (Unaudited)
Net revenue from external customers	$	116,827		$	43,361		$	—		$	160,188
Intersegment sales		39			5,632			(5,671	)		—
Total net revenue	$	116,866		$	48,993		$	(5,671	)	$	160,188
Interest income	$	386		$	94		$	—		$	480
Interest expense		5,250			531			—			5,781
Depreciation and amortization		4,073			795			—			4,868
Operating profit		16,723			2,144			—			18,867
Identifiable assets as of March 31, 2002		112,573			34,147			—			146,720
Fiscal 2002
Net revenue from external customers	$	184,478		$	84,210		$	—		$	268,688
Intersegment sales		99			11,603			(11,702	)		—
Total net revenue	$	184,577		$	95,813		$	(11,702	)	$	268,688
Interest income	$	1,331		$	124		$	—		$	1,455
Interest expense		7,795			929			—			8,724
Depreciation and amortization		6,960			1,507			—			8,467
Operating profit		3,461			1,436			—			4,897
Identifiable assets as of August 31, 2002		139,543			43,352			—			182,895

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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

	North America			Europe and Pacific Rim			Eliminations			Total
Fiscal 2001
Net revenue from external customers	$	146,185		$	51,383		$	—		$	197,568
Intersegment sales		317			8,588			(8,905	)		—
Total net revenue	$	146,502		$	59,971		$	(8,905	)	$	197,568
Interest income	$	377		$	94		$	—		$	471
Interest expense		9,743			1,250			—			10,993
Depreciation and amortization		7,104			1,758			—			8,862
Operating profit		20,055			3,160			—			23,215
Identifiable assets as of August 31, 2001		96,508			29,122			—			125,630
Fiscal 2000
Net revenue from external customers	$	119,869		$	68,757		$	—		$	188,626
Intersegment sales		165			15,888			(16,053	)		—
Total net revenue	$	120,034		$	84,645		$	(16,053	)	$	188,626
Goodwill writedown	$	17,870		$	—		$	—		$	17,870
Interest income		3,298			460			—			3,758
Interest expense		11,176			273			—			11,449
Depreciation and amortization		9,671			3,531			—			13,202
Operating loss		(100,655	)		(19,405	)		—			(120,060	)
Identifiable assets as of August 31, 2000		88,669			4,424			—			93,093

Our gross revenue was derived from the following product categories:

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

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

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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

23. COMMITMENTS AND CONTINGENCIES

A. Legal Proceedings

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

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

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

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

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

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

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

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

F-68

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

Eastern District of New York, Central Islip Division; Sypes, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Berman, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division; Burk, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Brooklyn Division; Brake, et al. v. Acclaim Entertainment, Inc., Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division.

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

We and other companies in the entertainment industry were sued in an action entitled James, et al. v. Meow Media, et al. filed in April 1999 in the U.S. District Court for the Western District of Kentucky, Paducah Division. The plaintiffs alleged that the defendants negligently caused injury to the plaintiffs as a result of, in the case of Acclaim, its distribution of unidentified “violent” video games, which induced a minor to harm his high school classmates, thereby causing damages to plaintiffs, the parents of the deceased individuals. The plaintiffs seek damages in the amount of approximately $110 million. The U.S. District Court for the Western District of Kentucky dismissed this action and the dismissal was then appealed by the plaintiffs to the U.S. Court of Appeals for the Sixth Circuit. The U.S. Court of Appeals for the Sixth Circuit denied plaintiffs appeal. The plaintiff filed a petition for a Writ of Certiorari with the United States Supreme Court to challenge the Sixth Circuits decision. The United States Supreme Court denied the petition on January 21, 2003. No further appeals are available to the plaintiffs.

We and other companies in the entertainment industry were sued in an action entitled Sanders et al. v. Meow Media, et al., filed in April 2001 in the U.S. District Court for the District of Colorado. The complaint purports to be a class action brought on behalf of all persons killed or injured by the shootings which occurred at Columbine High School on April 20, 1999. We are a named defendant in the action along with more than ten other publishers of computer and video games. The complaint alleges that the video game defendants negligently caused injury to the plaintiffs as a result of their distribution of unidentified “violent” video games, which induced two minors to kill a teacher related to the plaintiff and to kill or harm their high school classmates, thereby causing damages to plaintiffs. The complaint seeks: compensatory damages in an amount not less than $15 for each plaintiff in the class, but up to $20 million for some of the members of the class; punitive damages in the amount of $5 billion; statutory damages against certain other defendants in the action; and equitable relief to address the marketing and distribution of “violent” video games to children. This case was dismissed on

F-69

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

March 4, 2002. Following dismissal, the plaintiffs moved for relief and the U.S. District Court for the District of Colorado denied the relief sought by plaintiff. On April 5, 2002, plaintiffs noted an appeal to the United States Court of Appeals for the Tenth Circuit. On October 3, 2002, the Tenth Circuit took jurisdiction over plaintiffs’ appeal. The plaintiffs subsequently filed a stipulation of dismissal of their appeal with prejudice, and the Tenth Circuit formally dismissed the appeal on December 10, 2002. No further appeals are available to the plaintiffs.

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

An action entitled David Mirra v. Acclaim Entertainment, Inc., was filed in the United States District Court for the Eastern District of New York on February 5, 2003. The plaintiff alleged that the defendants did not have authorization to utilize Mirra’s name and likeness in connection with a bicycle video game intended for mature audiences. Specifically, Mirra alleges that we engaged in (1) violations of § 1051 et seq. of the Lanham Act; (2) violations of §43(a) of the Lanham Act; (3) breach of the amendment to the license agreement; (4) unfair competition; (5) tortious interference; (6) injury to business reputation and dilution; (7) deceptive trade practices in violation of General Business Law of New York § 349; (8) false advertising in violation of General Business Law of New York § 350-D; (9) violation of the California Civil Code § 3344; and (10) invasion of privacy— misappropriation of likeness pursuant to California common law; (11) invasion of privacy—false light pursuant to California common law; and (12) and accounting. Mirra claims that he has been harmed by $1,000 per Counts 1-5 and 7-11, for a total of $10,000 in actual damages. Mirra is also claiming that our actions were willful and is demanding an additional $20,000 in punitive damages, plus costs and attorneys’ fees. We believe we have meritorious defenses to these allegations and we intend to defend this action vigorously. Neither party has yet to exchange their initial disclosures or to begin formal discovery.

B. Letters of Credit

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

F-70

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

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

C. Employee Benefits

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

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

24. QUARTERLY FINANCIAL DATA (UNAUDITED)

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

Twelve Months Ended March 31, 2003

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

Twelve Months Ended March 31, 2002

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

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

F-71

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

Acclaim will bear all expenses in connection with the preparation and filing of this registration statement. Brokers or dealers may receive commission or discounts from the selling stockholders in amounts to be negotiated immediately prior to the sale; commission expenses and brokerage fees will be paid by the selling stockholders.

Item 14. Indemnification of Directors and Officers.

Under Article VII of Acclaim’s by-laws, which are incorporated herein by reference, Acclaim agrees to hold harmless and indemnify any of its officers, directors, employees and agents from and against any judgments, fines, liabilities, or amounts paid in settlement as a result of or in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. Such action, suit, or proceeding must have been initiated against the indemnified party in his or her capacity as an officer, director, employee or agent of Acclaim. However, indemnification will only be paid if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Acclaim and, in the case of a criminal proceeding, had no reasonable cause to believe such conduct was unlawful. No indemnification shall be payable under this provision if a court having jurisdiction in the matter shall determine that such indemnification is not lawful.

Item 15. Recent Sales of Unregistered Securities.

In March 2001, subsequent to the second fiscal quarter closing, as an inducement to the junior participants to participate in a junior participation agreement with the Company’s primary lender, the Company, in reliance upon Section 4(2) of the Securities Act, issued to the Junior Participants five-year warrants to purchase up to an aggregate of 2,375,000 shares of common stock of the Company exercisable at an initial price of $1.25 per share. Two executive officers of the Company each own separate entities which received warrants to purchase 625,000 shares of common stock of the Company in connection with their pro rata allocation of the Participation. Another director of the Company received warrants to purchase 125,000 shares of common stock in connection with his pro rata allocation of the Participation.

In March and April 2001, the Company negotiated the repurchase of a total of $13.9 million in principal amount of its then outstanding 10% Convertible Subordinated Notes due 2002 (the “Old Notes”) for an aggregate discounted purchase price of approximately $6.8 million. In connection with the transactions, the Company sold 3,147,000 shares of its common stock to the Old Note holders for approximately $3.9 million based on a purchase price of $1.25 per share. The issuance of these shares of common stock was effected under the exemption from registration provided by Section 3(a) (9) of the Securities Act of 1933. The $6.8 million discounted purchase price of the Old Notes includes approximately $0.8 million reflecting the excess of the fair value of the common stock at issuance over the price paid by the Old Note holders, plus 6.0 million of cash paid by the Company (including the proceeds of the stock sale). Because the registration statement filed with the SEC by the Company covering the resale by the Old Note holders of the purchased common stock was not declared effective by the SEC by July 15, 2001, the Company was required to issue a total of 750,000 shares of common stock to the Old Note holders.

In June and July 2001, in reliance upon Section 4(2) of the Securities Act, the Company issued an aggregate of 329,389 shares of common stock to consultants in connection with services rendered to the Company under certain software development agreements.

II-1

In June 2001, the Company retired $6.7 million in principal amount of the Old Notes in exchange for 2,021,882 shares of its common stock. The issuance of these shares of common stock was effected under the exemption from registration provided by Section 3(a) (9) of the Securities Act of 1933.

On July 30, 2001, the Company issued a total of 9,335,334 shares of its common stock in a private placement to certain qualified institutional buyers and accredited investors at a price of $3.60 per share, for aggregate gross proceeds of $33,607,201. The private placement was effected under the exemption from registration provided under section 4(2) of the Securities Act of 1933. The resale of these 9,335,334 shares of common stock by the investors in the private placement is covered by an effective registration statement filed in May 2002.

In October 2001, Gregory Fischbach and James Scoroposki each exercised a warrant (granted in 1991) to purchase 562,500 shares of the Company’s common stock for aggregate consideration of $3,375,000 of which $3,352,500 was paid with a note and the remainder was paid in cash. The warrants were originally issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act of 1933. The $3,352,500 notes were extended in July 2002 and repaid in full in fiscal 2004. The resale of the shares of common stock underlying the warrant by Messrs. Fischbach and Scoroposki is covered by an effective registration statement filed in May 2002.

In October 2001, the Company issued to each of Gregory Fischbach and James Scoroposki a warrant to purchase 625,000 shares of common stock at an exercise price of $2.88 per share, in consideration for Messrs. G. Fischbach and Scoroposki personally pledging to the Bank shares of Common Stock valued at $5 million in the aggregate to partially secure the Over formula Loan. The warrants were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act of 1933. The warrants may be exercised at any time between April 2, 2002 and April 2, 2012. The resale of the shares of common stock underlying the warrant by Messrs. Fischbach and Scoroposki is covered by an effective registration statement filed in May 2002.

In October 2001, the Company issued a five-year warrant to purchase 100,000 shares of common stock to the Company’s primary lender at an exercise price of $4.70 per share, in connection with an overformula loan. The warrant was issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act of 1933. The warrant may be exercised at any time between October 31, 2001 and October 2006.

On February 13, 2002, the Company issued a total of 7,166,667 shares of its common stock in a private placement to certain qualified institutional buyers and accredited investors at a price of $3.00 per share, for aggregate gross proceeds of $21,500,000. The private placement was effected under the exemption from registration provided under Section 4(2) of the Securities Act of 1933. The resale of the 7,166,667 shares by the investors in the private placement is covered by an effective registration statement filed in May 2002.

On February 12, 2002, the Company retired $3.4 million in principal amount of our 10% convertible notes, plus accrued interest, in exchange for consideration consisting solely of 956,000 shares of our common stock. The issuance of these shares of common stock was effected under the exemption from registration provided by Section 3(a) (9) of the Securities Act of 1933.

On February 14, 2002, the Company retired an additional $9.3 million principal amount of our 10% convertible subordinated notes, plus accrued interest, in exchange for 3,253,420 shares of our common stock. The issuance of these shares of common stock was effected under the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933.

On or about June 2, 2003, the Company issued a total of 16,383,333 shares of its common stock to certain qualified institutional buyers and accredited investors at prices ranging from $0.50 to $0.60 per share, for an aggregate gross purchase price of $9,000,000. The private placement was effected under the exemption from registration provided under Section 4(2) of the Securities Act of 1933. In addition, the Company issued warrants

II-2

to purchase 477,667 shares of common stock to certain of these qualified institutional buyers and accredited investors, and to the placement agent for the transaction. The shares are issuable at any time or from time to time upon the exercise of the warrants by such parties, at an exercise price of $0.50 per share and, if not exercised in full prior to June 2, 2008, expire on that date. These warrants (and the underlying shares issuable upon exercise) were issued pursuant to the exemption from registration provided under Section 4(2) of the Securities Act. The resale by the investors in the private placement of the 16,383,333 shares of common stock and the 477,667 shares of common stock underlying the warrants are covered by an effective registration statement filed in August 2003.

In late September and early October 2003, the Company raised gross proceeds of $11,862,800 in connection with an offering to a limited group of private investors of Convertible Subordinated Notes due in 2010. For a more detailed description of the terms of this offering see “Selling Stockholders” on page 74 of this registration statement.

In February of 2004, the Company raised gross proceeds of $15,000,000 in connection with an offering to a single investor of Convertible Subordinated Notes due in 2007. For a more detailed description of the terms of this offering see “Selling Stockholders” on page 74 of this registration statement.

Item 16. Exhibits and Financial Statement Schedule

Exhibit Number	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)
†3.6	Amendment to the Certificate of Incorporation of the Company.
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)

II-3

Exhibit Number	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 (incorporated by reference to 4.6 of the Company’s Quarterly Report on Form 10-Q, filed on November 18, 2003)
4.7	Form of Warrant between the Company and certain purchasers of the Company’s securities, dated October, 2003 (incorporated by reference to 4.7 of the Company’s Quarterly Report on Form 10-Q, filed on November 18, 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 (incorporated by reference to 4.8 of the Company’s Quarterly Report on Form 10-Q, filed on November 18, 2003)
4.9	Form of Promissory Note between the Company and certain purchasers of the Company’s securities, dated October, 2003 (incorporated by reference to 4.9 of the Company’s Quarterly Report on Form 10-Q, filed on November 18, 2003)
†5	— Opinion of Katten Muchin Zavis Rosenman
+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

II-4

Exhibit Number	Description
	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)
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)

II-5

Exhibit Number	Description
*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)
*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

II-6

Exhibit Number	Description
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
†10.43	Note Purchase Agreement, dated February 17, 2004, between the Company and Alexandra Global Master Fund, Ltd.
†10.44	Indenture of the Company to U.S. Bank Trust National Association, as Trustee, dated February 17, 2004.
†10.45	First Supplemental Indenture of the Company to U.S. Bank Trust National Association, as Trustee, dated February 17, 2004.
†10.46	Warrant Agreement between the Company and Alexandra Global Master Fund, Ltd., dated February 17, 2004.
12.1	Computation of Ratio of Earnings to Fixed Charges
†23.1	— Consent of KPMG LLP
23.3	— Consent of Katten Muchin Zavis Rosenman (included in Exhibit 5)

* 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.

II-7

SCHEDULE II

ACCLAIM ENTERTAINMENT, INC.

AND SUBSIDIARIES

ALLOWANCE FOR PRICE CONCESSIONS AND RETURNS

(In thousands of dollars)

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

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

Item 17. Undertakings.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

II-8

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-9

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Glen Cove, State of New York, on March 5, 2004.

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

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Rodney P. Cousens, his true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this registration statement, and to file the same, with all the exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/    GREGORY E. FISCHBACH       Gregory E. Fischbach	Co-Chairman of the Board	March 5, 2004
/s/    JAMES R. SCOROPOSKI         James R. Scoroposki	Co-Chairman of the Board; Senior Executive Vice President; Treasurer	March 5, 2004
/s/    GERARD F. AGOGLIA         Gerard F. Agoglia	Chief Financial Officer and Executive Vice President; Chief Financial and Accounting Officer	March 5, 2004
/s/    JAMES SCIBELLI         James Scibelli	Director	March 5, 2004
/s/    ROBERT GROMAN         Robert Groman	Director	March 5, 2004
/s/    BERNARD FISCHBACH         Bernard Fischbach	Director	March 5, 2004
/s/    KENNETH COLEMAN         Kenneth Coleman	Director	March 5, 2004
/s/    MICHAEL TANNEN         Michael Tannen	Director	March 5, 2004

II-10

EX-3.6

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

* * * * *

Under section 242 of the General Corporation Law

The undersigned officer of Acclaim Entertainment, Inc., (the “Corporation”), a Delaware corporation, in order to amend the Certificate of Incorporation of the Corporation, pursuant to the provisions of Section 242 of the General Corporation Law of the State of Delaware, does hereby certify as follows:

1) Part A of Article FOURTH of the Certificate of Incorporation of the Corporation is hereby amended and restated to read as follows:

FOURTH: A. The Corporation shall be authorized to issue (i) 300,000,000 shares of common stock, par value $0.02 per share, and (ii) 1,000,000 shares of preferred stock, par value $0.01 per share, of which 200,000 shares of preferred stock are designated Series A preferred stock and which shall have the powers, designations, preferences, rights, limitations and qualifications hereinafter set forth in part D of this Article FOURTH.

2) The foregoing amendment to the Certificate of Incorporation of the Corporation was duly adopted at a meeting of the Board of Directors of the Corporation held on November 4, 2003 and by the affirmative vote of a majority of the stockholders of the Corporation held on January 20, 2004.

IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Edward M. Slezak, its Vice President and Corporate Counsel, this 26th day of February, 2004.

Acclaim Entertainment, Inc.
By:	/S/    EDWARD M. SLEZAK
	Name:  Edward M. Slezak
	Title:    Vice President and Corporate Counsel

EX-5

EXHIBIT 5.1

March 10, 2004

Acclaim Entertainment, Inc.

One Acclaim Plaza

Glen Cove, NY 11542

Re: Acclaim Entertainment, Inc.

Registration Form S-1

Ladies and Gentlemen:

We have acted as counsel to Acclaim Entertainment, Inc., a Delaware corporation (the “Company”), in connection with the public offering by the selling stockholders named in the Registration Statement on Form S-1 (the “Registration Statement”) filed with the Securities and Exchange Commission (the “Commission”) by the Company on March 5, 2004, of (a) up to 63,500,000 shares (the “Secondary Shares”) of the Company’s common stock, par value $0.02 per share (the “Common Stock”) and (b) $15,000,000.00 principal amount of 9% Senior Subordinated Convertible Notes due February 17, 2007 (the “Notes”), governed by the Indenture (the “Original Indenture”) between Acclaim and U.S. Bank Trust National Association (the “Trustee”), as supplemented by the First Supplemental Indenture (the “Supplemental Indenture”) between the Company and the Trustee (collectively referred to as the “Indentures”).

This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the “Act”).

In connection with this opinion, we have relied as to matters of fact, without investigation, upon certificates and written statements of certain officers of the Company. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such instruments, documents and records as we have deemed relevant and necessary to examine for the purpose of this opinion, including (i) the Registration Statement; (ii) a specimen certificate representing the Common Stock; (iii) the Indentures; (iv) the Certificate of Incorporation of the Company, as presently in effect; (v) the By-Laws of the Company, as presently in effect; and (vi) certain resolutions of the Board of Directors of the Company relating to the issuance and sale of the Secondary Shares and the Notes and related matters.

In connection with this opinion, we have assumed the legal capacity of all natural persons, the accuracy and completeness of all documents and records that we have reviewed, the genuineness of all signatures, the due authority of the parties signing such documents, the authenticity of the documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or reproduced copies. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the power, corporate or other, to enter into and perform all obligations thereunder, and have also assumed the due authorization by all requisite action, corporate or other, and the execution and delivery by such parties, of such documents and the validity and binding effect thereof.

Based upon and subject to the foregoing, it is our opinion that:

1.  The Notes are valid and binding obligations on the Company entitled to the benefits of the Indentures and enforceable against the Company in accordance with their terms, except to the extent that (a) enforcement thereof may be limited by (1) bankruptcy, insolvency, reorganization, receivership, fraudulent conveyance, moratorium, or other similar laws now or hereinafter in effect relating to creditors’ rights generally and (2) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity) and (b) the waiver contained in Section 515 of the Original Indenture may be deemed unenforceable; and

2.  When issued in accordance with the terms of the 16% Convertible Subordinated Notes, Indentures or warrants referred to in the Registration Statement, the Common Stock issuable upon such conversion or exercise will be validly issued, fully paid and nonassessable.

Our opinion expressed above is limited to the General Corporation Law of the State of Delaware, including the applicable provisions of the Constitution of the State of Delaware and the reported judicial decisions interpreting such laws and provisions. This opinion is given as of the date hereof and we assume no obligation to advise you of changes that may hereafter be brought to our attention.

We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the caption “Legal Matters” in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission.

Very truly yours,

KATTEN MUCHIN ZAVIS ROSENMAN
By	/S/  JOEL YUNIS
	Partner

EX-10.43

EXHIBIT 10.43

NOTE PURCHASE AGREEMENT

dated February 17, 2004

by and between

ACCLAIM ENTERTAINMENT, INC.

and

ALEXANDRA GLOBAL MASTER FUND LTD.

9% Senior Subordinated Convertible Notes due 2007

and

Common Stock Purchase Warrants

ACCLAIM ENTERTAINMENT, INC.

NOTE PURCHASE AGREEMENT

9% SENIOR SUBORDINATED

CONVERTIBLE NOTES DUE 2007

and

COMMON STOCK PURCHASE WARRANTS

TABLE OF CONTENTS

			Page
1.	DEFINITIONS		1
2.	PURCHASE AND SALE; PURCHASE PRICE		10
	(a)	Purchase	10
	(b)	Exercise of First Purchase Option	11
	(c)	Exercise of Second Purchase Option	11
	(d)	Initial Closing	13
3.	REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYER		13
	(a)	Purchase for Investment	13
	(b)	Accredited Investor	14
	(c)	Subsequent Offers and Sales	14
	(d)	Company Reliance	14
	(e)	Information Provided	14
	(f)	Absence of Approvals	15
	(g)	Note Purchase Agreement	15
	(h)	Brokers	15
	(i)	No General Solicitation	15
	(j)	Subordination of Notes	15
	(k)	Non-contravention	16
4.	REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY		16
	(a)	Organization and Authority	16
	(b)	Capitalization	17
	(c)	Corporate Authorization	18
	(d)	Non-contravention	18
	(e)	Approvals, Filings, Etc.	19
	(f)	Information Provided	19

-i-

	(h)	Absence of Certain Proceedings	20
	(i)	Absence of Certain Changes	20
	(j)	Internal Accounting Controls	20
	(k)	Compliance with Law	20
	(l)	Properties	20
	(m)	Insurance	20
	(n)	Investment Company	21
	(o)	Absence of Brokers, Finders, Etc.	21
	(p)	No Solicitation	21
	(q)	Indenture; Supplemental Indentures	21
	(r)	Absence of Rights Agreement	21
	(s)	Tax Matters	21
5.	CERTAIN COVENANTS		22
	(a)	Transfer Restrictions	22
	(b)	Restrictive Legends	23
	(c)	Form D	24
	(d)	Nasdaq Listing; Reporting Status	24
	(f)	Use of Proceeds	25
	(g)	Debt Obligation	25
	(h)	Security Interest; Financing Statements, Etc.	25
	(i)	Limitation on Certain Actions	26
6.	CONDITIONS TO COMPANY’S OBLIGATION TO SELL		26
7.	CONDITIONS TO BUYER’S OBLIGATION TO PURCHASE		27
8.	REGISTRATION RIGHTS		28
	(a)	Mandatory Registration	28
	(b)	Obligations of the Company	31
	(c)	Obligations of the Buyer	34
	(d)	Rule 144	35
9.	INDEMNIFICATION AND CONTRIBUTION		35
	(a)	Indemnification	35
	(b)	Contribution	38
	(c)	Other Rights	38
10.	POST CLOSING COVENANTS		38
	(a)	Collateral and Security	38
	(b)	Intercreditor Agreement	39
	(c)	Perfecting Security Interests	39
11.	MISCELLANEOUS		39
	(a)	Governing Law	39
	(b)	Headings	39
	(c)	Severability	39
	(d)	Notices	39
	(e)	Counterparts	40

-ii-

(f)	Entire Agreement; Benefit	40
(g)	Waiver	41
(h)	Amendment	41
(i)	Further Assurances	41
(j)	Fees and Expenses	41
(k)	Survival	42
(l)	Public Statements, Press Releases, Etc.	42
(n)	Limitation of Liability	42

DISCLOSURE SCHEDULE

4(a)	List of Subsidiaries
4(b)	Capitalization
4(d)	Non-contravention
4(i)	Certain Changes
4(o)	Brokers and Finders
4(s)	Tax Matters

ANNEXES

ANNEX I	Form of Indenture
ANNEX II	Form of Purchase Option Notice
ANNEX III	Form of Common Stock Purchase Warrants
ANNEX IV	Form of First Supplemental Indenture
ANNEX V	Form of Opinion of Company Counsel
ANNEX VI	Form of Pledge and Security Interest; Collateral; Mortgage and Mortgaged Property Provisions to be contained in Supplemental Indenture
ANNEX VII	Form of Mortgage

-iii-

NOTE PURCHASE AGREEMENT

THIS NOTE PURCHASE AGREEMENT, dated as of February 17, 2004 (this “Agreement”), by and between ACCLAIM ENTERTAINMENT, INC., a Delaware corporation (the “Company”), with headquarters located at One Acclaim Plaza, Glen Cove, New York, 11542, and ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands corporation (the “Buyer”, also referred to herein as the “Investor”)).

W  I  T  N  E  S  S  E  T  H:

WHEREAS, the Buyer wishes to purchase from the Company and the Company wishes to sell to the Buyer, upon the terms and subject to the conditions of this Agreement, the Notes (such capitalized term and all other capitalized terms used in this Agreement having the meanings provided in Section 1) in the principal amounts set forth on the signature page of this Agreement and which will be convertible into shares of Common Stock;

WHEREAS, on or before the Initial Closing Date the Company and the Trustee shall execute and deliver, one to the other, the Supplemental Indenture in the form referred to herein, which provides, among other things, for the grant to the Trustee for the ratable benefit of the holders from time to time of the Notes of a second priority security interest in certain collateral upon the terms and with the effect as provided therein; and

WHEREAS, in connection with the issuance of the Notes, the Company is issuing to the Buyer the Warrants on the terms provided herein;

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:

1. DEFINITIONS.

(a) As used in this Agreement, the terms “Agreement”, “Buyer” and “Company” shall have the respective meanings assigned to such terms in the introductory paragraph of this Agreement.

(b) All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Agreement.

(c) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Account” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Additional Registrable Securities” means any Notes and shares of Common Stock which are included within the definition of Registrable Securities but not included in any Registration Statement pursuant to Section 8(a)(1).

“Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject Person. For purposes of this definition, “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise.

“Approved Market” means the American Stock Exchange, Inc., Nasdaq, Nasdaq SmallCap or the New York Stock Exchange, Inc.

“Blackout Period” means the period of up to 45 consecutive Trading Days (whether or not consecutive) during any period of 365 consecutive days after the date the Company notifies the Investor that it is required, pursuant to Section 8(c)(4), to suspend offers and sales of Registrable Securities as a result of an event or circumstance described in Section 8(b)(5)(A), during which period, by reason of Section 8(b)(5)(B), the Company is not required to amend the Registration Statement or supplement the related Prospectus.

“Business Day” means any day other than a Saturday, Sunday or a day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed.

“Claim” means, with respect to any Person, any losses, claims, damages or liabilities incurred by such Person.

“Closing Date” means the Initial Closing Date, the First Option Closing Date or the Second Option Closing Date, as the case may be.

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“Code” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder and published interpretations thereof.

“Collateral” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Common Stock” means the Common Stock, par value $.02 per share, of the Company.

“Contracts” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Conversion Price” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Conversion Shares” means the shares of Common Stock issuable upon conversion of the Note.

“Derivative Securities” shall have the meaning provided in Section 4(c)(1).

“Disclosure Schedule” means the Disclosure Schedule prepared by the Company and furnished to the Buyer prior to the date of execution and delivery of this Agreement by the Buyer.

“Effective Registration” with respect to any Registrable Securities means the resale of such Registrable Securities is covered by an effective Registration Statement in accordance with the terms herein and such Registration Statement is not subject to any suspension or stop order and is expected to remain effective and available for use by the selling stockholders named therein or in any related prospectus supplement for at least 15 Trading Days thereafter.

“Encumbrances” means all mortgages, deeds of trust, claims, security interests, liens, pledges, leases, subleases, charges, escrows, options, proxies, rights of occupancy, rights of first refusal, preemptive rights, covenants, conditional limitations, hypothecations, prior assignments, easements, title retention agreements, indentures, security agreements or any other encumbrances of any kind.

“Event of Default” shall have the meaning to be provided or provided in the Supplemental Indenture.

-3-

“First Option Closing Date” means 12:00 noon, New York City time, on the date which is five Trading Days after (i) the Company gives the Purchase Option Notice to exercise the First Purchase Option, or (ii) the Buyer gives the Company written notice that it has elected to purchase the First Option Notes, or such other date and time as is mutually agreed between the Company and the Buyer.

“First Option Notes” means the Notes in the principal amount of $5,000,000.00 issuable or issued pursuant to Section 2(b) having the terms and conditions set forth in the Supplemental Indenture.

“First Option Period” means the period beginning on the Initial Closing Date and ending on the day that is 270 days after the Initial Closing Date.

“GMAC” means GMAC Commercial Finance LLC.

“Holder” shall have the meaning to be provided or provided in the Indenture.

“Indebtedness” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Indemnified Party” means the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any Person who controls such stockholder or underwriter within the meaning of the 1933 Act or the 1934 Act.

“Indemnified Person” means each Investor who owns or holds Registrable Securities and each Investor who sells such Registrable Securities in the manner permitted under this Agreement, the directors, if any, of such Investor, the officers, if any, of any such Investor, each Person, if any, who controls any such Investor within the meaning of the 1933 Act or the 1934 Act, any underwriter (as defined in the 1933 Act) acting on behalf of an Investor who participates in the offering of Registrable Securities of such Investor in accordance with the plan of distribution contained in the Prospectus, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each Person, if any, who controls any such underwriter within the meaning of the 1933 Act or the 1934 Act.

-4-

“Indenture” means the Indenture, to be dated February 17, 2004, by and between the Company and the Trustee in the form attached as Annex I to this Agreement.

“Initial Closing Date” means 12:00 noon, New York City time, on February 17, 2004, or such other date and time as is mutually agreed between the Company and the Buyer.

“Initial Notes” means the Notes in the principal amount of $15,000,000.00 issuable or issued pursuant to Section 2(a) having the terms and conditions set forth in the Supplemental Indenture.

“Initial Registrable Securities Amount” shall have the meaning provided in Section 8(a)(1).

“Intellectual Property” means all franchises, patents, patent rights, trademarks, service marks, trade names (whether registered or unregistered), copyrights, corporate names, licenses, trade secrets, proprietary software or hardware, proprietary technology, technical information, discoveries, designs and other proprietary rights, whether or not patentable, and confidential information (including, without limitation, know-how, processes and technology).

“Lien” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Margin Stock” shall have the meaning provided in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221).

“Market Price” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Maturity Date” shall have the meaning to be provided or provided in the Supplemental Indenture.

“NASD” means the National Association of Securities Dealers, Inc.

“Nasdaq” means the Nasdaq National Market.

“Nasdaq SmallCap” means the Nasdaq SmallCap Market.

“1934 Act” means the Securities Exchange Act of 1934, as amended.

-5-

“1939 Act” means the Trust Indenture Act of 1939, as amended.

“1939 Act Rules and Regulations” means the rules and regulations of the SEC under the 1939 Act.

“1933 Act” means the Securities Act of 1933, as amended.

“New York UCC” means the Uniform Commercial Code as in effect in the State of New York.

“Notes” means the 9% Senior Subordinated Convertible Notes due 2007 of the Company to be issued or issuable pursuant to this Agreement.

“Permitted Liens” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Person” means any natural person, corporation, partnership, limited liability company, trust, incorporated organization, unincorporated association, or similar entity or any government, governmental agency or political subdivision.

“Prospectus” means the prospectus forming part of a Registration Statement at the time such Registration Statement is declared effective and any amendment or supplement thereto (including the Prospectus Supplement), including any documents or information incorporated therein by reference.

“Purchase Option Notice” means a Purchase Option Notice in the form of Annex II to this Agreement.

“Purchase Price” means with respect to any Note the purchase price for such Note, which shall equal the principal amount of such Note.

“register,” “registered,” and “registration” refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415, and the declaration or ordering of effectiveness of such Registration Statement or Statements by the SEC.

“Registrable Securities” means the Notes, the Shares and any stock or other securities into which or for which the Common Stock may hereafter be changed, converted or exchanged by the Company or its successor, as the case may be, and any other securities issued to holders of such Common Stock (or such shares into which or for which such Shares are so changed, converted or exchanged) upon

-6-

any reclassification, share combination, share subdivision, share dividend, merger, consolidation or similar transaction or event.

“Registration Default Period” means the period following the date which is 45 days after the Closing Date during which any Registration Event occurs and is continuing.

“Registration Event” means the occurrence of any of the following events:

(i) the Company fails to file with the SEC a Registration Statement on or before the date by which the Company is required to file a Registration Statement pursuant to Section 8(a)(1),

(ii) the Registration Statement covering Registrable Securities is not declared effective by the SEC within 90 days following the applicable Closing Date; provided, however, that if such Registration Statement is subject to review by the SEC staff, such effective date shall be within 120 days following the applicable Closing Date, or

(iii) after the SEC Effective Date, sales cannot be made pursuant to the Registration Statement for a period of 30 consecutive Trading Days for any reason (including without limitation by reason of a stop order, or the Company’s failure to update the Registration Statement) but except as excused pursuant to Section 8(b)(5).

“Registration Period” means the period from the SEC Effective Date to the earlier of the date (x) which is two years after the issuance date of the Notes, (y) on which the Registrable Securities may be sold pursuant to Rule 144(k), or (z) the Registrable Securities remain outstanding.

“Registration Statement” means a registration statement of the Company under the 1933 Act relating to the Registrable Securities and which names the Investor as a selling stockholder.

“Repurchase Event” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Required Information” means, with respect to each Investor, all information regarding such Investor, the Registrable Securities held by such Investor or which such Investor has the right to acquire and the intended method of disposition of the Registrable Securities held by such Investor or which such

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Investor has the right to acquire as shall be required by the 1933 Act to effect the registration of the resale by such Investor of such Registrable Securities.

“Rule 415” means Rule 415 under the 1933 Act or any successor rule providing for offering securities on a delayed or continuous basis.

“Rule 144” means Rule 144 under the 1933 Act or any other similar rule or regulation of the SEC that may at any time provide a “safe harbor” exemption from registration under the 1933 Act so as to permit a holder of securities to sell such securities to the public without registration under the 1933 Act.

“Rules and Regulations” means the rules and regulations of the SEC under the 1933 Act.

“SEC” means the Securities and Exchange Commission.

“SEC Effective Date” means the date a particular Registration Statement is declared effective by the SEC.

“SEC Filing Date” means the date the Registration Statement is first filed with the SEC.

“SEC Reports” means (1) the Company’s Annual Report on Form 10-K for the transitional period from September 1, 2002 to March 31, 2003, (2) the Company’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders filed on January 5, 2004, (3) the Quarterly Reports on Form 10-Q filed on August 18, 2003 and November 17, 2003 and (4) the Company’s Current Reports on Form 8-K, dated June 2, 2003, June 10, 2003, July 18, 2003, July 28, 2003, August 19, 2003, September 10, 2003, October 1, 2003, October 6, 2003, December 18, 2003, January 22, 2004 and January 23, 2004, in each case as filed with the SEC and including the information and documents (other than exhibits) incorporated therein by reference.

“Second Option Closing Date” means 12:00 noon, New York City time, on the date which is five Trading Days after (i) the Company gives the Purchase Notice to exercise the Second Purchase Option, or (ii) the Buyer gives the Company written notice that it has elected to purchase the Second Option Notes, or such other date and time as is mutually agreed between the Company and the Buyer.

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“Second Option Notes” means the Note in the principal amount of $5,000,000.00 issuable or issued pursuant to Section 2(c) having the terms and conditions set forth in the Supplemental Indenture.

“Second Option Period” means the period beginning on the date which is 365 days after the Initial Closing Date and ending on the date which is 545 days after the Initial Closing Date.

“Securities” means, collectively, the Note, the Warrants and the Shares.

“Security Interest” shall have the meaning to be provided or provided in the Supplemental Indenture.

“September 10-Q” means the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the SEC.

“Shares” means the Conversion Shares and the Warrant Shares.

“Subsidiary” means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company.

“Supplemental Indenture” means the First Supplemental Indenture, to be dated as of February 17, 2004, by and between the Company and the Trustee in the form attached as Annex IV to this Agreement.

“Trading Day” shall have the meaning to be provided or provided in the Supplemental Indenture.

“Transaction Documents” means, collectively, this Agreement, the Indenture, the Supplemental Indenture, the Securities and the other agreements, instruments and documents contemplated hereby and thereby.

“Trustee” means U.S. Bank Trust National Association, as Trustee under the Indenture and the Supplemental Indenture.

“Violation” means

(i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective

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amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading,

(ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or

(iii) any failure by the Company to fulfill any undertaking included in the Registration Statement or any post-effective amendment thereof.

“Warrant Shares” means the shares of Common Stock issuable or issued upon exercise of the Warrants.

“Warrants” means the Common Stock Purchase Warrants in the form attached as Annex III to this Agreement to be issued or issued pursuant to this Agreement and initially entitling the holder to purchase the number of shares of Common Stock determined in accordance with Sections 2(a), 2(b) and 2(c), as the case may be.

2. PURCHASE AND SALE; PURCHASE PRICE.

(a) Purchase. Upon the terms and subject to the conditions of this Agreement, the Buyer hereby agrees to purchase from the Company, and the Company hereby agrees to sell to the Buyer on the Initial Closing Date, the Initial Note in the principal amount set forth on the signature page of this Agreement and having the terms and conditions as set forth in the Indenture and the Supplemental Indenture attached hereto as Annex IV for the Purchase Price. In connection with the purchase and sale of the Initial Note by the Buyer, the Company shall issue to the Buyer at the closing on the Closing Date a Warrant, registered in the name of the Buyer or its nominee, which shall initially entitle the holder to purchase a number of shares of Common Stock equal to 20 percent of the quotient obtained by dividing (x) the original principal amount of the Initial Note by (y) the Conversion Price at the time of issuance of the Initial Note, which Warrant shall have an initial Purchase Price (as defined in the Warrant) equal to the Conversion Price at the time of issuance of the Initial Note.

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(b) Exercise of First Purchase Option. (1) Upon the terms and subject to the conditions of this Agreement, during the First Option Period, the Company shall have the right to require the Investor to purchase from the Company, on the First Option Closing Date, the First Option Note, for the applicable Purchase Price. The Company shall not have the right to require the Investor to purchase the First Option Notes unless (i) on the date the Company gives the Purchase Option Notice with respect to the First Option Notes there is an Effective Registration with respect to the Registrable Securities issued or issuable in connection with the Notes and Warrants issued on the Initial Closing Date, (ii) during the First Option Period for a period of 20 consecutive Trading Days ending not more than ten Trading Days prior to the date the Company gives such Purchase Option Notice, the Company’s Common Stock trades at least 125% of the Conversion Price and (iii) the Common Stock is listed on an Approved Market.

(2) In connection with the purchase of the First Option Notes by the Buyer, the Company shall issue to the Buyer, at the closing on the First Option Closing Date, Warrants, registered in the name of the Buyer or its nominee, which shall initially entitle the holder to purchase a number of shares of Common Stock equal to 20% of the quotient obtained by dividing (x) the original principal amount of the First Option Note by (y) the Conversion Price at the time of issuance of the First Option Note, which Warrant shall have an initial Purchase Price equal to the Conversion Price at the time of issuance of the First Option Note and having the terms and conditions set forth in the form of Warrant attached hereto as Annex III.

(3) In order to exercise its right to require the Buyer to purchase the First Option Notes, the Company shall give a Purchase Option Notice to the Buyer, which notice shall be given by the Company during the First Option Period. Upon giving the Purchase Option Notice for the First Option Notes to the Buyer, the Company shall be obligated to sell and the Buyer shall be obligated to purchase the First Option Notes and the Company shall issue such Warrants upon the terms and subject to the conditions of this Agreement

(4) Notwithstanding anything to the contrary contained herein, the Buyer may in its sole discretion, elect to exercise its right to purchase from the Company on the First Option Closing Date the First Option Note by giving written notice to the Company during the First Option Period. Upon giving such written notice to the Company, the Company shall be obligated to sell the First Option Notes and issue the Warrants in accordance with Section 2(b)(2) upon the terms and subject to the conditions of this Agreement.

(c) Exercise of Second Purchase Option. (1) Upon the terms and subject to the conditions of this Agreement, during the Second Option Period

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the Company shall have the right to require the Buyer to purchase from the Company, on the Second Option Closing Date, the Second Option Note for the applicable Purchase Price. The Company shall not have the right to require the Investor to purchase the Second Option Notes unless (A) (i) with respect to a Purchase Option Notice given on or after the date which is 365 days after the Initial Closing Date, for a period of 20 consecutive Trading Days ending not more than ten Trading Days prior to the date the Company gives such Purchase Option Notice the Market Price of the Common Stock shall be at least 200% of the Conversion Price in effect on the date the Company gives such Purchase Option Notice, or (ii) with respect to a Purchase Option Notice given on or after the date which is 455 days after the Initial Closing Date, for a period of 20 consecutive Trading Days ending not more than ten Trading Days prior to the date the Company gives such Purchase Option Notice the Market Price of the Common Stock shall be at least 150% of the Conversion Price in effect on the date the Company gives such Purchase Option Notice and (B) the Common Stock is listed on an Approved Market.

(2) In connection with the purchase of the Second Option Notes by the Buyer, the Company shall issue to the Buyer, at the closing on the Second Option Closing Date, Warrants, registered in the name of the Buyer or its nominee, which shall initially entitle the holder to purchase a number of shares of Common Stock equal to 20% of the quotient obtained by dividing (x) the original principal amount of the Second Option Note by (y) the Conversion Price as in effect at the time of issuance of the Second Option Note, which Warrant shall have an initial Purchase Price equal to the Conversion Price at the time of issuance of the Second Option Note and having the terms and conditions set forth in the form of Warrant attached hereto as Annex III.

(3) In order to exercise its right to require the Buyer to purchase the Second Option Notes, the Company shall give a Purchase Option Notice to the Buyer, which notice shall be given by the Company during the Second Option Period. Upon giving the Purchase Option Notice for the Second Option Notes to the Buyer, the Company shall be obligated to sell the Second Option Notes and issue such Warrants to the Buyer upon the terms and subject to the conditions of this Agreement.

(4) Notwithstanding anything to the contrary contained herein, the Buyer may in its sole discretion, elect to exercise its right to purchase from the Company on the Second Option Closing Date the Second Option Note by giving written notice to the Company during the period beginning on the Initial Closing Date and ending on the date which is 545 days after the Initial Closing Date. Upon giving such written notice to the Company, the Company shall be obligated to sell

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the Second Option Notes and issue the Warrants in accordance with Section 2(c)(2) upon the terms and subject to the conditions of this Agreement.

(d) Initial Closing. The issuance and sale of the Note and the issuance of the Warrants issuable pursuant to Section 2(a) shall occur on the Initial Closing Date at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York. At the closing, upon the terms and subject to the conditions of this Agreement, (1) the Company shall issue and deliver to the Buyer the Note and the Warrants issuable pursuant to Section 2(a) against payment by the Buyer to the Company by wire transfer of immediately available funds of an amount equal to the Purchase Price, and (2) the Buyer shall pay to the Company an amount equal to the Purchase Price against delivery by the Company to the Buyer of the Note and the Warrants issuable pursuant to Section 2(a).

(e) First Option Closing; Second Option Closing. The issuance and sale of the Notes and the issuance of the Warrants issuable pursuant to Section 2(b) and 2(c) shall occur on the First Option Closing Date and the Second Option Closing Date, respectively, at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York. At the closing on each such Closing Date, upon the terms and subject to the conditions of this Agreement, (1) the Company shall issue and deliver to the Buyer the Notes and Warrants issuable pursuant to Section 2(b) or 2(c), as the case may be, against payment by the Buyer to the Company of amounts equal to the respective Purchase Prices therefor payable by the Buyer and (2) the Buyer shall pay to the Company by wire transfer of immediately available funds an amount equal to the Purchase Price payable by the Buyer for such Note against delivery by the Company to the Buyer of the Note and Warrant issuable to the Buyer pursuant to Section 2(b) or 2(c), as the case may be.

3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYER.

The Buyer represents and warrants to, and covenants and agrees with, the Company as follows:

(a) Purchase for Investment. The Buyer is purchasing the Notes and acquiring the Warrants for its own account for investment and not with a view towards the public sale or distribution thereof within the meaning of the 1933 Act; and the Buyer will acquire any Shares issued to the Buyer prior to the SEC Effective Date of a Registration Statement covering the resale of such Shares by the Buyer for its own account for investment and not with a view towards the public

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sale or distribution thereof within the meaning of the 1933 Act prior to the SEC Effective Date; and the Buyer has no intention of making any distribution, within the meaning of the 1933 Act, of the Shares except in compliance with the registration requirements of the 1933 Act or pursuant to an exemption therefrom;

(b) Accredited Investor. The Buyer 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 of Regulation D; and (v) not a broker-dealer or an affiliate of a broker-dealer as such terms are defined in the 1934 Act.

(c) Subsequent Offers and Sales. All subsequent offers and sales of the Securities by the Buyer shall be made pursuant to an effective registration statement under the 1933 Act or pursuant to an applicable exemption from such registration;

(d) Company Reliance. The Buyer understands that (1) the Notes are being offered and sold and the Warrants are being issued to the Buyer, (2) the Shares are being offered to the Buyer, and (3) upon exercise of the Warrants, the Warrant Shares will be sold to the Buyer, in each such case in reliance on one or more exemptions from the registration requirements of the 1933 Act, including, without limitation, Regulation D, and exemptions from state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth in this Agreement and in all of the other Transaction Documents, a true and accurate copy of which has been delivered by the Buyer to the Company, in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire or receive an offer to acquire the Securities;

(e) Information Provided. The Buyer and its advisors, if any, have requested, received and considered all information relating to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and information relating to the offer and sale of the Notes and the offer of the Warrant Shares deemed relevant by them; the Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company concerning the terms of the offering of the Securities and the business, properties, operations, condition (financial or other), results of operations and prospects of the Company and its Subsidiaries and have received satisfactory answers to any such inquiries; without limiting the generality of the foregoing, the

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Buyer has had the opportunity to obtain and to review the SEC Reports; in connection with its decision to purchase the Notes and to acquire the Warrants, the Buyer has relied solely upon the SEC Reports, the representations, warranties, covenants and agreements of the Company set forth in this Agreement and to be contained in the other Transaction Documents, as well as any investigation of the Company completed by the Buyer or its advisors; the Buyer understands that its investment in the Securities involves a high degree of risk; and the Buyer understands that the offering of the Notes is being made to the Buyer as part of an offering without any minimum or maximum amount of the offering (subject, however, to the right of the Company at any time prior to execution and delivery of this Agreement by the Company, in its sole discretion, to accept or reject an offer by the Buyer to purchase the Notes and to acquire the Warrants);

(f) Absence of Approvals. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities; and

(g) Note Purchase Agreement. The Buyer has all requisite power and authority, corporate or otherwise, to execute, deliver and perform its obligations under this Agreement, the Transaction Documents and all ancillary documents, schedules, and the other agreements executed by the Buyer in connection herewith and to consummate the transactions contemplated hereby and thereby; and this Agreement has been duly and validly authorized, duly executed and delivered by the Buyer and, assuming due execution and delivery by the Company, is a valid and binding agreement of the Buyer enforceable in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to or affecting creditors’ rights generally and general principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law.

(h) Brokers. The Buyer 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 Buyer 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 of the Supplemental Indenture, the Buyer represents and warrants that it is aware that

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the Notes are subordinate to the Senior Indebtedness (as defined in the Supplemental Indenture) and any and all payments which the Holder (as hereinafter defined) shall receive pursuant to the Note are subject to Section 10 of the Supplemental Indenture.

(k) Non-contravention. The execution and delivery of the Transaction Documents by the Buyer and the consummation by the Buyer of the transactions contemplated by the Transaction Documents do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of any provision of the organizational documents of the Buyer, (ii) conflict with or result in a breach by the Buyer of the terms or provisions of, or constitute a default under, or result in the modification of, or entitle any party other than the Buyer to terminate, or require any consent or approval of any such party with respect to, any material agreement to which the Buyer is a party, (iv) violate or contravene any applicable law, rule or regulation or any applicable decree, judgment or order of any court, federal or state regulatory body, administrative agency or other governmental body in the United States or in any other country having jurisdiction over the Buyer or any of their respective properties or assets which would have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations of the Buyer, taken as a whole, or the validity or enforceability of, or the ability of the Buyer to perform its obligations under, the Transaction Documents.

4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY.

The Company represents and warrants to, and covenants and agrees with, the Buyer that:

(a) Organization and Authority. 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

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proposed to be conducted and to own or lease their properties and assets as they are now owned or held under lease. The Company does not have any subsidiaries or equity investments in any one Person other than the Subsidiaries and other Persons listed in Section 4(a) of the Disclosure Schedule.

(b) Capitalization. (1) On the date hereof, the authorized capital stock of the Company consists of (A) 300,000,000 shares of Common Stock, of which 113,403,910 shares were outstanding at the close of business on February 5, 2004 and (B) 10,000,000 shares of Preferred Stock, $.02 par value, none of which are outstanding; from February 5, 2004 to the Initial Closing Date there will be (x) no material increase in the number of shares of Common Stock outstanding (except for shares of Common Stock issued upon exercise of options and warrants outstanding on the date hereof, or options or similar rights granted subsequent to the date of this Agreement pursuant to the Company’s stock option plans currently in effect, in each case under the Company’s stock option plans disclosed in the SEC Reports) and (y) no issuance of securities convertible into, exchangeable for, or otherwise entitling the holder to acquire, shares of Common Stock. Section 4(b) of the Disclosure Schedule 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 December 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 December 31, 2003.

(2) Issuance of the Securities and Warrant Shares. The Notes are duly authorized, issued and delivered and the Conversion 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. The Company received notification from Nasdaq (as defined below) on January 24, 2003 that the Common Stock did not meet the minimum bid requirements and is therefore subject to delisting from Nasdaq. On January 21, 2004, the Company was granted an extension of time until January 24, 2005 by Nasdaq (as defined below) to achieve compliance with such minimum bid requirements, and the Company has committed in writing to Nasdaq to seek shareholder approval for a reverse stock split at its next annual meeting of shareholders and to promptly effectuate such split, if compliance is not achieved by January 24, 2005. 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.

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(c) Corporate Authorization. This Agreement and the other Transaction Documents have been duly and validly authorized by the Company; this Agreement has been duly executed and delivered by the Company and, assuming due execution and delivery by the Buyer, this Agreement is, and, when executed and delivered by the Company and the Trustee, the Indenture and Supplemental Indenture will be, and when executed by the Company, authenticated by the Trustee and issued to the Buyer against payment therefor to the Company of the respective Purchase Prices in accordance with this Agreement, the Notes will be and, when executed by the Company, the Warrants will be, valid and binding obligations of the Company enforceable in accordance with their respective terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors’ rights generally and general principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law.

(d) Non-contravention. Except as disclosed in Section 4(d) of the Disclosure Schedule, the execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated by the Transaction Documents do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of any provision of the certificate of incorporation or by-laws of the Company or any Subsidiary, (ii) conflict with or result in a breach by the Company or any Subsidiary of any of the terms or provisions of, or constitute a default under, or result in the modification of, or result in the creation or imposition of any lien, security interest, charge or encumbrance (other than pursuant to the Supplemental Indenture) upon any of the properties or assets of the Company or any Subsidiary pursuant to, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties or assets are bound or affected, in any such case which would have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations of the Company and the Subsidiaries, taken as a whole, or the validity or enforceability of, or the ability of the Company to perform its obligations under, the Transaction Documents, (iii) conflict with or result in a breach by the Company or any Subsidiary of the terms or provisions of, or constitute a default under, or result in the modification of, or entitle any party other than the Company to terminate, or require any consent or approval of any such party with respect to, any material agreement to which the Company is a party that relates to any Subsidiary, (iv) violate or contravene any applicable law, rule or regulation or any applicable decree, judgment or order of any court, federal or state regulatory body, administrative agency or other

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governmental body in the United States or in any other country having jurisdiction over the Company or any Subsidiary or any of their respective properties or assets which (x) relates to or affects the Collateral or (y) would have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations of the Company and the Subsidiaries, taken as a whole, or the validity or enforceability of, or the ability of the Company to perform its obligations under, the Transaction Documents.

(e) Approvals, Filings, Etc. No authorization, approval or consent of, or filing with, any United States or foreign court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained or made by the Company or any Subsidiary for (A) the execution, delivery and performance by the Company of the Transaction Documents, (B) the issuance and sale of the Securities as contemplated by the Transaction Documents, (C) for the grant by the Company of the Lien on the Collateral pursuant to the Supplemental Indenture, (D) to perfect the Lien purported to be created by the Supplemental Indenture and (E) the performance by the Company of its other obligations under the Transaction Documents, other than (1) listing of the Shares on Nasdaq SmallCap, (2) effectiveness of the Registration Statement under the 1933 Act, (3) qualification of the Indenture under the 1939 Act, (4) as may be required under applicable state securities or “blue sky” laws, and (5) filing of financing statements under the provisions of applicable state Uniform Commercial Codes.

(f) Information Provided. The SEC Reports, the Transaction Documents and the instruments delivered by the Company to the Buyer in connection with the closing on the Closing Date do not and will not on the date of execution and delivery of this Agreement, the date of delivery thereof to the Buyer and on the Closing Date contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, it being understood that for purposes of this Section 4(f), any statement contained in such information shall be deemed to be modified or superseded for purposes of this Section 4(f) to the extent that a statement in any document included in such information which was prepared and furnished to the Buyer on a later date or filed with the SEC on a later date modifies or replaces such statement, whether or not such later prepared or filed statement so states.

(g) SEC Filings. The Company has filed all reports required to be filed under the 1934 Act and any other material reports or documents required to be filed with the SEC since September 1, 2002.

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(h) Absence of Certain Proceedings. Except as disclosed in the SEC Reports, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body, or governmental agency pending or, to the actual knowledge of the Company and the Subsidiaries, threatened against or affecting the Company or any Subsidiary wherein an unfavorable decision, ruling or finding would have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations.

(i) Absence of Certain Changes. Since September 31, 2003, except as disclosed in the SEC Reports or Section 4(i) of the Disclosure Schedule, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or other), results of operations.

(j) Internal Accounting Controls. The Company maintains a system of internal accounting controls for the Company and the Subsidiaries which meets the requirements of the 1934 Act in all material respects.

(k) Compliance with Law. To the knowledge of the Company, except as set forth in the SEC Reports, neither the Company nor any Subsidiary is in violation of or has any liability under any statute, law, rule, regulation, ordinance, decision or order of any governmental agency or body or any court, domestic or foreign, except where such violation or liability would not individually or in the aggregate have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations of the Company and the Subsidiaries, taken as a whole.

(l) Properties. Except as disclosed in the SEC Reports, the Company and each Subsidiary has good title to all property, real and personal (tangible and intangible), and other assets owned by it, free and clear of all security interests, pledges, charges, mortgages, liens or other encumbrances, except for Permitted Liens. The leases, licenses or other contracts or instruments under which the Company and each Subsidiary leases, holds or is entitled to use any property, real or personal, which individually or in the aggregate are material to the Company and the Subsidiaries, taken as a whole, are valid, subsisting and enforceable. Neither the Company nor any Subsidiary has received notice of any material violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties.

(m) Insurance. The Company and each Subsidiary maintains insurance against loss or damage by fire or other hazard and such other insurance, including but not limited to, product liability insurance, in such amounts and

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covering such risks as the Company reasonably believes is adequate for the conduct of its business and the value of its properties.

(n) Investment Company. Neither the Company nor any Subsidiary is an “investment company” within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder.

(o) Absence of Brokers, Finders, Etc. Except as set forth on Section 4(o) of the Disclosure Schedule, no broker, finder, or similar Person is entitled to any commission, fee, or other compensation by reason of the transactions contemplated by this Agreement, and the Company shall pay, and indemnify and hold harmless the Buyer from, any claim made against the Buyer by any Person for any such commission, fee or other compensation.

(p) No Solicitation. No form of general solicitation or general advertising was used by the Company or, to the best of its knowledge, any other Person acting on behalf of the Company, in respect of the Securities or in connection with the offer and sale of the Securities. Neither the Company nor, to its knowledge, any Person acting on behalf of the Company has, either directly or indirectly, sold or offered for sale to any Person any of the Securities or, within the six months prior to the date hereof, any other similar security of the Company except as contemplated by this Agreement; and neither the Company nor any Person authorized to act on its behalf will sell or offer for sale any promissory notes, warrants, shares of Common Stock or other securities to, or solicit any offers to buy any such security from, any Person so as thereby to cause the issuance or sale of any of the Securities to be in violation of any of the provisions of Section 5 of the 1933 Act.

(q) Indenture; Supplemental Indentures. On the SEC Effective Date of the Registration Statement registering the Initial Notes, the Indenture, as supplemented by the Supplemental Indenture, will comply with all applicable provisions of the 1939 Act and the 1939 Act Rules and Regulations.

(r) Absence of Rights Agreement. The execution, delivery and performance of the Transaction Documents by the Company will not cause a Triggering Event as that term is defined in the Rights Agreement between the Company and American Securities Transfer & Trust, Inc.

(s) Tax Matters. Except as set forth in Section 4(s) of the Disclosure Schedule, the Company and each Subsidiary has filed all federal, state and local income and franchise tax returns required to be filed and has paid all

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taxes shown by such returns to be due, and no tax deficiency in excess of $50,000 has been determined adversely to the Company or any Subsidiary which has had (nor does the Company or any Subsidiary have any knowledge of any deficiency in excess of $50,000 which, if determined adversely to the Company or any Subsidiary, might have) a material adverse effect on the business, properties, operations, condition (financial or other), or results of operations of the Company and the Subsidiaries, taken as a whole.

5. CERTAIN COVENANTS.

(a) Transfer Restrictions. The Buyer acknowledges and agrees that (1) the Warrants have not been and are not being registered under the provisions of the 1933 Act or any state securities laws and, except as provided in Section 8, the Notes and the Shares have not been and are not being registered under the 1933 Act or any state securities laws, and that the Notes and the Warrants may not be transferred unless the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company and its legal counsel, to the effect that the Notes or the Warrants to be transferred may be transferred without such registration or unless transferred in accordance with Rule 144A to a Qualified Institutional Buyer (as defined in Rule 144A) (“QIB”); (2) no sale, assignment or other transfer of the Notes or the Warrants or any interest therein may be made except in accordance with the terms hereof and thereof; (3) the Notes and the Shares may not be resold by the Buyer unless the resale has been registered under the 1933 Act or is made pursuant to an applicable exemption from such registration and the Company shall have received the opinion of counsel provided for in the second to last sentence of this Section 5(a); (4) any sale of the Notes and the Shares under a Registration Statement shall be made only in compliance with the terms of this Section 5(a) and Section 8 (including, without limitation, Section 8(c)(5)); (5) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if the exemption provided by Rule 144 is not available, any resale of the Securities under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (6) the Company is under no obligation to register the Securities (other than registration of the resale of the Notes and the Shares in accordance with Section 8) under the 1933 Act or, except as provided in Section 5(c) and Section 8, to comply with the terms and conditions of any exemption thereunder. Prior to the time particular Shares are eligible for resale under Rule 144(k), the Buyer may not transfer the Shares in a transaction which does not constitute a transfer thereof

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pursuant to the applicable Registration Statement in accordance with the plan of distribution set forth therein or in any supplement to the related Prospectus unless the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company and its legal counsel, that such Shares may be so transferred without registration under the 1933 Act. Nothing in any of the Transaction Documents shall limit the right of a holder of the Securities to make a bona fide pledge thereof to an institutional lender and the Company agrees to cooperate with any Buyer who seeks to effect any such pledge by providing such information and making such confirmations as reasonably requested.

(b) Restrictive Legends. (1) The Buyer acknowledges and agrees that until such time as the Notes have been registered for resale under the 1933 Act as contemplated by Section 8, the Note shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the Note):

This Note has not been registered under the Securities Act of 1933, as amended (the “1933 Act”), or any state securities laws. The issuance to the holder of this Note of the shares of Common Stock issuable pursuant to this Note are not covered by a registration statement under the 1933 Act or registration under state securities laws. This Note has been acquired, and such shares must be acquired, for investment only and may not be sold, transferred or assigned unless (1) their resale is registered under the 1933 Act, (2) the Company has received an opinion of counsel reasonably satisfactory in form, scope and substance to the Company and its legal counsel that such registration is not required or (3) sold, transferred or assigned to a QIB pursuant to Rule 144A.

(2) The Buyer further acknowledges and agrees that the Warrants shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the Warrants):

This Warrant and the securities issuable upon its exercise have not been registered under the Securities Act of 1933, as amended (the “Act”), and may not be sold, transferred or assigned unless (1) the resale hereof is registered under the Act, (2) the Company has received an opinion of counsel reasonably satisfactory in form, scope and substance to the Company and its legal counsel that such registration is not required or (3) sold, transferred or assigned to a QIB pursuant to Rule 144A.

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(3) The Buyer further acknowledges and agrees that until such time as the Shares have been registered for resale under the 1933 Act as contemplated by Section 8 or are eligible for resale under Rule 144(k) under the 1933 Act, the certificates for the Shares, may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for the Shares):

The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “1933 Act”). The securities have been acquired for investment purposes only and may not be resold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act or an opinion of counsel that registration is not required under the 1933 Act.

(4) After the SEC Effective Date of any Registration Statement, or particular Shares covered by any Registration Statement are eligible for resale pursuant to Rule 144(k) under the 1933 Act, with respect to any Shares covered by such Registration Statement thereafter (1) upon request of the Buyer the Company will substitute certificates without restrictive legend for certificates for any such Shares issued prior to the SEC Effective Date or prior to the time of such eligibility, as the case may be, which bear such restrictive legend and remove any stop-transfer restriction relating thereto promptly but in no event later than ten Business Days after surrender of such certificates by the Buyer and (2) the Company shall not place any restrictive legend on certificates for Conversion Shares issued on conversion of a Note or on any Warrant Shares issued upon exercise of a Warrant or impose any stop-transfer restriction thereon.

(c) Form D. The Company agrees to file one or more Forms D with respect to the Securities as required under Regulation D to claim the exemption provided by Rule 506 of Regulation D and to provide a copy thereof to the Buyer promptly after such filing.

(d) Nasdaq Listing; Reporting Status. Prior to the Initial Closing Date, the Company will file with Nasdaq SmallCap an application or other document required by Nasdaq for the listing of the Shares with Nasdaq SmallCap. So long as the Buyer beneficially owns any portion of any of the Securities, the Company will use commercially reasonable efforts to maintain the listing of the Common Stock on Nasdaq SmallCap or another national securities exchange. During the Registration Period, the Company shall timely file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would

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permit such termination. For the purposes of this Section 5(d) a report, or reports, filed within the time specified in Form 12b-25 filed with the SEC in accordance with the 1934 Act shall be deemed a timely filing regardless of the frequency of such Form 12b-25 filings by the Company.

(e) Indenture; Supplemental Indenture; Financing Statements, Etc. The Company agrees to execute and deliver to the Trustee on or before the Closing Date the Indenture in the form of Annex I to this Agreement and the Supplemental Indenture in the form of Annex IV to this Agreement.

(f) Use of Proceeds. The Company represents and agrees that: (1) the proceeds of sale of the Notes, the Warrants and the Warrant Shares will be used for general working capital purposes and in the operation of the Company’s business; (2) none of such proceeds will be used, directly or indirectly (A) to make any loan to or investment in any other Person that is principally engaged in any business other than the types of business permitted by Section 5.04 of the Supplemental Indenture or that would otherwise fail to comply with the Indenture or the Supplemental Indenture or (B) for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is currently a Margin Stock or for any other purpose which would constitute the transactions contemplated by this Agreement as a “purpose credit” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System; and (3) neither the Company nor any agent acting on its behalf has taken or will take any action which would cause this Agreement or the transactions contemplated hereby to violate Regulation T, Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the 1934 Act, in each case as in effect now or as the same may hereafter be in effect.

(g) Debt Obligation. So long as any portion of the Note is outstanding, the Company shall cause its books, records and financial statements to reflect the Note in accordance with generally accepted accounting principles of the United States, consistently applied.

(h) Security Interest; Financing Statements, Etc. The Company shall use commercially reasonable efforts to promptly, but in no event later than ten (10) business days after the Buyer enters into an Intercreditor Agreement with GMAC, as contemplated by Article 10 of this Agreement complete the steps necessary for the perfection of the Mortgage and the Security Interest in the Collateral contemplated by the Supplemental Indenture including, without limitation, obtaining any necessary consent of GMAC. The Company shall prepare

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and within ten (10) business days after the Buyer enters into an Intercreditor Agreement with GMAC, as contemplated by Article 10 of this Agreement execute and deliver to the Trustee Uniform Commercial Code financing statements on Form UCC-1 relating to the Collateral in which the Company is granting a second priority Security Interest to the Trustee for the benefit of the holders of the Notes pursuant to the Supplemental Indenture for filing with the appropriate officials.

(i) Limitation on Certain Actions. From the date of execution and delivery of this Agreement by the parties hereto to the date of issuance of the Initial Notes, the Company (1) shall comply with Article Five of the Supplemental Indenture as if the Supplemental Indenture had been executed and delivered by the Company and the Trustee and the Notes were outstanding, (2) shall not take any action which, if the Note were outstanding, (A) would constitute an Event of Default or, with the giving of notice or the passage of time or both, would constitute an Event of Default or (B) would constitute a Repurchase Event or, with the giving of notice or the passage of time or both, would constitute a Repurchase Event.

6. CONDITIONS TO COMPANY’S OBLIGATION TO SELL.

The Company’s obligation to sell to the Buyer the Notes and to issue to the Buyer the Warrants on each Closing Date under the Agreement are subject to the satisfaction of the following conditions precedent on or before the Closing Date (any or all of which may be waived by the Company in its sole discretion):

(a) On such Closing Date, no legal action, suit or proceeding shall be pending or threatened which seeks to restrain or prohibit the transactions contemplated by the Transaction Documents;

(b) The representations and warranties of the Buyer contained in this Agreement shall have been true and correct on the date of this Agreement and on such Closing Date as if made on such Closing Date (except for representations given as of a specific date, which representations shall be true and correct as of such date); and on or before such Closing Date the Buyer shall have performed all covenants and agreements of the Buyer contained in the Transaction Documents and required to be performed by the Buyer on or before such Closing Date; and

(c) The Buyer shall have delivered the respective Purchase Price to be paid by the Buyer for the respective Notes at the closing on such Closing Date as specified in Section 2(a), 2(b) or 2(c), as the case may be; and

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(d) On or prior to the Initial Closing Date, the Company shall have received a written consent or waiver from GMAC appropriate for consummation of the transactions contemplated by the Transaction Documents.

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

(f) The Company shall have received from the Buyer such other certificates and documents as it or its representatives, if applicable, shall reasonably request, and all proceedings taken by the Buyer 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. CONDITIONS TO BUYER’S OBLIGATION TO PURCHASE.

The Buyer’s obligation to purchase the Note and acquire the Warrants from the Company on each Closing Date under this Agreement are subject to satisfaction of the following conditions precedent on or before such Closing Date (any or all of which may be waived by the Buyer in its sole discretion):

(a) The Trustee shall have executed and delivered to the Company the Indenture and the Supplemental Indenture and copies thereof, as so executed and duly executed and delivered by the Company, shall have been furnished to the Buyer;

(b) On such Closing Date, no legal action, suit or proceeding shall be pending or threatened which seeks to restrain or prohibit the transactions contemplated by the Transaction Documents;

(c) The representations and warranties of the Company contained in the Transaction Documents shall have been true and correct on the date of this Agreement and shall be true and correct on such Closing Date as if given on and as of such Closing Date (except for representations given as of a specific date, which representations shall be true and correct as of such date); and on or before such Closing Date the Company shall have performed all covenants and agreements of the Company contained herein or in any of the other Transaction Documents required to be performed by the Company on or before such Closing Date;

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(d) No event which, if the Note were outstanding, (1) would constitute an Event of Default or which, with the giving of notice or the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing or (2) would constitute a Repurchase Event or, with the giving of notice or the passage of time, or both, would constitute a Repurchase Event shall have occurred and be continuing;

(e) The Company shall have delivered to the Buyer a certificate, dated such Closing Date, duly executed by its Chief Executive Officer or Chief Financial Officer, to the effect set forth in subparagraphs (b), (c) and (d) of this Section 7;

(f) The Company shall have delivered to the Buyer a certificate, dated such Closing Date, of the Secretary of the Company certifying (1) the Certificate of Incorporation and By-Laws of the Company as in effect on the Closing Date, (2) all resolutions of the Board of Directors (and committees thereof) of the Company relating to this Agreement and the Transaction Documents and the transactions contemplated hereby and thereby and (3) such other matters as reasonably requested by the Buyer;

(g) On such Closing Date, the Buyer shall have received an opinion of counsel for the Company, dated such Closing Date, addressed to the Buyer, substantially in the form attached as Annex V to this Agreement with references to the Notes and Warrants being issued at such closing and the shares of Common Stock underlying such Notes and Warrants;

(h) On such Closing Date, (i) trading in securities on the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or the Nasdaq shall not have been suspended or materially limited and (ii) a general moratorium on commercial banking activities in the State of California or the State of New York shall not have been declared by either federal or state authorities; and

(i) On or prior to the Initial Closing Date, the Company shall have received a written consent or waiver from GMAC appropriate for consummation of the transactions contemplated by the Transaction Documents.

8. REGISTRATION RIGHTS.

(a) Mandatory Registration. (1) The Company shall include all Registrable Securities in the Registration Statement covering the shares underlying the convertible indebtedness of the Company existing on the date hereof. If for any

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reason the SEC does not permit all of the Registrable Securities to be included in such Registration Statement, then the Company shall prepare and file with the SEC a separate Registration Statement with respect to any such Registrable Securities not included with the initial Registration Statement, as expeditiously as possible, but in no event later than the date which is 45 days after the First Option Closing Date or the Second Option Closing Date, as the case may be, which covers the resale by the Buyer of (A) the Note issued on such Closing Date; (B) a number of shares of Common Stock equal to at least the number of Conversion Shares issuable to the Buyer if such Note were converted in full at the Conversion Price in effect on the date such Registration Statement is filed with the SEC; and (C) a number of shares of Common Stock equal to the number of Warrant Shares issuable upon exercise of the Warrant issued on such Closing Date, in each case in the preceding clauses (B) and (C), determined without regard to any restrictions on beneficial ownership contained in the Notes or the Warrants. Such Registration Statement also shall cover, to the extent allowable under the 1933 Act and the rules promulgated thereunder (including rule 416), which determination shall be made by the Company and its legal counsel, such indeterminate number of additional shares of Common Stock resulting from stock splits, stock dividends or similar transactions with respect to the Registrable Securities. For the avoidance of doubt, if the Company files the Registration Statement within the timeframes prescribed herein, but the SEC does not permit all of the Registrable Securities to be included therein, then such filing of that Registration Statement shall still be deemed timely filed and such filing will not trigger any liquidated damages provisions contained in this Agreement. On the SEC Effective Date the Company shall qualify the Indenture and the Supplemental Indenture under the 1939 Act.

(2) Prior to the applicable SEC Effective Date, and during any time subsequent to the applicable SEC Effective Date when a Registration Statement for any reason (other than reasons not attributable to the Company’s failure to take commercially reasonable actions to keep such Registration Statement effective) is not available for use by any Buyer for the resale of any Registrable Securities, the Company shall not, without prior written consent of the Buyer, file any other registration statement or any amendment thereto with the SEC under the 1933 Act or request the acceleration of the effectiveness of any other registration statement previously filed with the SEC, other than (A) any registration statement on Form S-8 and (B) any registration statement or amendment which the Company is required to file, or as to which the Company is required to request acceleration, pursuant to any obligation in effect on the date of execution and delivery of this Agreement.

(3) If a Registration Event occurs, then the Company will make payments to the Buyer as partial liquidated damages for the minimum amount of damages to the Buyer by reason thereof, and not as a penalty, at the rate of 1% per

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month of the Purchase Price paid by the Buyer pursuant to this Agreement, for each calendar month of the Registration Default Period (pro rated for any period less than 30 days). Each such payment shall be due and payable within five (5) days after the end of each calendar month of the Registration Default Period until the termination of the Registration Default Period and within five (5) days after such termination. The Registration Default Period shall terminate upon (w) the filing of the applicable Registration Statement in the case of clause (i) of the definition of “Registration Event”; (x) the applicable SEC Effective Date in the case of clause (ii) of the definition of “Registration Event”; (y) the ability of the Buyer to effect sales pursuant to the Registration Statement in the case of clause (iii) of the definition of “Registration Event”; and (z) in the case of the events described in clauses (ii) and (iii) of the definition of “Registration Event”, the earlier termination of the Registration Period and in each such case any Registration Default Period that commenced by reason of the occurrence of such event shall terminate if at the time no other Registration Event is continuing. The amounts payable as partial liquidated damages pursuant to this paragraph shall be payable in lawful money of the United States. Amounts payable as partial liquidated damages hereunder shall cease when the Buyer no longer holds the Notes, the 16% Convertible Subordinated Notes issued by the Company in September 2003 (the “Other Notes”), or the Warrants.

(4) At any time and from time to time, promptly following the written demand of the Investor following the issuance of any Additional Registrable Securities, and in any event within forty-five (45) days following such written demand, the Company shall prepare and file with the SEC either a new Registration Statement or a post-effective amendment to a previously filed Registration Statement, to the extent permitted under the 1933 Act, on Form S-3 (or, if Form S-3 is not then available to the Company, on such form of registration statement as is then available to effect a registration for resale of the Additional Registrable Securities) covering the resale of the Additional Registrable Securities in an amount equal to the number of Additional Registrable Securities. Such Registration Statement also shall cover, to the extent allowable under the 1933 Act and the rules promulgated thereunder (including Rule 416), as determined by the Company and its legal counsel, such indeterminate number of additional shares of Common Stock resulting from stock splits, stock dividends or similar transactions with respect to the Additional Registrable Securities. The Registration Statement (and each amendment or supplement thereto) shall be provided in accordance with Section 8(b) to the Purchaser and its counsel prior to its filing or other submission.

(5) In the event that Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form and (ii) attempt to

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register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statements then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

(b) Obligations of the Company. In connection with the registration of the Registrable Securities, the Company shall:

(1) use its commercially reasonable efforts to cause the Registration Statement to become effective as promptly as possible after the Closing Date and to keep the Registration Statement effective pursuant to Rule 415 at all times during the Registration Period. The Company shall submit to the SEC, within three Business Days after the Company learns that no review of the Registration Statement will be made by the staff of the SEC or that the staff of the SEC has no further comments on the Registration Statement, as the case may be, a request for acceleration of effectiveness of the Registration Statement to a time and date not later than 48 hours after the submission of such request.

(2) subject to Section 8(b)(5), prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the Prospectus as may be necessary to keep the Registration Statement effective, and the Prospectus current, at all times during the Registration Period, and, during the Registration Period (other than during any Blackout Period during which the provision of Section 8(b)(5)(B) as applicable), comply with the provisions of the 1933 Act applicable to the Company in order to permit the disposition by the Investor of all Registrable Securities covered by the Registration Statement;

(3) furnish to the Investor whose Registrable Securities are included in the Registration Statement and such Investor’s respective legal counsel, promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, (1) five copies of the Registration Statement and any amendment thereto and the Prospectus and each amendment or supplement thereto, and (2) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor;

(4) subject to Section 8(b)(5), use its commercially reasonable efforts (i) to register and qualify the Registrable Securities covered by the Registration Statement under the securities or blue sky laws of such jurisdictions as the Buyer reasonably requests, (ii) to prepare and to file in those jurisdictions such

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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 and (iii) to take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale by the Investor in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto (I) to qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 8(b)(4), (II) to subject itself to general taxation in any such jurisdiction, (III) to file a general consent to service of process in any such jurisdiction, (IV) to provide any undertakings that cause more than nominal expense or burden to the Company or (V) to make any change in its charter or by-laws which the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders;

(5) (A) as promptly as practicable after becoming aware of such event or circumstance, notify the Buyer of the occurrence of any event or circumstance of which the Company has knowledge (x) as a result of which the Prospectus, 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, in light of the circumstances under which they were made, not misleading or (y) which requires the Company to amend or supplement the Registration Statement due to the receipt from the Buyer or any other selling stockholder named in the Prospectus of new or additional information about such Buyer or selling stockholder or its intended plan of distribution of its Registrable Securities or other securities covered by such Registration Statement, and use its commercially reasonable efforts promptly to prepare a supplement or amendment to the Registration Statement and Prospectus to correct such untrue statement or omission or to add any new or additional information, and deliver a number of copies of such supplement or amendment to the Buyer as the Buyer may reasonably request;

(B) notwithstanding Section 8(b)(5)(A) above, if at any time the Company notifies the Buyer as contemplated by Section 8(b)(5)(A) the Company also notifies the Buyer that the event giving rise to such notice relates to a development involving the Company which occurred subsequent to the later of (x) the SEC Effective Date and (y) the latest date prior to such notice on which the Company has amended or supplemented the Registration Statement, then the Company shall not be required to use commercially reasonable efforts to make such amendment during a Blackout Period; provided, however, that in any period of 365 consecutive days the Company shall not be entitled to avail itself of its rights under this Section 8(b)(5)(B) with respect to more than two Blackout Periods; and provided

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further, however, that no Blackout Period may commence sooner than 90 days after the end of an earlier Blackout Period;

(6) as promptly as practicable after becoming aware of such event, notify each Buyer who holds Registrable Securities being offered or sold pursuant to the Registration Statement of the issuance by the SEC of any stop order or other suspension of effectiveness of the Registration Statement at the earliest possible time;

(7) permit the Buyer who holds Registrable Securities being included in the Registration Statement, (or its designee) and their counsel at such Buyer’s sole expense to review and have a reasonable opportunity to comment on the Registration Statement and all amendments thereto at least two Business Days (or such shorter period as may reasonably be specified by the Company) prior to their filing with the SEC;

(9) use commercially reasonable efforts to cause all the Registrable Securities covered by the Registration Statement as of the SEC Effective Date to be listed on Nasdaq, Nasdaq SmallCap or such other principal securities market on which securities of the same class or series issued by the Company are then listed or traded;

(10) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities at all times;

(11) cooperate with the Buyer who holds Shares being offered pursuant to a Registration Statement to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Shares to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts as the Buyer may reasonably request and registered in such names as the Buyer may request; and, not later than the applicable SEC Effective Date, the Company shall cause legal counsel selected by the Company to deliver to the Buyer, whose Registrable Securities are included in the Registration Statement opinions of counsel addressed to the Buyer, in the form, scope and substance as is customarily given in an underwritten public offering.

(12) during the Registration Period, the Company shall not bid for or purchase any Common Stock or any right to purchase Common Stock or attempt to induce any Person to purchase any such security or right if such bid, purchase or attempt would in any way limit the right of the Investor to sell Registrable Securities by reason of the limitations set forth in Regulation M under the 1934 Act; and

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(13) take all other reasonable actions necessary to expedite and facilitate disposition by the Buyer of the Registrable Securities pursuant to the Registration Statements relating thereto.

(c) Obligations of the Buyer. In connection with the registration of the Registrable Securities, the Buyer shall have the following obligations:

(1) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of the Buyer that the Buyer shall furnish to the Company the Required Information and shall execute such documents in connection with such registration as the Company may reasonably request;

(2) The Buyer by the Buyer’s acceptance of the Registrable Securities agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Buyer has notified the Company of the Buyer’s election to exclude all of such Buyer’s Registrable Securities from the Registration Statement;

(3) Each Buyer agrees that it will not effect any disposition of the Registrable Securities except as contemplated in the Registration Statement or as otherwise is in compliance with applicable securities laws and that it will promptly notify the Company of any material changes in the information set forth in the Registration Statement regarding such Buyer or its plan of distribution; each Buyer agrees (a) to notify the Company in writing in the event that such Buyer enters into any material agreement with a broker or a dealer for the sale of the Registrable Securities through a block trade, special offering, exchange distribution or a purchase by a broker or dealer(b) in connection with such agreement, to provide to the Company in writing the information necessary to prepare any supplemental prospectus pursuant to Rule 424(c) under the 1933 Act which is required with respect to such transaction; and (c) to promptly notify the Company when it has sold all of its Registrable Securities;

(4) Each Buyer acknowledges that there may occasionally be times as specified in Section 8(b)(5) or 8(b)(6) when the Company must suspend the use of the Prospectus until such time as an amendment to the Registration Statement has been filed by the Company and declared effective by the SEC, the Company has prepared a supplement to the Prospectus or the Company has filed an appropriate report with the SEC. Each Buyer hereby covenants that it will not sell any Registrable Securities pursuant to the Prospectus during the period commencing at

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the time at which the Company gives such Buyer notice of the suspension of the use of the Prospectus in accordance with Section 8(b)(5) or 8(b)(6) and ending at the time the Company gives such Buyer notice that such Buyer may thereafter effect sales pursuant to the Prospectus, or until the Company delivers to such Buyer or files with the SEC an amended or supplemented Prospectus; and

(5) In connection with any sale of Registrable Securities which is made by an Buyer pursuant to the Registration Statement (A) if such sale is made through a broker, such Buyer shall instruct such broker to deliver the Prospectus to the purchaser or purchasers (or the broker or brokers therefore) in connection with such sale, shall supply copies of the Prospectus to such broker or brokers and shall instruct such broker or brokers to deliver such Prospectus to the purchaser in such sale or such purchaser’s broker; (B) if such sale is made in a transaction directly with a purchaser and not through the facilities of any securities exchange or market, such Buyer shall deliver, or cause to be delivered, the Prospectus to such purchaser; and (C) if such sale is made by any means other than those described in the immediately preceding clauses (A) and (B), such Buyer shall otherwise use its reasonable best efforts to comply with the prospectus delivery requirements of the 1933 Act applicable to such sale.

(d) Rule 144. With a view to making available to each Buyer the benefits of Rule 144, the Company agrees:

(1) so long as the Buyer owns Registrable Securities, promptly upon request of such Buyer, to furnish to such Buyer such information as may be necessary to permit such Buyer to sell Registrable Securities pursuant to Rule 144 without registration and otherwise reasonably to cooperate with such Buyer and

(2) if at any time the Company is not required to file reports with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, to use its commercially reasonable efforts, upon the request of an Investor, to make publicly available other information so long as is necessary to permit publication by brokers and dealers of quotations for the Common Stock and sales of the Registrable Securities in accordance with Rule 15c2-11 under the 1934 Act.

9. INDEMNIFICATION AND CONTRIBUTION.

(a) Indemnification. (1) To the extent not prohibited by applicable law, the Company will indemnify and hold harmless each Indemnified Person against any Claims to which any of them may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such Claims (or actions or

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proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any Violation or any of the transactions contemplated by this Agreement. Subject to the restrictions set forth in Section 9(a)(3) with respect to the number of legal counsel, the Company shall reimburse the Investor and each such controlling Person, promptly as such expenses are incurred and are due and payable, for any documented reasonable legal fees or other documented and reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 9(a)(1) shall not apply to: (I) a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information relating to an Indemnified Person furnished in writing to the Company by such Indemnified Person or an underwriter for such Indemnified Person expressly for use in connection with the preparation of any Registration Statement or any such amendment thereof or supplement thereto; (II) any Claim arising out of or based on any statement or omission in any Prospectus, which statement or omission was corrected in any subsequent Prospectus that was delivered to the Indemnified Person prior to the pertinent sale or sales of Registrable Securities by such Indemnified Person; and (III) amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company. 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 the Investor. Notwithstanding anything to the contrary in this Agreement or the Transaction Documents, the aggregate payments for indemnification made by the Company to Indemnified Persons pursuant to this section shall not exceed the amount equal to the sum of the aggregate Purchase Price paid at the time such Claim arises.

(2) In connection with the Registration Statement, each Investor agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in Section 9(a)(1), each Indemnified Party against any Claim to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement or any amendment thereof or supplement thereto; and such Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 9(a)(2) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor; provided, further, however, that the Investor shall be liable under this Section 9(a)(2) for only that amount of all Claims in the aggregate as

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does not exceed the amount by which the proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement exceeds the amount paid by such Investor for such Registrable Securities. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investor. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 9(a)(2) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in such preliminary prospectus was corrected on a timely basis in the related Prospectus, as then amended or supplemented. Notwithstanding anything to the contrary in this Agreement or the Transaction Documents, the aggregate payments for indemnification made by the Buyer to Indemnified Parties pursuant to this section shall not exceed the amount equal to the sum of the aggregate Purchase Price paid at the time such Claim arises.

(3) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 9(a) of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 9(a), deliver to the indemnifying party a notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel reasonably satisfactory to the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the 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 or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding, in which case the indemnifying party shall not be responsible for more than one such separate counsel, and one local counsel in each jurisdiction in which an Action is pending, for all Indemnified Persons or Indemnified Parties, as the case may be. The failure to deliver notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 9(a), except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

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(b) Contribution. To the extent any indemnification by an indemnifying party as set forth in Section 9(a) above is applicable by its terms but is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 9(a) to the fullest extent permitted by law. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative fault of each party, the parties’ relative knowledge of and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission and any other equitable considerations appropriate under the circumstances; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 9(a), (b) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any other Person who was not guilty of such fraudulent misrepresentation and (c) the aggregate contribution by any seller of Registrable Securities shall be limited to the amount by which the proceeds received by such seller from the sale of such Registrable Securities exceeds the amount paid by such Investor for such Registrable Securities.

(c) Other Rights. The indemnification and contribution provided in this Section shall be in addition to any other rights and remedies available at law or in equity.

10. POST CLOSING COVENANTS

(a) Collateral and Security. The Company covenants and agrees that, subject to the agreement and modification, if any, by GMAC and subject to the terms and provisions contained in an Intercreditor Agreement to be entered into between GMAC and the Buyer, after the Closing and promptly after the execution of such Intercreditor Agreement, the Company shall provide the provisions (subject to the revisions, modifications and amendments, if any, as stated within this paragraph 10(a)) contained in Annex VI to this Agreement for inclusion in a second Supplemental Indenture. Additionally, the Company covenants and agrees that, subject to the agreement and modification, if any, by GMAC and subject to the terms and provisions contained in an Intercreditor Agreement to be entered into between GMAC and the Buyer after the Closing, the Company shall execute, in favor of Buyer, a second mortgage on its Glen Cove, New York property in substantially the form and substance contained in Annex VII hereto and as provided in Annex VI to this Agreement.

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(b) Intercreditor Agreement. The Company covenants and agrees that promptly after the Closing, the Company shall request from GMAC that its legal counsel provide, as rapidly as possible, an Intercreditor Agreement to Buyer and its legal counsel, as contemplated herein. The Buyer covenants and agrees that once the Intercreditor Agreement is received from GMAC, Buyer shall correspond directly with GMAC’s legal counsel, and if necessary, the Company and its legal counsel as well, in order to rapidly and expeditiously execute an Intercreditor Agreement, it being understood by the parties hereto that the terms of Annex VI, as well as such other terms and provisions, if any, contained in any of the Transaction Documents which relate to or govern the Buyer’s Security Interest in the Collateral, among other things, are subject to review and potential comment or modification by GMAC.

(c) Perfecting Security Interests. The Buyer understands and agrees that, notwithstanding anything to the contrary contained in any of the Transaction Documents, the Company will not and can not, pursuant to its existing agreements with GMAC, create any liens on its property or execute or file any security agreements (including, but not limited to, UCC-1 filings or the execution of a second mortgage, in favor of Buyer, on the Company’s Glen Cove, New York property, a model for which is contained in Annex VII hereto) until such time as the Intercreditor Agreement has been entered into by the parties thereto and GMAC has approved the terms of any such security documents.

11. MISCELLANEOUS.

(a) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York.

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

(c) 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 enforceability of this Agreement in any other jurisdiction.

(d) Notices. Any notices required or permitted to be given under the terms of this Agreement shall be in writing and shall be sent by mail, personal delivery, telephone line facsimile transmission or courier and shall be effective five days after being placed in the mail, if mailed, or upon receipt, if delivered

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personally, by facsimile or by courier, in each case addressed to a party at such party’s address (or telephone line facsimile transmission number) shown in the introductory paragraph or on the signature page of this Agreement or such other address (or telephone line facsimile transmission number) as a party shall have provided by notice to the other party in accordance with this provision. In the case of any notice to the Company, such notice shall be addressed to the Company at its address shown in the introductory paragraph of this Agreement, Attention: Chief Financial Officer (telephone line (516) 656-2775, facsimile number (516) 656-2039), with a copy to Edward M. Slezak, Esq., Vice President, Corporate Counsel (telephone line (516) 656-2234, facsimile number (516) 656-2045) and in the case of any notice to the Buyer, such notice shall be addressed to the Buyer at its address shown on the signature page of this Agreement.

(e) Counterparts. This Agreement may be executed in counterparts and by the parties hereto on separate counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. A telephone line facsimile transmission of this Agreement bearing a signature on behalf of a party hereto shall be legal and binding on such party. Although this Agreement is dated as of the date first set forth above, the actual date of execution and delivery of this Agreement by each party is the date set forth below such party’s signature on the signature page hereof. Any reference in this Agreement or in any of the documents executed and delivered by the parties hereto in connection herewith to (1) the date of execution and delivery of this Agreement by the Buyer shall be deemed a reference to the date set forth below the Buyer’s signature on the signature page hereof, (2) the date of execution and delivery of this Agreement by the Company shall be deemed a reference to the date set forth below the Company’s signature on the signature page hereof and (3) the date of execution and delivery of this Agreement, or the date of execution and delivery of this Agreement by the Buyer and the Company, shall be deemed a reference to the later of the dates set forth below the signatures of the parties on the signature page hereof.

(f) Entire Agreement; Benefit. This Agreement, including the Annexes and Schedules, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein and therein. This Agreement, including the Annexes and Schedules, supersedes all prior agreements and understandings, whether written or oral, between the parties hereto with respect to the subject matter hereof. This Agreement and the terms and provisions hereof are for the sole benefit of only the Company, the Buyer and their respective successors and permitted assigns and in no event shall the Buyer have any liability to any stockholder or creditor of the

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Company or any other Person (other than the Company) in any way relating to or arising from this Agreement or the transactions contemplated hereby.

(g) Waiver. 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, or course of dealing between the parties, shall not operate as a waiver thereof or an amendment hereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or exercise of any other right or power.

(h) Amendment. No amendment, modification, waiver, discharge or termination of any provision of this Agreement nor consent to any departure by the Buyer or the Company therefrom shall in any event be effective unless the same shall be in writing and signed by the party to be charged with enforcement, and then shall be effective only in the specific instance and for the purpose for which given. No course of dealing between the parties hereto shall operate as an amendment of this Agreement.

(i) Further Assurances. Each party to this Agreement will perform any and all acts and execute any and all documents as may be necessary and proper under the circumstances in order to accomplish the intents and purposes of this Agreement and to carry out its provisions.

(j) Fees and Expenses. The Company shall be responsible for its expenses (including, without limitation, the legal fees and expenses of its counsel), incurred by the Company in connection with the negotiation and execution of, and closing under, and performance of, this Agreement. The Company shall pay Alexandra Investment Management, LLC, a closing fee in cash equal to 2% of the Purchase Price of the Notes issued to the Buyer pursuant to this Agreement. All reasonable expenses incurred in connection with registrations, filings or qualifications pursuant to this Agreement shall be paid by the Company, including, without limitation, all registration, listing and qualifications fees, printers fees, accounting fees and the fees and disbursements of counsel for the Company but excluding (a) fees and expenses of investment bankers retained by the Buyer and (b) brokerage commissions incurred by the Buyer. The Company shall promptly pay upon presentation of documentation reasonably satisfactory to the Company the expenses incurred by the Buyer, which are the reasonable fees and disbursements of counsel directly associated with (1) the negotiation, preparation or execution of any amendment, modification or waiver of any of the Transaction Documents, (2) any default or breach of any of the Company’s obligations set forth in any of the Transaction Documents which results in a claim by the Buyer against the

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Company, and (3) the enforcement or restructuring of any right of, including the collection of any payments due, the Buyer under any of the Transaction Documents, including any action or proceeding relating to such enforcement or any order, [injunction or other process seeking to restrain the Company from paying any amount due the Buyer]. Except as otherwise provided in this Section 11(j), each of the Company and the Buyer shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby.

(k) Survival. The respective representations, warranties, covenants and agreements of the Company and the Buyer contained in this Agreement and the other Transaction Documents shall survive the execution and delivery of this Agreement and the other Transaction Documents and the closing hereunder and delivery of and payment for the Note and issuance of the Warrants, and shall remain in full force and effect regardless of any investigation made by or on behalf of the Buyer or any Person controlling or acting on behalf of the Buyer or by the Company or any Person controlling or acting on behalf of the Company, for two years or the sale of all Registrable Securities, whichever is shorter.

(l) Public Statements, Press Releases, Etc. The Company and the Buyer shall have the right to approve before issuance any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of the Buyer, to make any press release or other public disclosure with respect to such transactions as is required by applicable law and regulations, including the 1933 Act and the rules and regulations promulgated thereunder (although the Buyer shall be consulted by the Company prior to the release or making of any such press release or other public disclosure that identifies the Buyer and shall be provided with a copy thereof).

(m) Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

(n) Limitation of Liability. Except as provided in this Section 11(n), in connection with any exercise by the Company of its rights under Section 2(b) or 2(c), the Buyer (a) shall be liable for damages from breach of the Buyer’s obligations relating to such exercise only if and to the extent such breach shall have been determined by final judgment, not subject to further appeal, of a court of competent jurisdiction to have resulted from conduct of the Buyer which constitutes gross negligence or willful misconduct, (b) shall have no liability in connection with any dispute or legal action relating to such exercise if at any time prior to a final judgment referred to in the immediately preceding clause (a) the Buyer shall have

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tendered the purchase price of the Note to be purchased by the Buyer at the applicable closing, the purchase of which is in dispute (in which case the Company shall issue such Note and the related Warrant to the Buyer in accordance with this Agreement) and (c) if the immediately preceding clause (b) is inapplicable, shall not in any event be liable for damages or liability arising from or in any way relating to any breach or alleged breach by the Buyer of its obligations under Section 2(b) or 2(c) or otherwise in connection with this Agreement in an amount in excess of the purchase price of the Note to be purchased by the Buyer on such Closing Date. This Agreement and the terms and provisions hereof are for the sole and exclusive benefit of the Buyer, the Company and the Buyer’s permitted assigns and in no event shall the Buyer have any liability to any stockholder or creditor of the Company or any other person (other than the Company, subject to the limitations on liability to the Company contained herein) in any way relating to or arising from this Agreement or the transactions contemplated hereby. Nothing in this Section 11(n) shall affect or impair the obligation or right of the Buyer to purchase the proposed amount of Notes provided in Section 2(b) and 2(c) pursuant to the terms and conditions set forth in this Agreement. Nothing in this Section 11(n) shall in any way affect or limit the Buyer’s obligations under Section 9 above.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers or other representatives thereunto duly authorized as of the date first set forth above and on the dates set forth below their respective signatures.

ACCLAIM ENTERTAINMENT, INC.
By:	/S/    GERARD F. AGOGLIA
	Name:    Gerard F. Agoglia
	Title:      Chief Financial Officer and     Executive Vice President
Date:  February 17, 2004

ALEXANDRA GLOBAL MASTER FUND, LTD.
By: ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:	/S/    MIKHAIL FILIMONOV
	Name:    Mikhail Filimonov
	Title:      Chairman, Chief Executive Officer     and Chief Investment Officer
Address:
	c/o Alexandra Investment Management, LLC 767 Third Avenue 39th Avenue New York, New York 10017 Facsimile No.: 212-301-1810
Date:  February 17, 2004

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EX-10.44

EXHIBIT 10.44

Acclaim Entertainment, Inc.

To

U.S. Bank Trust National Association,

as Trustee

Indenture

Dated February 17, 2004

Debt Securities

CROSS-REFERENCE SHEET

Certain Sections of this Indenture relating to Sections 310 through 318, inclusive, of the Trust Indenture Act of 1939:

Trust Indenture Act Section	Indenture Section
ss.310 (a)(1)	609
(a)(2)	609
(a)(3)	Not Applicable
(a)(4)	Not Applicable
(b)	608, 610
ss.311 (a)	613
(b)	613
ss.312 (a)	701, 702
(b)	702
(c)	702
ss.313 (a)	703
(b)	703
(c)	703
(d)	703
ss.314 (a)	704
(a)(4)	101, 1004
(b)	1006
(c)(1)	102
(c)(2)	102
(c)(3)	Not Applicable
(d)	1501
(e)	102
ss.315 (a)	601
(b)	602
(c)	601
(d)	601
(e)	514
ss.316 (a)	101
(a)(1)(A)	502, 512
(a)(1)(B)	513
(a)(2)	Not Applicable
(b)	508
(c)	104
ss.317 (a)(1)	503
(a)(2)	504
(b)	1003
ss.318 (a)	107

NOTE: This cross-reference sheet shall not, for any purpose, be deemed to be a part of the Indenture.

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Acclaim Entertainment, Inc.

To

U.S. Bank Trust National Association,

as Trustee

Indenture

Debt Securities

TABLE OF CONTENTS

		Page
Article One	Definitions and Other Provisions of General Application	1
Section 101.	Definitions	1
Section 102.	Compliance Certificates and Opinions	8
Section 103.	Form of Documents Delivered to Trustee	8
Section 104.	Acts of Holders	9
Section 105.	Notices, Etc. to Trustee and Company	11
Section 106.	Notice to Holders; Waiver	11
Section 107.	Conflict with Trust Indenture Act	12
Section 108.	Effect of Headings and Table of Contents	12
Section 109.	Successors and Assigns	12
Section 110.	Separability Clause	12
Section 111.	Benefits of Indenture	12
Section 112.	Governing Law	12
Section 113.	Legal Holidays	12
Section 114.	Indenture and Securities Solely Corporate Obligations	12
Article Two	Security Forms	13
Section 201.	Forms Generally	13
Section 202.	Form of Legend for Global Securities	13
Section 203.	Form of Trustee’s Certificate of Authentication	14
Section 204.	Form of Conversion Notice	14
Article Three	The Securities	14
Section 301.	Amount Unlimited; Issuable in Series	14
Section 302.	Denominations	17
Section 303.	Execution, Authentication, Delivery and Dating	17
Section 304.	Temporary Securities	18
Section 305.	Registration; Registration of Transfer and Exchange	19
Section 306.	Mutilated, Destroyed, Lost and Stolen Securities	20
Section 307.	Payment of Interest; Interest Rights Preserved	21
Section 308.	Persons Deemed Owners	22
Section 309.	Cancellation	23
Section 310.	Computation of Interest	23

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Article Four	Satisfaction and Discharge	23
Section 401.	Satisfaction and Discharge of Indenture	23
Section 402.	Application of Trust Money	24
Article Five	Remedies	24
Section 501.	Events of Default	24
Section 502.	Acceleration of Maturity; Rescission and Annulment	25
Section 503.	Collection of Indebtedness and Suits for Enforcement by Trustee	26
Section 504.	Trustee May File Proofs of Claim	26
Section 505.	Trustee May Enforce Claims without Possession of Securities	27
Section 506.	Application of Money Collected	27
Section 507.	Limitation on Suits	27
Section 508.	Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert	28
Section 509.	Restoration of Rights and Remedies	28
Section 510.	Rights and Remedies Cumulative	28
Section 511.	Delay or Omission not Waiver	29
Section 512.	Control by Holders	29
Section 513.	Waiver of Past Defaults	29
Section 514.	Undertaking for Costs	30
Section 515.	Waiver of Usury, Stay or Extension Laws	30
Article Six	The Trustee	30
Section 601.	Certain Duties and Responsibilities	30
Section 602.	Notice of Defaults	30
Section 603.	Certain Rights of Trustee	31
Section 604.	Not Responsible for Recitals or Issuance of Securities	31
Section 605.	May Hold Securities and Act as Trustee Under Other Indentures	32
Section 606.	Money Held in Trust	32
Section 607.	Compensation and Reimbursement	32
Section 608.	Conflicting Interests	32
Section 609.	Corporate Trustee Required; Eligibility	33
Section 610.	Resignation and Removal; Appointment of Successor	33
Section 611.	Acceptance of Appointment by Successor	34
Section 612.	Merger, Conversion, Consolidation or Succession to Business	35
Section 613.	Preferential Collection of Claims Against Company	35
Section 614.	Appointment of Authenticating Agent	36

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Article Seven	Holders’ Lists and Reports by Trustee and Company	38
Section 701.	Company to Furnish Trustee Names and Addresses of Holders	38
Section 702.	Preservation of Information; Communications to Holders	38
Section 703.	Reports by Trustee	38
Section 704.	Reports by Company	39
Article Eight	Consolidation, Merger, Conveyance, Transfer or Lease	39
Article Nine	Supplemental Indentures	39
Section 901.	Supplemental Indentures without Consent of Holders	39
Section 902.	Supplemental Indentures with Consent of Holders	40
Section 903.	Execution of Supplemental Indentures	41
Section 904.	Effect of Supplemental Indentures	42
Section 905.	Conformity with Trust Indenture Act	42
Section 906.	Reference in Securities to Supplemental Indentures	42
Article Ten	Covenants	42
Section 1001.	Payment of Principal, Premium and Interest	42
Section 1002.	Maintenance of Office or Agency	42
Section 1003.	Money For Securities Payments to Be Held in Trust	43
Section 1004.	Statement by Officers as to Default	44
Section 1005.	Existence	44
Section 1006.	Opinions as to Pledged Property	44
Section 1007.	Waiver of Certain Covenants	45
Article Eleven	Redemption of Securities	45
Section 1101.	Applicability of Article	45
Section 1102.	Election to Redeem; Notice to Trustee	45
Section 1103.	Selection by Trustee of Securities to Be Redeemed	45
Section 1104.	Notice of Redemption	46
Section 1105.	Payment of Redemption Price	46
Section 1106.	Securities Payable on Redemption Date	46
Section 1107.	Securities Redeemed in Part	47
Article Twelve	Sinking Funds	47
Section 1201.	Applicability of Article	47
Section 1202.	Satisfaction of Sinking Fund Payments with Securities	47
Section 1203.	Redemption of Securities for Sinking Fund	48
Article Thirteen	Defeasance and Covenant Defeasance	48
Section 1301.	Company’s Option to Effect Defeasance or Covenant Defeasance	48
Section 1302.	Defeasance and Discharge	48
Section 1303.	Covenant Defeasance	49

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Section 1304.	Conditions to Defeasance or Covenant Defeasance	49
Section 1305.	Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions	51
Section 1306.	Reinstatement	51
Article Fourteen	Conversion of Securities	52
Section 1401.	Applicability of Article	52
Section 1402.	Notice of Certain Corporate Actions	52
Section 1403.	Reservation of Shares of Common Stock	52
Section 1404.	Payment of Certain Taxes upon Conversion	52
Section 1405.	Nonassessability	52
Section 1406.	Duties of Trustee Regarding Conversion	52
Section 1407.	Repayment of Certain Funds upon Conversion	53
Article Fifteen	Collateral	53
Section 1501.	Releases of Collateral	53

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INDENTURE, dated February 17, 2004, between ACCLAIM ENTERTAINMENT, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the “Company”), having its principal executive office at One Acclaim Plaza, Glen Cove, New York 11542, and U.S. BANK TRUST NATIONAL ASSOCIATION, a national banking association duly organized and existing under the laws of the United States of America, as Trustee (herein called the “Trustee”).

RECITALS OF THE COMPANY

The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its secured and unsecured debentures, notes or other evidences of indebtedness (herein called the “Securities”), to be issued in one or more series as provided in this Indenture.

All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof appertaining, as follows:

ARTICLE ONE

DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

Section 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided herein or in a Supplemental Indenture, or unless the context otherwise requires:

(1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;

(2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;

(3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term “generally accepted accounting principles” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation;

(4) unless the context otherwise requires, any reference to an “Article” or a “Section” refers to an Article or a Section, as the case may be, of this Indenture; and

(5) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

“Act” when used with respect to any Holder, has the meaning specified in Section 104.

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Appraiser” means a Person engaged in the business of appraising property who (except as otherwise expressly provided in this Indenture) may be employed by or affiliated with the Company.

“Authenticating Agent” means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities of one or more series.

“Board of Directors” means either the board of directors of the Company or any duly authorized committee of that board empowered to act for it with respect to this Indenture.

“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.

“Business Day” when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close.

“Commission” means the Securities and Exchange Commission, from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.

“Company” means the corporation named as the “Company” in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor Person.

“Company Request” or “Company Order” means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its

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President or a Vice President, and by its principal financial officer, its Secretary or an Assistant Secretary, and delivered to the Trustee.

“Corporate Trust Office” means the corporate trust office of the Trustee at which at any particular time the trust created by this Indenture shall be administered, which office on the date hereof is located at 100 Wall Street, 16^th Floor, New York, New York, 10005.

“corporation” means a corporation, association, company, joint-stock company or business trust.

“Covenant Defeasance” has the meaning specified in Section 1303.

“Defaulted Interest” has the meaning specified in Section 307.

“Defeasance” has the meaning specified in Section 1302.

“Depositary” means, with respect to Securities of any series issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities as contemplated by Section 301.

“Event of Default” has the meaning specified in Section 501.

“Exchange Act” means the Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time.

“Expiration Date” has the meaning specified in Section 104.

“Fair Market Value” means, at any time with respect to any property, the sale value of such property which could be realized in an arm’s length sale at such time between an informed and willing vendee, and an informed and willing vendor, under no compulsion to buy or sell, respectively, all as determined in good faith (a) in the case of any Officers’ Certificate or other certificate delivered pursuant to Section 1501, by the signer or signers thereof and (b) in all other cases, (i) by the vendor’s board of directors or (ii) in the case of any such property of the Company or any Restricted Subsidiary, by the Chief Executive Officer or the President of the Company, except as otherwise specifically provided in this Indenture or any Indenture supplemental hereto.

“Financial Advisor” shall mean an investment banking firm of national reputation which (except as otherwise expressly provided in this Indenture) may be employed by or affiliated with the Company.

“Global Security” means a Security that evidences all or part of the Securities of any series and bears the legend set forth in Section 204 (or such legend as may be specified as contemplated by Section 301 for such Securities).

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“Holder” means a Person in whose name a Security is registered in the Security Register.

“Indenture” means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term “Indenture” shall also include the terms of particular series of Securities established as contemplated by Section 301; provided, however, that if at any time more than one Person is acting as Trustee under this Indenture due to the appointment of one or more separate Trustees for any one or more separate series of Securities, “Indenture” shall mean, with respect to such series of Securities for which any such Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securities for which such Person is Trustee established as contemplated by Section 301, exclusive, however, of any provisions or terms which relate solely to other series of Securities for which such Person is not Trustee, regardless of when such terms or provisions were adopted, and exclusive of any provisions or terms adopted by means of one or more indentures supplemental hereto executed and delivered after such Person had become such Trustee, but to which such Person, as such Trustee, was not a party; provided, further, that in the event that this Indenture is supplemented or amended by one or more indentures supplemental hereto which are only applicable to certain series of Securities, the term “Indenture” for a particular series of Securities shall include only the supplemental indentures applicable thereto.

“Independent” when used with respect to any specified Person means such a Person who (a) is independent within the meaning of the Trust Indenture Act, (b) does not have any direct financial interest or any material indirect financial interest in the Company or in any other obligor under the Securities or in any Affiliate of the Company or of such other obligor and (c) is not connected with the Company or such other obligor as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions. Whenever it is herein provided that any Independent Person’s opinion or certificate shall be furnished to the Trustee, such Person shall be appointed by a Company Order and such opinion or certificate shall state that the signer has read this definition and that the signer is Independent within the meaning thereof.

“interest” when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity.

“Interest Payment Date” when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security.

“Investment Company Act” means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time.

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“Lien” shall mean any lien, mortgage, security interest, chattel mortgage, pledge, equity or other encumbrance (statutory or otherwise) of any kind, including, without limitation, any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Uniform Commercial Code of New York or similar evidence of any encumbrance, whether within or outside the United States.

“Maturity” when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.

“Notice of Default” means a written notice of the kind specified in a Board Resolution or Supplemental Indenture with respect to any series of Securities.

“Officers’ Certificate” means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President or a Vice President, and by the principal financial officer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers’ Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company.

“Opinion of Counsel” means a written opinion of counsel, who may be counsel for, or an employee of, the Company, and who shall be reasonably acceptable to the Trustee.

“Original Issue Discount Security” means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502.

“Outstanding” when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

(1) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation;

(2) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made;

(3) Securities as to which Defeasance has been effected pursuant to Section 1302; and

(4) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this

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Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, (A) the principal amount of an Original Issue Discount Security which shall be deemed to be Outstanding shall be the amount of the principal thereof which would be due and payable as of such date upon acceleration of the Maturity thereof to such date pursuant to Section 502, (B) if, as of such date, the principal amount payable at the Stated Maturity of a Security is not determinable, the principal amount of such Security which shall be deemed to be Outstanding shall be the amount as specified or determined as contemplated by Section 301, (C) the principal amount of a Security denominated in one or more foreign currencies or currency units which shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by Section 301, of the principal amount of such Security (or, in the case of a Security described in Clause (A) or (B) above, of the amount determined as provided in such Clause), and (D) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.

“Paying Agent” means any Person authorized by the Company to pay the principal of or any premium or interest on any Securities on behalf of the Company.

“Person” means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Place of Payment” when used with respect to the Securities of any series, means the place or places where the principal of and any premium and interest on the Securities of that series are payable as specified as contemplated by Section 301.

“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.

“Prior Lien” means any Lien on any of the collateral securing the Company’s obligations with respect to Securities issued under this Indenture ranking prior to or upon parity with the Lien of this Indenture.

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“Property” means any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible.

“Redemption Date” when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.

“Redemption Price” when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.

“Regular Record Date” for the interest payable on any Interest Payment Date on the Securities of any series means the date specified for that purpose as contemplated by Section 301.

“Responsible Officer” means an officer in the Corporate Trust Office of the Trustee.

“Securities” has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture.

“Securities Act” means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time.

“Security Register” and “Security Registrar” have the respective meanings specified in Section 305.

“Special Record Date” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307.

“Stated Maturity” when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable.

“Subsidiary” means a corporation or other entity of which a majority of the outstanding voting stock or similar voting securities having the power to elect a majority of the board of directors of such corporation or similar body or Person of such entity is at the time owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries and the accounts of which are consolidated with those of the Company in its then most recent consolidated financial statements in accordance with generally accepted accounting principles. For the purposes of this definition, “voting stock” means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.

“Trust Indenture Act” means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust

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Indenture Act of 1939 is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.

“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, “Trustee” as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series.

“U.S. Government Obligation” has the meaning specified in Section 1304.

“Vice President,” when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title “vice president.”

Section 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers’ Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture.

Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include,

(1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;

(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

Section 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons

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as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his or her certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

Section 104. Acts of Holders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. The Trustee shall promptly deliver to the Company copies of all such instrument or instruments delivered to the Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.

The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a signer acting in a capacity other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of his or her authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.

The ownership of Securities shall be proved by the Security Register.

Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the

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Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.

The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to give, make or take any request, demand, authorization, direction, vote, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities of such series, provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of the relevant series on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106.

The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 502, (iii) any request to institute proceedings referred to in Section 507(2) or (iv) any direction referred to in Section 512, in each case with respect to Securities of such series. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of such series on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company’s expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106.

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With respect to any record date set pursuant to this Section, the party hereto which sets such record date may designate any day as the “Expiration Date” and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities of the relevant series in the manner set forth in Section 106, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto which set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date.

Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount.

Section 105. Notices, Etc. to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,

(1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing (or by facsimile transmissions ((212) 509-3384), provided that oral confirmation of receipt shall have been received) to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department (Acclaim Entertainment, Inc. Debt Securities), or

(2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company, Attention: Chief Financial Officer.

Section 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at its address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

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In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.

Section 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be.

Section 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

Section 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

Section 110. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

Section 111. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.

Section 112. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.

Section 113. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security or the last date on which a Holder has the right to convert a Security at a particular conversion price shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities (other than a provision of any Security which specifically states that such provision shall apply in lieu of this Section)) payment of interest or principal (and premium, if any) or, if applicable to a particular series of Securities, conversion need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, at the Stated Maturity or on such last day for conversion, as the case may be.

Section 114. Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Security, or

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for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer, or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities.

ARTICLE TWO

SECURITY FORMS

Section 201. Forms Generally. The Securities of each series shall be in substantially the form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. If the form of Securities of any series is established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities. Any such Board Resolution or record of such action shall have attached thereto a true and correct copy of the form of Security referred to therein approved by or pursuant to such Board Resolution.

The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.

Section 202. Form of Legend for Global Securities. Unless otherwise specified as contemplated by Section 301 for the Securities evidenced thereby, every Global Security authenticated and delivered hereunder shall bear a legend in substantially the following form:

THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE

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THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.

Section 203. Form of Trustee’s Certificate of Authentication. The Trustee’s certificates of authentication shall be in substantially the following form:

This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture.

U.S. BANK TRUST NATIONAL         ASSOCIATION, as Trustee
By:
	Authorized Officer

Section 204. Form of Conversion Notice.

The Securities of any series may provide, in a Board Resolution or in one or more indentures supplemental hereto, for a Form of Conversion Notice.

ARTICLE THREE

THE SECURITIES

Section 301. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.

The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution and, subject to Section 303, set forth, or determined in the manner provided, in an Officers’ Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series,

(1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of any other series);

(2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906 or 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder);

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(3) the Person to whom any interest on a Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest;

(4) the date or dates on which the principal of any Securities of the series is payable;

(5) the rate or rates at which any Securities of the series shall bear interest, if any, the date or dates from which any such interest shall accrue, the Interest Payment Dates on which any such interest shall be payable, whether and under what circumstances interest shall be payable in cash or another form of consideration and the Regular Record Date for any such interest payable on any Interest Payment Date;

(6) the place or places where the principal of and any premium and interest on any Securities of the series shall be payable;

(7) the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series may be redeemed, in whole or in part, at the option of the Company and, if other than by a Board Resolution, the manner in which any election by the Company to redeem the Securities shall be evidenced;

(8) the obligation, if any, of the Company to redeem or purchase any Securities of the series pursuant to any sinking fund or analogous provisions or at the option of the Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;

(9) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which any Securities of the series shall be issuable;

(10) if the amount of principal of or any premium or interest on any Securities of the series may be determined with reference to an index or pursuant to a formula, the manner in which such amounts shall be determined;

(11) if other than the currency of the United States of America, the currency, currencies or currency units in which the principal of or any premium or interest on any Securities of the series shall be payable and the manner of determining the equivalent thereof in the currency of the United States of America for any purpose, including for purposes of the definition of “Outstanding” in Section 101; provided, however, that prior to the issuance of any such Securities, the Company shall have obtained the written consent of the Trustee, which consent may be withheld in the sole discretion of the Trustee, to the currency, currencies or currency units so established;

(12) if the principal of or premium, if any, or interest on any Securities of the series is to be payable, at the election of the Company or the Holder thereof, in one or more currencies or currency units other than that or those in which such Securities are stated to be

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payable, the currency, currencies or currency units in which the principal of or any premium or interest on such Securities as to which such election is made shall be payable, the periods within which and the terms and conditions upon which such election is to be made and the amount so payable (or the manner in which such amount shall be determined); provided, however, that prior to the issuance of any such Securities, the Company shall have obtained the written consent of the Trustee, which consent may be withheld in the sole discretion of the Trustee, to the currency, currencies or currency units so established;

(13) if other than the entire principal amount thereof, the portion of the principal amount of any Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502;

(14) if the principal amount payable at the Stated Maturity of any Securities of the series will not be determinable as of any one or more dates prior to the Stated Maturity, the amount which shall be deemed to be the principal amount of such Securities as of any such date for any purpose thereunder or hereunder, including the principal amount thereof which shall be due and payable upon any Maturity other than the Stated Maturity or which shall be deemed to be Outstanding as of any date prior to the Stated Maturity (or, in any such case, the manner in which such amount deemed to be the principal amount shall be determined);

(15) if applicable, that the Securities of the series, in whole or any specified part, shall be defeasible pursuant to Section 1302 or Section 1303 or both such Sections and, if other than by a Board Resolution, the manner in which any election by the Company to defease such Securities shall be evidenced;

(16) if applicable, the terms of any right to convert Securities of the series into shares of Common Stock of the Company or other securities or property;

(17) if applicable, that any Securities of the series shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective Depositaries for such Global Securities, the form of any legend or legends which shall be borne by any such Global Security in addition to or in lieu of that set forth in Section 202 and any circumstances in addition to or in lieu of those set forth in Clause (2) of the last paragraph of Section 305 in which any such Global Security may be exchanged in whole or in part for Securities registered, and any transfer of such Global Security in whole or in part may be registered, in the name or names of Persons other than the Depositary for such Global Security or a nominee thereof;

(18) any addition to or change in the Events of Default which applies to any Securities of the series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to Section 502;

(19) any addition to or change in the covenants set forth in Article Ten which applies to Securities of the series; and

(20) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 901(5)).

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All Securities of any one series shall be substantially identical except as to denomination, certificate number and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 303) set forth, or determined in the manner provided, in the Officers’ Certificate referred to above or in any such indenture supplemental hereto.

If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers’ Certificate setting forth the terms of the series.

Section 302. Denominations. The Securities of each series shall be issuable only in registered form without coupons and only in such denominations as shall be specified as contemplated by Section 301. In the absence of any such specified denomination with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $1,000 and any integral multiple thereof.

Section 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its principal financial officer, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile.

Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating,

(1) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 201, that such form has been established in conformity with the provisions of this Indenture;

(2) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and

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(3) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee’s own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee.

Notwithstanding the provisions of Section 301 and of the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers’ Certificate otherwise required pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued.

Each Security shall be dated the date of its authentication.

No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

Section 304. Temporary Securities. Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.

If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to

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the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series and tenor.

Section 305. Registration; Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed “Security Registrar” for the purpose of registering Securities and transfers of Securities as herein provided.

Subject to any limitations or requirements of any indenture supplemental hereto relating to the Securities of a particular series, upon surrender for registration of transfer of any Security of a series at the office or agency of the Company in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount.

At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.

All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.

Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or its attorney duly authorized in writing.

No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer.

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If the Securities of any series (or of any series and specified tenor) are to be redeemed in part, the Company shall not be required (A) to issue, register the transfer of or exchange any Securities of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Securities selected for redemption under Section 1103 and ending at the close of business on the day of such mailing, or (B) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.

The provisions of Clauses (1), (2), (3) and (4) below shall apply only to Global Securities:

(1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture.

(2) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (A) such Depositary (i) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security or (C) there shall exist such circumstances, if any, in addition to or in lieu of the foregoing as have been specified for this purpose as contemplated by Section 301.

(3) Subject to Clause (2) above, any exchange of a Global Security for other Securities may be made in whole or in part, and all Securities issued in exchange for a Global Security or any portion thereof shall be registered in such names as the Depositary for such Global Security shall direct.

(4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Section, Section 304, 306, 906 or 1107 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof.

Section 306. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.

If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in

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the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.

In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security at its Maturity; provided that the Holder of such Security may exercise any and all of its rights prior to such payment.

Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder.

The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities except as otherwise provided as contemplated by Section 301 with respect to any Series of Securities.

Section 307. Payment of Interest; Interest Rights Preserved. Except as otherwise provided as contemplated by Section 301 with respect to any series of Securities, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest.

Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below:

(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid

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in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given to each Holder of Securities of such series in the manner set forth in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2).

(2) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange.

Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.

In the case of any Security (or any part thereof) which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Security the principal of (or premium, if any, on) which shall become due and payable, whether at Stated Maturity or by declaration of acceleration prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or any one or more Predecessor Securities) is registered at the close of business on such Regular Record Date, provided that such person shall surrender to the Company upon conversion an amount equal to the interest payable on such Interest Payment Date on the principal amount of the Security then being converted. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security (or any part thereof) which is converted, interest whose Stated Maturity is after the date of conversion of such Security (or such part thereof) shall not be payable.

Section 308. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any premium and (subject to Section 307) any interest on such Security and for all other

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purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

Section 309. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of as directed by a Company Order.

Section 310. Computation of Interest. Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months.

ARTICLE FOUR

SATISFACTION AND DISCHARGE

Section 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when

(1) either

(A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or

(B) all such Securities not theretofore delivered to the Trustee for cancellation

(i) have become due and payable, or

(ii) will become due and payable at their Stated Maturity within one year, or

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(iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose money in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;

(2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

(3) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive.

Section 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest for whose payment such money has been deposited with the Trustee.

ARTICLE FIVE

REMEDIES

Section 501. Events of Default. “Event of Default,” wherever used herein with respect to Securities of any series, means any of the events specified in a Board Resolution or Supplemental Indenture with respect to such series, as well as:

(1) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver,

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liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or

(2) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator 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 admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action.

Section 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(1) or 501(2)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable. If an Event of Default specified in Section 501(1) or 501(2) with respect to Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable.

At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if

(1) the Company has paid or deposited with the Trustee a sum sufficient to pay

(A) all overdue interest on all Securities of that series,

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(B) the principal (or other specified amount in the case of Original Issue Discount Securities) of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities,

(C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and

(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and

(2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513.

No such rescission shall affect any subsequent default or impair any right consequent thereon.

Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if

(1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or

(2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.

If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

Section 504. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee

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shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607.

No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors’ or other similar committee.

Section 505. Trustee May Enforce Claims without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.

Section 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or any premium or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee under Section 607; and

SECOND: To the payment of the amounts then due and unpaid for principal of and any premium, if any, and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and premium, if any, and interest, respectively.

Section 507. Limitation on Suits. No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless

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(1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series;

(2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

(3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;

(4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and

(5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series;

it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders.

Section 508. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date), to convert such Securities in accordance with Article Fourteen and the terms of any indenture supplemental hereto relating to the Securities of a particular series and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

Section 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.

Section 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy,

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and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

Section 511. Delay or Omission not Waiver. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee (subject to the limitations contained in this Indenture) or by the Holders, as the case may be.

Section 512. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that

(1) such direction shall not be in conflict with any rule of law or with this Indenture and the Trustee shall not have determined that the action so directed would be unjustly prejudicial to Holders of Securities of that series, or any other series, not taking part in such direction, and

(2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction or this Indenture.

Section 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default

(1) in the payment of the principal of or any premium or interest on any Security of such series, or

(2) in respect of a covenant or provision hereof which under Article Nine or the terms of any indenture supplemental hereto relating to Securities of such series cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected.

Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.

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Section 514. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or in any suit for the enforcement of the right to convert any Security in accordance with Article Fourteen or the terms of any indenture supplemental hereto relating to Securities of a particular series.

Section 515. Waiver of Usury, Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

ARTICLE SIX

THE TRUSTEE

Section 601. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section.

Section 602. Notice of Defaults. If a default occurs hereunder with respect to Securities of any series which default is known to the Trustee, the Trustee shall give the Holders of Securities of such series notice of such default as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default in the performance, or breach, of any covenant or warranty contained in a Board Resolution or Supplemental Indenture for any series of Securities with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series.

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Section 603. Certain Rights of Trustee. Subject to the provisions of Section 601:

(1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order, and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution;

(3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers’ Certificate;

(4) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company upon reasonable advance notice during normal business hours, personally or by agent or attorney; and

(7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder.

Section 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating

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Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof.

Section 605. May Hold Securities and Act as Trustee Under Other Indentures. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent.

Subject to the limitations imposed by the Trust Indenture Act, nothing in this Indenture shall prohibit the Trustee from becoming and acting as trustee under other indentures under which other securities, or certificates of interest of participation in other securities, of the Company are outstanding in the same manner as if it were not Trustee hereunder.

Section 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company.

Section 607. Compensation and Reimbursement. The Company agrees

(1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and

(3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

Section 608. Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by such Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series.

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Section 609. Corporate Trustee Required; Eligibility. There shall at all times be one (and only one) Trustee hereunder with respect to the Securities of each series, which may be Trustee hereunder for Securities of one or more other series. Each Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has (or if the Trustee is a subsidiary of a bank holding company its parent shall have) a combined capital and surplus of at least $100,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee with respect to the Securities of any series shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

Section 610. Resignation and Removal; Appointment of Successor. No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611.

The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company.

If at any time:

(1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or

(2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or

(3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (A) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (B) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months

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may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.

If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, the retiring Trustee may petition, or any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition, any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of Securities of such series in the manner provided in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.

Section 611. Acceptance of Appointment by Successor. In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an

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indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.

Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be.

No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.

Section 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee (including the trust created by this Indenture), shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.

Section 613. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the

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Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor).

Section 614. Appointment of Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having (or if the Authenticating Agent is a subsidiary of a bank holding company its parent shall have) a combined capital and surplus of not less than $100,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.

Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent (including the authenticating agency contemplated by this Indenture), shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.

An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment in the manner provided in Section 106 to all Holders of Securities of the series with respect to which such Authenticating Agent will serve. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor

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hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.

The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607.

If an appointment with respect to one or more series is made pursuant to this Section 614, the Securities of such series may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:

This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee
By:
	As Authenticating Agent

By:
	Authorized Officer

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ARTICLE SEVEN

HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY

Section 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee

(1) semi-annually, not later than 15 days after the Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of each series as of such Regular Record Date, as the case may be, and

(2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;

provided that no such list need be furnished by the Company to the Trustee so long as the Trustee is acting as Security Registrar.

Section 702. Preservation of Information; Communications to Holders. The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701, if any, and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished.

The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act.

Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act.

Section 703. Reports by Trustee. The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto.

Reports so required to be transmitted at stated intervals of not more than 12 months shall be transmitted no later than July 1 in each calendar year, commencing with the first July 1 after the first issuance of Securities pursuant to this Indenture.

A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange.

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Section 704. Reports by Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to the Trust Indenture Act; provided that any such information, documents or reports required to be filed by the Company with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission.

ARTICLE EIGHT

CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

[Reserved]

ARTICLE NINE

SUPPLEMENTAL INDENTURES

Section 901. Supplemental Indentures without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes:

(1) to evidence the succession of another Person to the Company, or successive successions, and the assumption by any such successor of the covenants of the Company herein and in the Securities in accordance with the requirements of this Indenture; or

(2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or

(3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such additional Events of Default are to be for the benefit of less than all series of Securities, stating that such additional Events of Default are expressly being included solely for the benefit of such series); or

(4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or

(5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or

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elimination (A) shall neither (i) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of any such Security with respect to such provision or (B) shall become effective only when there is no such Security Outstanding; or

(6) to secure the Securities of any one or more series; or

(7) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or

(8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611; or

(9) to make provision with respect to the conversion rights of Holders or Holders of Securities of one or more series, pursuant to the requirements of Article Fourteen, including providing for the conversion of the Securities into any security (other than the Common Stock of the Company) or Property of the Company; or

(10) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this Clause (10) shall not adversely affect the interests of the Holders of Securities of any series in any material respect; or

(11) to supplement any of the provisions of the Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Articles Four and Thirteen, provided that any such action shall not adversely affect the interests of the Holders of Securities of such series or any other series of Securities in any material respect.

Section 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,

(1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of

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the principal of an Original Issue Discount Security or any other Security which would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or modify the provisions of this Indenture with respect to the subordination of such series of Securities in a manner adverse to the Holders of Securities of such series, or

(2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of the Holders of which is required for any such supplemental indenture, or the consent of the Holders of which is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or

(3) modify any of the provisions of this Section, Section 513 or Section 1007, except to increase any percentage provided for herein or therein or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to “the Trustee” and concomitant changes in this Section and Section 1007, or the deletion of this proviso, in accordance with the requirements of Sections 611 and 901(8), or

(4) if applicable, make any change that adversely affects the right to convert any security as provided in Article Fourteen or pursuant to Section 301 (except as permitted by Section 901(9)) or decrease the conversion rate or increase the conversion price of any such security.

A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.

It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

Section 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Sections 601 and 603) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

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Section 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

Section 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act.

Section 906. Reference in Securities to Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.

ARTICLE TEN

COVENANTS

Section 1001. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture.

Section 1002. Maintenance of Office or Agency. The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange, where Securities of that series may be surrendered for conversion and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.

The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that

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no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.

Section 1003. Money For Securities Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of or any premium or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium and interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.

Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, on or prior to each due date of the principal of or any premium or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.

The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (1) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series.

The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.

Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or any premium or interest on any Security of any series and remaining unclaimed for a period ending on the earlier of the date that is ten Business Days prior to the date such money would escheat to the State or two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any

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such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in each Place of Payment, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.

Section 1004. Statement by Officers as to Default. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers’ Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.

Section 1005. Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence.

Section 1006. Opinions as to Pledged Property. In the case of any series of Securities in respect of which the Company’s obligations are secured pursuant to an indenture supplemental hereto, promptly after the execution and delivery of the supplemental indenture establishing such series of Securities, the Company shall furnish to the Trustee an Opinion of Counsel stating that, in the opinion of such counsel, such actions have been taken with respect to the recording and filing of this Indenture and such supplemental indenture relating to such series of Securities and with respect to the execution and filing of any financing statements and continuation statements as are necessary to make effective and perfect the Lien and security interest intended to be created by this Indenture and such indenture supplemental hereto in favor of the Trustee for the benefit of the Holders of Securities of such series, and reciting the details of such action, or stating that, in the opinion of such counsel, no such action is necessary to make such Lien and security interest effective.

If after the first issuance of Securities of a particular series in respect of which the Company’s obligations are secured pursuant to an indenture supplemental hereto the Company shall execute any other supplemental indenture or other requisite document relating to such series of Securities, promptly after such execution the Company shall furnish to the Trustee an Opinion of Counsel stating that, in the opinion of such counsel, such actions have been taken with respect to the recording, filing, re-recording and refiling of this Indenture and any such supplemental indentures other requisite documents relating to such series of Securities and with respect to the execution and filing of any financing statements and continuation statements as are necessary to make effective and perfect the Lien and security interest intended to be created by this Indenture, such indentures supplemental hereto and such other requisite documents in favor of the Trustee for the benefit of Holders of Securities of such series and reciting the details of such action or referring to prior Opinions of Counsel in which such details are given, or stating that, in the opinion of such counsel, no such action is necessary to make such Lien and security interest effective.

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On or before May 1, in each calendar year, beginning with the first calendar year commencing more than three months after the date of authentication and delivery of any Securities of any series that are secured by any Lien on property, the Company shall furnish to the Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording, filing, re-recording and re-filing of this Indenture, any indentures supplemental hereto and any other requisite documents and with respect to the execution and filing of any financing statements and continuation statements as is necessary to maintain the Lien and security interest created by this Indenture and any such indentures supplemental hereto with respect to the property pledged to secure such Securities and reciting the details of such action or stating that in the opinion of such counsel no such action is necessary to maintain such Lien and security interest. Such Opinion of Counsel shall also describe the recording, filing, re-recording and re-filing of this Indenture, any indentures supplemental hereto and any other requisite documents and the execution and filing of any financing statements and any other requisite documents and the execution and filing of any financing statements and continuation statements that will, in the opinion of such counsel, be required to maintain the Lien and security interest of this Indenture and any such indentures supplemental hereto with respect to such property until May 1 in the following calendar year.

Section 1007. Waiver of Certain Covenants. Except as otherwise specified as contemplated by Section 301 for Securities of such series, the Company may, with respect to the Securities of any series, omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to Section 301(19), 901(2) or 901(7) for the benefit of the Holders of such series if before the time for such compliance the Holders of at least 50% in principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.

ARTICLE ELEVEN

REDEMPTION OF SECURITIES

Section 1101. Applicability of Article. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for such Securities) in accordance with this Article.

Section 1102. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities.

Section 1103. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities of any series are to be redeemed (unless all the Securities of such series

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and of a specified tenor are to be redeemed or unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security of such series, provided that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. If less than all the Securities of such series and of a specified tenor are to be redeemed (unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series and specified tenor not previously called for redemption in accordance with the preceding sentence.

If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection.

The Trustee shall promptly notify the Company in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed.

The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.

For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.

Section 1104. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, and shall be in the form as specified in a Board Resolution or Supplemental Indenture for any series of Securities hereunder.

Section 1105. Payment of Redemption Price. Payment of the Redemption Price shall be made as provided in a Board Resolution or Supplemental Indenture for any series of Securities hereunder.

Section 1106. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest)

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such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that, unless otherwise specified as contemplated by Section 301, installments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307.

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.

Section 1107. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or its attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.

ARTICLE TWELVE

SINKING FUNDS

Section 1201. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of any series except as otherwise specified as contemplated by Section 301 for such Securities.

The minimum amount of any sinking fund payment provided for by the terms of any Securities is herein referred to as a “mandatory sinking fund payment,” and any payment in excess of such minimum amount provided for by the terms of such Securities is herein referred to as an “optional sinking fund payment.” If provided for by the terms of any Securities, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities as provided for by the terms of such Securities.

Section 1202. Satisfaction of Sinking Fund Payments with Securities. The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to any Securities of such series required to be made pursuant to the terms of such Securities as and to the extent

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provided for by the terms of such Securities; provided that the Securities to be so credited have not been previously so credited. The Securities to be so credited shall be received and credited for such purpose by the Trustee at the Redemption Price, as specified in the Securities so to be redeemed, for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.

Section 1203. Redemption of Securities for Sinking Fund. Not less than 60 days prior to each sinking fund payment date for any Securities, the Company will deliver to the Trustee an Officers’ Certificate specifying the amount of the next ensuing sinking fund payment for such Securities pursuant to the terms of such Securities, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so delivered. Not less than 30 days prior to each such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107.

ARTICLE THIRTEEN

DEFEASANCE AND COVENANT DEFEASANCE

Section 1301. Company’s Option to Effect Defeasance or Covenant Defeasance. The Company may elect, at its option at any time, to have Section 1302 or Section 1303 applied to any Securities or any series of Securities, as the case may be, designated pursuant to Section 301 as being defeasible pursuant to such Section 1302 or 1303, in accordance with any applicable requirements provided pursuant to Section 301 and upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities.

Section 1302. Defeasance and Discharge. Upon the Company’s exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, the Company shall be deemed to have been discharged from its obligations with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called “Defeasance”). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 1304 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on such Securities when payments are due, (2) the Company’s obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, and, if applicable,

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Article Fourteen and the provisions of any indenture supplemental hereto relating to conversion of such Securities, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (4) this Article. Subject to compliance with this Article, the Company may exercise its option (if any) to have this Section applied to any Securities notwithstanding the prior exercise of its option (if any) to have Section 1303 applied to such Securities.

Section 1303. Covenant Defeasance. Upon the Company’s exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, (1) the Company shall be released from its obligations under any covenants provided pursuant to Section 301(19), 901(2) or 901(7) for the benefit of the Holders of such Securities and (2) the occurrence of any event with respect to any such covenants provided pursuant to Section 301(19), 901(2) or 901(7), shall be deemed not to be or result in an Event of Default, in each case with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called “Covenant Defeasance”). For this purpose, such Covenant Defeasance means that, with respect to such Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section, whether directly or indirectly by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby.

Section 1304. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to the application of Section 1302 or Section 1303 to any Securities or any series of Securities, as the case may be:

(1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee which satisfies the requirements contemplated by Section 609 and agrees to comply with the provisions of this Article applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefits of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or any such other qualifying trustee) to pay and discharge, the principal of and any premium and interest on such Securities on the respective Stated Maturities, in accordance with the terms of this Indenture and such Securities. As used herein, “U.S. Government Obligation” means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in Clause

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(x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt.

(2) In the event of an election to have Section 1302 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (A) or (B) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur.

(3) In the event of an election to have Section 1303 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur.

(4) The Company shall have delivered to the Trustee an Officers’ Certificate to the effect that neither such Securities nor any other Securities of the same series, if then listed on any securities exchange, will be delisted as a result of such deposit.

(5) No event which is, or after notice or lapse of time or both would become, an Event of Default with respect to such Securities or any other Securities shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 501(5) and (6), at any time on or prior to the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day).

(6) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act).

(7) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound.

(8) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the

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Investment Company Act unless such trust shall be registered under such Act or exempt from registration thereunder.

(9) The Company shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with.

Section 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee or other qualifying trustee (solely for purposes of this Section and Section 1306, the Trustee and any such other trustee are referred to collectively as the “Trustee”) pursuant to Section 1304 in respect of any Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any such Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal and any premium and interest, but money so held in trust need not be segregated from other funds except to the extent required by law.

The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1304 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities.

Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1304 with respect to any Securities which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to such Securities.

Section 1306. Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and such Securities from which the Company has been discharged or released pursuant to Section 1302 or 1303 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 1305 with respect to such Securities in accordance with this Article; provided, however, that if the Company makes any payment of principal of or any premium or interest on any such Security following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of such Securities to receive such payment from the money so held in trust.

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ARTICLE FOURTEEN

CONVERSION OF SECURITIES

Section 1401. Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are convertible into shares of Common Stock of the Company, and the issuance of such shares of Common Stock upon the conversion of such Securities, except as otherwise specified as contemplated by Section 301 for the Securities of such series.

Section 1402. Notice of Certain Corporate Actions. The Company shall give such notice to Holders as shall be specified in a Board Resolution or Supplemental Indenture for any series of Securities hereunder.

Section 1403. Reservation of Shares of Common Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Securities, the full number of shares of Common Stock of the Company then issuable upon the conversion of all outstanding Securities of any series that has conversion rights.

Section 1404. Payment of Certain Taxes upon Conversion. Except as provided in the next sentence, the Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of its Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of its Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established, to the satisfaction of the Company, that such tax has been paid.

Section 1405. Nonassessability. The Company covenants that all shares of its Common Stock which may be issued upon conversion of Securities will upon issue in accordance with the terms hereof be duly and validly issued and fully paid and nonassessable.

Section 1406. Duties of Trustee Regarding Conversion. Neither the Trustee nor any conversion agent shall at any time be under any duty or responsibility to any Holder of Securities of any series that is convertible into Common Stock of the Company to determine whether any facts exist which may require any adjustment of the conversion price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, whether herein or in any supplemental indenture, any resolutions of the Board of Directors or written instrument executed by one or more officers of the Company provided to be employed in making the same. Neither the Trustee nor any conversion agent shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock of the Company, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Securities and neither the Trustee nor any conversion agent makes any representation with respect thereto. Subject to the provisions of Section 601, neither the

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Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of its Common Stock or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion or to comply with any of the covenants of the Company contained in this Article Fourteen or in the applicable supplemental indenture, resolutions of the Board of Directors or written instrument executed by one or more duly authorized officers of the Company.

Section 1407. Repayment of Certain Funds upon Conversion. Any funds which at any time shall have been deposited by the Company or on its behalf with the Trustee or any other paying agent for the purpose of paying the principal of, and premium, if any, and interest, if any, on any of the Securities (including, but not limited to, funds deposited for the sinking fund referred to in Article Twelve hereof and funds deposited pursuant to Article Thirteen hereof) and which shall not be required for such purposes because of the conversion of such Securities as provided in this Article Fourteen shall after such conversion be repaid to the Company by the Trustee upon the Company’s written request.

ARTICLE FIFTEEN

COLLATERAL

Section 1501. Releases of Collateral. In case this Indenture or any indenture supplemental hereto shall provide for the release of any collateral from the Lien hereof or thereof in favor of the Holders of Securities of any series the Trustee shall release the same from the Lien of this Indenture or such indenture supplemental hereto upon receipt by the Trustee of an application of the Company requesting such release and describing the Property to be so released, together with:

(a) an Officers’ Certificate, dated not more than 30 days prior to the date of the application for such release, stating in substance as follows:

(i) the Company has sold or disposed of or has contracted to sell or dispose of the Property so requested to be released or the Company is otherwise entitled to the release of such Property, and in any such case identifying the section or sections of this Indenture or any indenture supplemental hereto under which the Company is entitled to the release of such Property;

(ii) that, in the opinion of the signer, the security afforded by this Indenture and such indenture supplemental hereto will not be impaired by such release in contravention of the provisions hereof and thereof, and, in the case of Property to be disposed of by the Company, unless the Property (or comparable Property) is to be leased or rented by the Company, the Property to be released is not necessary for the efficient operation of its remaining Property that is used or useful in connection with its business;

(iii) in case it shall be stated pursuant to clause (b)(i) that such Property is to be sold or disposed of, either (1) that the Company has disposed of or will dispose of, the

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Property so to be released for a consideration representing, in the opinion of the signers, its Fair Market Value, which consideration may consist of any one or more of the following: (A) cash, (B) obligations secured by a purchase money Lien upon the Property so to be released, and (C) any other Property that, upon acquisition thereof by the Company, would be subject to the Lien of this Indenture, and such indenture supplemental hereto subject to no Lien other than Liens permitted hereby and thereby, all of such consideration to be briefly described in the certificate, or (2) that the Property so to be released has been or is to be disposed of without consideration (or for consideration less than Fair Market Value), in which event such certificate shall state the reason for its disposition at less than Fair Market Value;

(iv) that no Default or Event of Default exists;

(v) the Fair Market Value, in the opinion of the signers, of the Property to be released; provided, however, that it shall not be necessary under this clause (v) to state the Fair Market Value of any Property whose Fair Market Value is certified in a certificate of an Independent Appraiser or Independent Financial Advisor under subdivision (b) of this Section;

(vi) that all conditions precedent provided in this Indenture and any indenture supplemental hereto relating to the release of the Property in question have been complied with; and

(vii) whether the aggregate of the Fair Market Value of the Property to be released and the Fair Market Value of all other Property released since the commencement of the then current calendar year (as previously certified to the Trustee in connection with releases) is 10% or more of the aggregate principal amount of all Securities of such series then outstanding and whether the Fair Market Value of the Property to be released is at least $25,000 and at least 1% of the aggregate principal amount of all Securities of such series at the time outstanding and if all the facts specified in this clause (vii) are present, that a certificate of an Independent Appraiser or Independent Financial Advisor as to the Fair Market Value of the Property to be released will be furnished under subdivision (c) of this Section;

(b) in case it shall be stated pursuant to clause (a)(vii) that the same shall be furnished, a certificate of an Independent Appraiser, or if such Property consists of securities being pledged as collateral, a certificate of an Independent Financial Advisor, dated not more that 30 days prior to the application for such release, stating:

(1) the Fair Market Value, in the opinion of the signer, of the Property to be released; and

(2) that such release, in the opinion of the signer, will not impair the security under this Indenture and any indenture supplemental hereto in contravention of the terms hereof and thereof;

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(c) any Property other than cash or obligations received or to be received as consideration for any Property so to be released or, if the Property so to be released is subject to a Prior Lien, a certificate of the trustee, mortgagee or other holder of such Prior Lien that it has received such money or obligations received and has been irrevocably authorized by the Company to pay over to the Trustee any balance of such money or obligations, remaining after the discharge of such Prior Lien; and, if any Property other than cash or obligations is included in the consideration for any Property so to be released, such instruments of conveyance, assignment and transfer, if any, as may be necessary, in the Opinion of Counsel hereinafter referred to, to subject to the Lien of this Indenture and any such indenture supplemental hereto all the right, title and interest of the Company in and to such Property;

(d) an Opinion of Counsel substantially to the effect (i) either (1) that such instruments of conveyance, assignment and transfer as have been or are then delivered to the Trustee are sufficient to subject to the Lien of this Indenture and any such indenture supplemental hereto all the right, title and interest of the Company in and to any Property, other than cash and obligations, that is included in the consideration for the Property so to be released, or (2) that no instruments of conveyance, assignment or transfer are necessary for such purpose, (ii) that the Company has corporate power to own all Property included in the consideration for such release, and (iii) that all conditions precedent herein provided and provided in any indenture supplemental hereto relating to the release of the Property in question have been complied with.

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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed all as of the day and year first above written.

ACCLAIM ENTERTAINMENT, INC.
By:	/S/    GERARD F. AGOGLIA
	Title:   Chief Financial Officer

U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee
By:	/S/    PATRICK J. CROWLEY
	Title:   Vice President

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EX-10.45

EXHIBIT 10.45

ACCLAIM ENTERTAINMENT, INC.

TO

U.S. BANK TRUST NATIONAL ASSOCIATION,

AS TRUSTEE

FIRST SUPPLEMENTAL INDENTURE

Dated February 17, 2004

$25,000,000

9% Senior Subordinated Convertible Notes due 2007

Supplemental to Indenture Dated February 17, 2004

ACCLAIM ENTERTAINMENT, INC.

to

U.S. BANK TRUST NATIONAL ASSOCIATION,

AS TRUSTEE

FIRST SUPPLEMENTAL INDENTURE

9% Senior Subordinated Convertible Notes due 2007

TABLE OF CONTENTS

			Page
ARTICLE ONE DEFINITIONS			2
	Section 1.01.	Definitions	2
ARTICLE TWO FORM OF NOTES			17
	Section 2.01.	Form of Notes	17
	Section 2.02.	Form of Face of Notes	17
	Section 2.03.	Form of Reverse of Notes	20
	Section 2.04.	Form of Conversion Notice	23
ARTICLE THREE THE NOTES			24
	Section 3.01.	Establishment of Series; Amount	24
	Section 3.02.	Defeasance	24
ARTICLE FOUR REMEDIES			25
	Section 4.01.	Events of Default	25
ARTICLE FIVE COVENANTS			26
	Section 5.01.	Limitations on Certain Indebtedness	26
	Section 5.02.	Investment Company Act	26
	Section 5.03.	Limitations on Asset Sales, Liquidations, Etc.; Certain Matters	26
	Section 5.04.	Limitations on Liens	27
	Section 5.05.	Certain Obligations	27
	Section 5.06.	Notice of Defaults	27
	Section 5.07.	Further Documentation; Pledge of Instruments and Chattel Paper	27
	Section 5.08.	Indemnification	28
	Section 5.09.	Maintenance of Records	28
	Section 5.10.	Limitation on Liens on Collateral	28
	Section 5.11.	Limitations on Dispositions of Collateral	29
	Section 5.12.	Performance of Contracts and Agreements Giving Rise to Accounts	29
	Section 5.13.	Further Identification of Collateral	29
	Section 5.14.	Notices	29
	Section 5.15.	Changes in Locations, Name, Etc.	29
	Section 5.16.	Additional Collateral in Respect of Pledged Securities	29

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	Section 5.17.	Limitations on Dividends and Other Share Payments	30
	Section 5.18.	Limitation on Certain Issuances of Securities	31
ARTICLE SIX PLEDGE, SECURITY INTEREST AND MORTGAGE; COLLATERAL AND MORTGAGED PROPERTY			31
ARTICLE SEVEN REPURCHASE UPON A REPURCHASE EVENT			31
	Section 7.01.	Repurchase Right	31
	Section 7.02.	Notices; Method of Exercising Repurchase Rights, Etc.	32
	Section 7.03.	Other	33
	Section 7.04.	Form of Company Notice	33
	Section 7.05.	Form of Holder Notice	34
ARTICLE EIGHT CONVERSION			35
	Section 8.01.	Right to Convert	35
	Section 8.02.	Exercise of Conversion Right; Issuance of Common Stock on Conversion	36
	Section 8.03.	Adjustment of Conversion Price	39
(k)	Additional Reductions in Conversion Price		45
	Section 8.04.	Effect of Reclassification, Consolidation, Merger or Sale	45
	Section 8.05.	Reservation of Shares; Shares to Be Fully Paid; Listing of Common Stock	47
	Section 8.06.	Notice to Holders Prior to Certain Actions	47
	Section 8.07.	Limitation on Conversions	48
ARTICLE NINE OPTIONAL REDEMPTION			49
	Section 9.01.	Optional Redemption Right	49
	Section 9.02.	Optional Redemption Notice	50
	Section 9.03.	Payment of Optional Redemption Price	52
	Section 9.04.	Redemption to Be Pro Rata; Minimum Amount	52
	Section 9.05.	Effect of Conversions; Limitation on Redemptions	52
	Section 9.06.	No Prepayment	53
ARTICLE TEN SUBORDINATION			53
	Section 10.01.	Agreement to Subordinate	53
	Section 10.02	Liquidation, Dissolution, Bankruptcy	53
	Section 10.03	Senior Indebtedness	54
	Section 10.04.	Acceleration of Payment of Notes and Exercise of Remedies	54
	Section 10.05.	When Distribution Must Be Paid Over	54
	Section 10.06.	Subrogation	54
	Section 10.07.	Relative Rights	55
	Section 10.08.	Subordination May Not Be Impaired by Company	55
	Section 10.09.	Reinstatement	55
	Section 10.10.	Proofs of Claim	55
	Section 10.11.	Non-Impairment	56
	Section 10.12.	No Modification	56
	Section 10.13.	Waivers; Reliance by Holders of Senior Indebtedness	57
	Section 10.14.	Enforcement of Rights	57
	Section 10.15.	Prohibition of Payment of Notes	57

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	Section 10.16	Trustee Not Charged with Knowledge of Prohibition	57
	Section 10.17	Rights of Trustee as Holder of Senior Indebtedness	57
	Section 10.18	Trustee Not Fiduciary for Holders of Senior Indebtedness	58
ARTICLE ELEVEN SUNDRY PROVISIONS			58
	Section 11.01.	Trustee Not Responsible for Recitals	58
	Section 11.02.	Effect of Headings and Table of Contents	58
	Section 11.03.	Successors and Assigns	58
	Section 11.04.	Separability Clause	58
	Section 11.05.	Benefits of Supplemental Indenture	58
	Section 11.06.	Governing Law	58
	Section 11.07.	Counterparts	58
	Section 11.08.	Enforceable Obligation	58
	Section 11.09.	Certain Performance	59
	Section 11.10.	Amendments and Waivers	59
	Section 11.11.	Reference to and Effect on Original Indenture	59
	Section 11.12.	Notices	59
	Section 11.13.	Payment of Notes on Repurchase; Deposit of Repurchase Price, Etc.	60
	Section 11.14	Certain Determinations	61

SCHEDULE I	Certain Permitted Indebtedness
SCHEDULE II	Certain Pledged Securities
SCHEDULE III	Subordination Of Indebtedness

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ACCLAIM ENTERTAINMENT, INC.

TO

U.S. BANK TRUST NATIONAL ASSOCIATION, AS TRUSTEE

FIRST SUPPLEMENTAL INDENTURE

9% Senior Subordinated Convertible Notes due 2007

FIRST SUPPLEMENTAL INDENTURE, dated February 17, 2004, between ACCLAIM ENTERTAINMENT, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the “Company”), having its principal executive office at One Acclaim Plaza, Glen Cove, New York, 11542, and U.S. BANK TRUST NATIONAL ASSOCIATION, a national banking association duly organized and existing under the laws of the United States of America, as Trustee under the Original Indenture mentioned below (herein called the “Trustee”).

RECITALS OF THE COMPANY

The Company and the Trustee have heretofore entered into an Indenture, dated February 17, 2004 (hereinafter called the “Original Indenture”), to provide, among other things, for the issuance from time to time of Securities, unlimited as to principal amount, all as provided in the Original Indenture.

The Securities authorized hereby are the first series of Securities to be authorized under the Original Indenture.

Section 901 of the Original Indenture provides that, without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time or from time to time, may enter into one or more indentures supplemental to the Original Indenture, in form satisfactory to the Trustee, for the purpose of, among other things, establishing the form or terms of Securities of any series as permitted by Sections 201 and 301 of the Original Indenture, to add to, change or eliminate any provisions of the Original Indenture in respect of any one or more series of Securities, to secure the Securities of one or more series or to make provision with respect to the conversion rights of Holders of Securities of one or more series.

The Company desires to issue from time to time its 9% Senior Subordinated Convertible Notes due 2007, and to add to the provisions of the Original Indenture certain provisions with respect to such Notes.

The entry into this Supplemental Indenture by the parties hereto is in all respects authorized by the provisions of the Original Indenture.

All things necessary to make this Supplemental Indenture a valid agreement of the Company in accordance with its terms have been done.

NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, without preference, priority or distinction of any of the Notes over any of the others by reason of priority in time of issuance or otherwise, except as otherwise provided in the Original Indenture or this Supplemental Indenture, as follows:

ARTICLE ONE

DEFINITIONS

Section 1.01. Definitions. (a) For all purposes of this Supplemental Indenture, except as otherwise herein expressly provided or unless the context otherwise requires:

(1) The terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular;

(2) terms used herein in capitalized form and defined in the Original Indenture and not otherwise defined herein shall have the respective meanings specified in the Original Indenture;

(3) the words “herein”, “hereof” and “hereunder” and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular Article, Section or other subdivision of this Supplemental Indenture;

(4) the terms defined in the introductory paragraph hereof and in the first paragraph of the Recitals of the Company herein shall have the respective meanings specified therein;

(5) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Accounts” means all rights to payment for goods sold or leased or for services rendered, whether or not such rights have been earned by performance.

“Aggregation Persons” shall have the meaning provided in Section 8.07(a).

“AMEX” means the American Stock Exchange, Inc.

“Applicable Rate” means 9 percent per annum; provided, however, that if an Event of Default shall have occurred, then the Applicable Rate shall be increased to the Default Rate during the period from the date of such Event of Default until the date no Event of Default

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is continuing (or in either such case such lesser rate as shall be the highest rate permitted by applicable law).

“Business Day” means any day other than a Saturday, Sunday or a day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed.

“Chattel Paper” shall have the meaning assigned to such term under the Code.

“Code” means the Uniform Commercial Code as in effect from time to time in the State of New York.

“Collateral” shall have the meaning assigned to such term in the security agreement or supplemental indenture hereto to be executed and delivered as contemplated by Section 5(h) of the Note Purchase Agreement, the form and contents of which are set forth on Annex VII attached thereto subject to the consent and final approval of GMAC.

“Common Stock” includes the Company’s Common Stock, $.02 par value, and the related Preferred Share Purchase Rights (and any similar rights issued with respect to the Common Stock), as authorized on the date hereof, and any other securities into which or for which the Common Stock or the related Preferred Share Purchase Rights (and any similar rights issued with respect to the Common Stock) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise and any stock (other than Common Stock) and other securities of the Company or any other Person which the Holders at any time shall be entitled to receive, or shall have received, on the conversion of the Notes, in lieu of or in addition to Common Stock.

“Common Stock Equivalent” means any warrant, option, subscription or purchase right with respect to shares of Common Stock, any security convertible into, exchangeable for, or otherwise entitling the holder thereof to acquire, shares of Common Stock or any warrant, option, subscription or purchase right with respect to any such convertible, exchangeable or other security.

“Company” shall have the meaning provided in the first paragraph of this Supplemental Indenture.

“Company Certificate” means a certificate of the Company signed by an Officer.

“Company Notice” means a Company Notice in the form set forth in Section 7.04.

“Contracts” shall have the meaning assigned to such term under the Code.

“Conversion Date” means the date on which a Conversion Notice is given in accordance with Section 8.02(a).

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“Conversion Notice” means a duly executed Notice of Conversion of 9% Senior Subordinated Convertible Note due 2007 substantially in the form set forth in Section 2.04.

“Conversion Price” means $0.65, subject to adjustment as provided in Section 8.03.

“Current Market Price” shall mean the arithmetic average of the daily Market Prices per share of Common Stock for the ten consecutive Trading Days immediately prior to the date in question; provided, however, that (1) if the “ex” date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 8.03(a), (b), (c), (d), or (e) occurs during such ten consecutive Trading Days, the Market Price for each Trading Day prior to the “ex” date for such other event shall be adjusted by multiplying such Market Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the “ex” date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 8.03(a), (b), (c), (d), or (e) occurs on or after the “ex” date for the issuance or distribution requiring such computation and prior to the day in question, the Market Price for each Trading Day on and after the “ex” date for such other event shall be adjusted by multiplying such Market Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the “ex” date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Market Price for each Trading Day on or after such “ex” date shall be adjusted by adding thereto the amount of any cash and the Fair Market Value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 8.03(d), whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such “ex” date. For purposes of any computation under Section 8.03(d), the Current Market Price of the Common Stock on any date shall be deemed to be the arithmetic average of the daily Market Prices per share of Common Stock for such day and the next two succeeding Trading Days; provided, however, that if the “ex” date for any event (other than the Tender Offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 8.03(a), (b), (c), (d), or (e), occurs on or after the Expiration Time for the Tender Offer requiring such computation and prior to the day in question, the Market Price for each Trading Day on and after the “ex” date for such other event shall be adjusted by multiplying such Market Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term “ex” date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades, regular way, on the relevant exchange or in the relevant market from which the Market Price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades, regular way, on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (3) when used with respect to any Tender Offer means the first date on which the Common Stock trades, regular way, on such exchange or in such market after the Expiration Time of such Tender Offer. Notwithstanding the

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foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to Section 8.03, such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of Section 8.03 and to avoid unjust or inequitable results as determined in good faith by the Board of Directors.

“Default” means any event that is, or with the passage of time or the giving of notice or both would become, an Event of Default.

“Default Rate” means 14 percent per annum (or such lesser rate equal to the highest rate permitted by applicable law).

“Depositary” means The Depository Trust Company.

“Documents” shall have the meaning assigned to such term under the Code.

“Equipment” shall have the meaning provided in Annex VI to the Note Purchase Agreement.

“Event of Default” shall have the meaning provided in Section 4.01.

“Excluded Shares” shall have the meaning provided in Section 8.07.

“Expiration Time” shall have the meaning provided in Section 8.03(f).

“Extended Redemption Date” means with respect to any Note or portion thereof that is an Inconvertible Note, the date that is 20 Trading Days after the latest date on which such Note or portion thereof no longer is an Inconvertible Note.

“Fundamental Change” means

(a) Any consolidation or merger of the Company with or into another entity where the stockholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving entity of such consolidation or merger immediately following such transaction; or the sale of all or substantially all of the assets of the Company and the Subsidiaries in a single transaction or a series of related transactions; or

(b) The occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) which is not all or substantially all common stock which is (or will, upon consummation of or immediately following such transaction or event, will be) listed on the NYSE or the AMEX or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting of securities prices; or

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(c) The acquisition by a Person or entity or group of Persons or entities acting in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Company representing 50% or more of the combined voting power of the outstanding voting securities of the Company ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors.

“General Intangibles” shall have the meaning assigned to such term under the Code.

“Generally Accepted Accounting Principles” for any Person means the generally accepted accounting principles and practices applied by such Person from time to time in the preparation of its audited financial statements.

“GMAC” means 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 Credit Agreement” means the 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, as lender, as amended and restated on February 28, 1995, and as amended thereafter.

“GMAC Intercreditor Agreement” means such intercreditor agreement or agreements as GMAC shall present to the Trustee and the Trustee shall execute and deliver on terms satisfactory to GMAC relating to their respective rights and remedies with respect to the Collateral and the Mortgaged Property, unless such intercreditor agreement contains terms relating to the Trustee that are unsatisfactory as they relate to the Trustee.

“Government Obligations” means direct obligations of, or obligations the timely payment of the principal of and the interest on which are unconditionally guaranteed by, the United States of America and which are not, by their terms, callable.

“Guaranty” means any obligation, contingent or otherwise, of any Person, directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person:

(1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or maintain financial statement conditions or otherwise); or

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(2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part);

provided, however, that the term “Guaranty” will not include endorsements for collection or deposit in the ordinary course of business. The term “guarantee” used as a verb has a corresponding meaning.

“Holder Notice” means a Holder Notice in the form set forth in Section 7.05.

“Improvements” shall have the meaning provided in Annex VI to the Note Purchase Agreement.

“Inconvertible Notes” shall have the meaning provided in Section 9.05(b).

“Indebtedness,” when used with respect to any Person, and without duplication means:

(1) all indebtedness, obligations and other liabilities (contingent or otherwise) of such Person for borrowed money (including obligations of the Company in respect of overdrafts, foreign exchange contracts, currency exchange agreements, Interest Rate Protection Agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments) or evidenced by bonds, debentures, notes or other instruments for the payment of money, or incurred in connection with the acquisition of any property, services or assets (whether or not the recourse of the lender is to the whole of the assets of such Person or to only a portion thereof), other than any account payable or other accrued current liability or obligation to trade creditors incurred in the ordinary course of business in connection with the obtaining of materials or services;

(2) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees, bankers’ acceptances, surety bonds, performance bonds or other guaranty of contractual performance;

(3) all obligations and liabilities (contingent or otherwise) in respect of (a) leases of such Person required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person and (b) any lease or related documents (including a purchase agreement) in connection with the lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the landlord and the obligations of such Person under such lease or related document to purchase or to cause a third party to purchase the leased property;

(4) all obligations of such Person (contingent or otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or

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agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement;

(5) all direct or indirect Guaranties or similar agreements by such Person in respect of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness, obligations or liabilities of another Person of the kind described in clauses (1) through (4) of this definition;

(6) any indebtedness or other obligations described in clauses (1) through (5) of this definition secured by any Lien existing on property which is owned or held by such Person, regardless of whether the indebtedness or other obligation secured thereby shall have been assumed by such Person; and

(7) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (1) through (6) of this definition;

provided, however, that “Indebtedness” shall not include trade debt incurred in the ordinary course of business to trade creditors that is payable on customary trade terms.

“Interest Payment Dates” shall mean each April 1 and October 1, commencing October 1, 2004, and the Stated Maturity. Accrued and unpaid interest shall also be paid to the Conversion Date as provided in Section 8.01.

“Instrument” shall have the meaning assigned to such term under the Code.

“Interest Rate Protection Agreement” means, with respect to any Person, any interest rate swap agreement, interest rate cap or collar agreement or other financial agreement or arrangement designed to protect such person against fluctuations in interest rates, as in effect from time to time.

“Inventory” shall have the meaning assigned to such term under the Code, and in any event, including all inventory, merchandise, goods and other personal property that are held by or on behalf of a Person for sale or lease or to be furnished under a contract of service or which give rise to any Account, including returned goods.

“Issuance Date” means the date any Note was first issued to an original Holder of such Notes.

“Issuing Agent” means the Company, its successor or such other person who shall be serving as transfer agent and registrar for the Common Stock and who shall have been authorized by the Company to act as conversion agent for the Notes in accordance with the Issuing Agent Instruction and the name, address and telephone number of whom shall have been given to the Trustee and the Holders by notice from the Company.

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“Issuing Agent Instruction” means the Issuing Agent Instruction, dated February 17, 2004, from the Company to the Issuing Agent for the benefit of the Holders and the holders from time to time of the Warrants.

“Land” shall have the meaning provided in Annex VI to the Note Purchase Agreement.

“Majority Holders” means at any time Holders who hold Notes that are Outstanding which, based on the Outstanding principal amount thereof, represent a majority of the aggregate Outstanding principal amount of all the Notes.

“Market Price” with respect to any security on any day shall mean the closing bid price of such security on such day on the Nasdaq or the NYSE or the AMEX, as applicable, or, if such security is not listed or admitted to trading on the Nasdaq, the NYSE or the AMEX, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, in any such case as reported by Bloomberg, L.P. or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question, as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution.

“Mortgage” means the second mortgage on the Mortgaged Property as contemplated in Section 5(h), Article 10 and Annex VI to the Note Purchase Agreement.

“Mortgaged Property” shall have the meaning contemplated in Section 5(h), Article 10 and Annex VI to the Note Purchase Agreement.

“Nasdaq” means the Nasdaq National Market or the Nasdaq SmallCap Market.

“New York UCC” means the Uniform Commercial Code as in effect from time to time in the State of New York.

“Newly Issued Shares” shall have the meaning provided in Section 8.03(g).

“1934 Act” means the Securities Exchange Act of 1934, as amended.

“1933 Act” means the Securities Act of 1933, as amended.

“Note Purchase Agreement” means the Note Purchase Agreement, dated February 17, 2004, by and between the Company and the original Holder of the Notes.

“Notes” means the Company’s 9% Senior Subordinated Convertible Notes due 2007 issued pursuant to the Original Indenture and this Supplemental Indenture.

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“NYSE” means the New York Stock Exchange, Inc.

“Obligations” means:

(1) the full and prompt payment when due of all obligations and liabilities to the Holders, whether now existing or hereafter arising, under the Notes, this Supplemental Indenture or the other Transaction Documents and the due performance and compliance with the terms of the Notes and the other Transaction Documents;

(2) any and all sums advanced in accordance with the terms of the Notes, this Supplemental Indenture or applicable law by the Trustee or any Holder in order to preserve the Collateral or to preserve the Trustee’s security interest in the Collateral;

(3) in the event of any proceeding for the collection or enforcement of any obligations or liabilities of the Company referred to in the immediately preceding clauses (1) and (2) in accordance with the terms of the Notes and this Supplemental Indenture, the reasonable expenses of re-taking, holding, preparing for sale, selling or otherwise disposing of or realizing on the Collateral, or of any other exercise by the Trustee of its rights hereunder, together with reasonable attorneys’ fees and court costs; and

(4) any amounts for which any Holder is entitled to indemnification under Section 5.11.

“Officer” means the Chairman of the Board, the Chief Executive Officer, the President or the Chief Financial Officer of the Company.

“Optional Redemption Date” means each Business Day on which Notes are to be redeemed in whole or in part pursuant to Article Nine.

“Optional Redemption Notice” means an Optional Redemption Notice in the form specified in Section 9.02(b).

“Optional Redemption Period” means the period which commences on August 18, 2004 and ends on the Maturity Date.

“Optional Redemption Price” means an amount in cash equal to the sum of (1) 100% of the outstanding principal amount of the Note or portion thereof specified in an Optional Redemption Notice as being redeemed by the Company plus (2) accrued and unpaid interest on such principal amount to the applicable Optional Redemption Date plus (3) accrued and unpaid Default Interest, if any, on the amount referred to in the immediately preceding clause (2) at the Default Rate to the Optional Redemption Date, subject to reduction pursuant to Section 9.05(a).

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“Optional Redemption Threshold Price” means for any Trading Day in each period specified below the product obtained by multiplying (x) the Conversion Price in effect on such date times (y) the applicable Threshold Redemption Percentage for such Trading Day:

Period	Threshold Redemption Percentage
August 19, 2004 to February 18, 2005	250%
February 19, 2005 to August 19, 2005	200%
August 20, 2005 to February 18, 2006	175%
February 19, 2006 and thereafter	150%

“Permitted Encumbrances” shall have the meaning provided in Annex VI to the Note Purchase Agreement.

“Permitted Indebtedness” means

(1) the total aggregate maximum amount of all borrowing availability (including the availability for the Company and/or any of its Subsidiaries to open letters of credit) of the Company, its Subsidiaries and Affiliates under the GMAC Credit Agreement, and an additional amount of Indebtedness of the Company, its Subsidiaries and Affiliates to GMAC not to exceed $5,000,000.00;

(2) Indebtedness represented by the Notes;

(3) Indebtedness between or among the Company and any of its Subsidiaries;

(4) Indebtedness incurred by the Company or any of its Subsidiaries for the purpose of purchasing or otherwise acquiring goods, assets, materials or services in the ordinary course of business so long as the amount of such indebtedness does not exceed the purchase or acquisition price thereof or Indebtedness representing amounts recorded as accounts payable, trade payables, royalties, advances or Guaranties of minimum royalties in respect of agreements entered into by the Company and any of its Subsidiaries for the acquisition, development or distribution of intellectual properties, games or other products in the ordinary course of business and which is recorded on the books and records of the Company and its Subsidiaries as deferred expenses;

(5) Indebtedness representing deposits held by the Company or any Subsidiary (which are unsecured);

(6) Indebtedness constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business in respect of workers’ compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers’ compensation claims or self-insurance, and obligations in respect of performance and surety bonds and completion guarantees incurred in the ordinary course of business; provided, however, that upon the drawing of such letters of credit or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence;

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(7) Guaranties by the Company or any of its Subsidiaries of Indebtedness of the Company or any of its Subsidiaries which Indebtedness is Permitted Indebtedness that is of the type or character specified in clauses (1), (2), (4), (6) or (9) of this definition;

(8) the Company’s 16% Convertible Subordinated Notes due 2010 in the aggregate principal amount of $11,800,000.00; and

(9) Permitted Refinancing Indebtedness issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, in whole or in part, the Permitted Indebtedness identified in clauses (1), (2), (4) or (8) of this definition.

“Permitted Liens” means any of the following Liens, so long as (except in the case of clause (2) of this definition) such Lien does not relate to any of the Collateral:

(1) Liens securing Permitted Indebtedness specified in clause (1) of the definition thereof;

(2) Liens upon any property of any Subsidiary or Subsidiaries of the Company as security for indebtedness owing to the Company;

(3) Liens securing the Notes ratably and not securing any other Indebtedness or obligation of the Company or any Subsidiary;

(4) Liens for taxes or assessments or governmental charges or levies on the property of the Company if such taxes or assessments or charges or levies shall not at the time be due and payable or if the amount, applicability, or validity of any such tax, assessment, charge or levy shall currently be contested in good faith by appropriate proceedings or necessary preliminary steps are being taken to contest, compromise or settle the amount thereof or to determine the applicability or validity thereof and if the Company shall have set aside on its books reserves (segregated to the extent required by sound accounting practice) deemed by it adequate with respect thereto; deposits or pledges to secure payment of worker’s compensation, unemployment insurance, old age pensions or other social security; deposits or pledges to secure performance of bids, tenders, contracts (other than contracts for the payment of money borrowed or credit extended), leases, public or statutory obligations, surety or appeal bonds, or other deposits or pledges for purposes of like general nature in the ordinary course of business; mechanics’, carriers’, workers’, repairmen’s or other like Liens arising in the ordinary course of business securing obligations which are not overdue for a period of 60 days, or which are in good faith being contested or litigated, or deposits to obtain the release of such Liens; Liens created by or resulting from any litigation or legal proceedings or proceedings being contested in good faith by appropriate proceedings, provided any execution levied thereon shall be stayed; leases made, or existing on property acquired, in the ordinary course of business; landlords’ Liens under leases to which the Company is a

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party; and zoning restrictions, easements, licenses or restrictions on the use of real property or minor irregularities in title thereto; provided that all such Liens described in this subsection (3) do not, in the aggregate, materially impair the use of such property in the operations of the business of the Company or the value of such property for the purpose of such business;

(5) Liens upon specific items of inventory or other goods of any Person and on proceeds thereof securing such Person’s obligations in respect of banker’s acceptances issued or created for the account of such Person to facilitate the purchase, shipment, or storage of such inventory or other goods;

(6) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; and

(7) Liens securing Permitted Indebtedness described in clause (4) of the definition of “Permitted Indebtedness” which relate only to the goods, assets, materials or services purchased or acquired with such Permitted Indebtedness and do not extend to any other assets or property of the Company or any of its Subsidiaries;

“Permitted Refinancing Indebtedness” means any Indebtedness of the Company or any of its Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Subsidiaries (other than intercompany Indebtedness); provided that all of the following requirements are met:

(1) the principal amount (or accreted value, if applicable, determined in accordance with Generally Accepted Accounting Principles) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable, determined in accordance with Generally Accepted Accounting Principles) of the Indebtedness extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued interest on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded and the amount of all expenses and premiums incurred in connection therewith);

(2) such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity not less than the Weighted Average Life to Maturity of the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness is subordinated in right of payment to the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

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(4) such Indebtedness is incurred by such of the Company or its Subsidiary that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

(5) the Indebtedness that is being extended, refinanced, renewed, replaced, defeased or refunded will not remain outstanding after the incurrence of such Permitted Refinancing Indebtedness; provided, however, that in the case of any extension, refinancing, renewal, replacement, defeasance or refunding of Indebtedness referred to in the definition of Permitted Indebtedness, if prior notice to the holder or holders of the Indebtedness to be extended, refinanced, renewed, replaced, defeased or refunded is required in order to repay such Indebtedness, then such Indebtedness may remain outstanding for up to 60 days after the incurrence of such Permitted Refinancing Indebtedness so long as on or before the date of incurrence of such Permitted Refinancing Indebtedness the Company or the applicable Subsidiary shall have (a) given such notice to the holder or holders of such Indebtedness and (b) irrevocably deposited in trust with a trustee (other than the Company or any of its Subsidiaries), for the exclusive benefit of the holder or holders of the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded, an amount at least equal to the aggregate amount that the Company or such Subsidiary will be obligated to pay in respect of such Indebtedness from such date to the date of payment in full of such Indebtedness; and

“Pledged Securities” means:

(1) the outstanding shares of capital stock of the Company’ Subsidiaries described on Schedule II hereto as “Pledged Securities”; and

(2) any and all other shares of capital stock or other securities of any Subsidiary and any and all rights to acquire capital stock or other securities of any Subsidiary hereafter acquired by the Company and required to be delivered to the Trustee in accordance with Section 5.16.

“Preferred Share Purchase Rights” means the Preferred Share Purchase Rights issued or issuable pursuant to the Rights Agreement (or any similar right hereafter issued by the Company with respect to the Common Stock).

“Proceeds” shall have the meaning assigned to such term under the Code.

“Record Date” shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).

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“Registration Event” shall have the meaning provided in the Note Purchase Agreement.

“Registration Statement” shall have the meaning provided in the Note Purchase Agreement.

“Repurchase Date” means with respect to any Repurchase Event the date that is five Business Days a Holder exercises the repurchase right pursuant to Article Seven with respect to such Repurchase Event.

“Repurchase Event” means the occurrence of any one or more of the following events:

(a) Any Fundamental Change; or

(b) The inability of any Holder for 135 days (whether or not consecutive) after the date the Registration Statement is declared effective, as provided in the Note Purchase Agreement, in any period of 365 consecutive days to sell such Holder’s Notes or the shares of Common Stock issued or issuable to such Holder upon conversion of Notes or exercise of Warrants pursuant to the Registration Statement by reason of the failure of the Registration Statement to meet the requirements of the 1933 Act, the 1934 Act or any of the rules or regulations under either thereof.

“Repurchase Percentage” means 100%.

“Repurchase Price” means with respect to any repurchase of a Note pursuant to Sections 7.01 and 7.02 an amount in cash equal to the sum of (1) the outstanding principal amount of such Note to be repurchased in accordance with Article Seven, plus (B) accrued and unpaid interest on such principal amount to the date the Repurchase Price is required to be paid, plus (C) accrued and unpaid Default Interest, if any, thereon at the Default Rate from the date the Repurchase Price is required to be paid to the date of payment of the Repurchase Price or deposit thereof in accordance with Section 11.12.

“Restricted Ownership Percentage” shall have the meaning provided in Section 8.07(b).

“Rights Agreement” means the Rights Agreement, dated as of June 5, 2000 between the Company and American Securities Transfer & Trust, Inc.

“SEC” means the Securities and Exchange Commission.

“SEC Effective Date” shall have the meaning provided in Section 8.03(f).

“Securities” shall have the meaning provided in Section 8.03(d).

“Security Interest” means the security interest granted in, and collateral assignment of, the Collateral pursuant to this Supplemental Indenture.

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“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 GMAC Credit Agreement; and

(b) any Indebtedness issued in exchange for the Senior Indebtedness identified in the immediately preceding clause (a), or any indebtedness arising from the satisfaction of the Senior Indebtedness identified in the immediately preceding clause (a) by a guarantor, any additional loans or advances hereafter made in respect of the Senior Indebtedness identified in the immediately preceding clause (a) and any amendment, modification, or change in the Senior Indebtedness identified in the immediately preceding clause (a) and the documents evidencing the same.

“Share Payments” shall have the meaning provided in Section 5.09.

“Specified Market Value” when used with respect to the Common Stock as of a specified date means with respect to each share of Common Stock the average of the closing prices of the Common Stock sold on all securities exchanges (including the Nasdaq and the Nasdaq SmallCap Market) on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on such day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if on such day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of five Trading Days consisting of the day as of which the Specified Market Value of Common Stock is being determined (or if such day is not a Trading Day, the Trading Day next preceding such day) and the four consecutive Trading Days prior to such day. If on the date for which Specified Market Value is to be determined the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the Specified Market Value of Common Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not an employee or director of the Company at the time of determination) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors.

“Stated Maturity” means for the Notes February 17, 2007.

“Subordination Terms” means the terms set forth in Schedule III to this Supplemental Indenture.

“Tender Offer” means a tender offer or exchange offer.

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“Trading Day” means a day on which any of the national securities exchange or Nasdaq which then constitutes the principal securities market for the Common Stock is open for general trading of securities.

“Transaction Documents” means the Original Indenture, this Supplemental Indenture, the Notes, the Note Purchase Agreement, the Warrants and the other agreements, instruments and documents contemplated hereby and thereby.

“Trigger Event” shall have the meaning provided in Section 8.03(d).

“Warrants” means the Common Stock Purchase Warrants of the Company issued or issuable to the original Holders of the Notes pursuant to the Note Purchase Agreement.

“Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date, the number of years (rounded to the nearest one-twelfth) obtained by dividing:

(1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect of such Indebtedness, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by

(2) the outstanding principal amount of such Indebtedness at such date.

ARTICLE TWO

FORM OF NOTES

Section 2.01. Form of Notes. The Notes shall be in substantially the form set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Original Indenture and this Supplemental Indenture, and may have such other letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing the Notes, as evidenced by their execution thereof.

Section 2.02. Form of Face of Notes.

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”). THE ISSUANCE TO THE HOLDER OF THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE 1933 ACT. PURSUANT TO THE NOTE PURCHASE AGREEMENT, THIS NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE ACQUIRED, FOR INVESTMENT ONLY AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF THE RESALE THEREOF UNDER THE 1933 ACT OR AN

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OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

ACCLAIM ENTERTAINMENT, INC.

9% Senior Subordinated Convertible Note due 2007

No.                                                  $                             

Acclaim Entertainment, Inc., a corporation duly organized and existing under the laws of Delaware (herein called the “Company,” which term includes any successor Person under the Original Indenture hereinafter referred to), for value received, hereby promises to pay to                                  , or registered assigns, the principal sum of                      Dollars (or such lesser principal amount of this Note as is outstanding on the date of payment) on February 17, 2007, and to pay interest thereon from the Issuance Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, on each Interest Payment Date in each year, commencing October 1, 2004, and at the Maturity of this Note, at the Applicable Rate, until the principal hereof is paid or made available for payment, provided that any principal or amount of interest which is overdue shall bear interest at a rate per annum equal to the Default Rate (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment, and such interest (“Default Interest”) shall be payable on demand. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Supplemental Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the fifth Business Day preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Default Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than ten days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Original Indenture and the Supplemental Indenture.

Payment of the principal of and any such interest on this Security and any other amounts payable in respect of this Security will be made at the office or agency of the Company maintained for that purpose in the city in which the Corporate Trust Office is located, 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 or, at the option of the Company and subject to the provisions of this Note; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register; provided further, however, that cash payments shall

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be made by wire transfer of immediately available funds to such account within the United States of America as the Holder may from time to time designate by notice to the Company in accordance with the Original Indenture and the Supplemental Indenture. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Original Indenture or the Supplemental Indenture or be valid or obligatory for any purpose.

Additional provisions of this Security are set forth on the other side of this Security.

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

Dated:	ACCLAIM ENTERTAINMENT, INC.
		By:
			Title:

Attest:

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee, certifies that this is one of the Securities of the series designated herein referred to in the within-mentioned Indenture.

By:
	Authorized Officer

Date of Authentication:

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Section 2.03. Form of Reverse of Notes. This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Original Indenture, dated as of February 17, 2004 (herein called the “Original Indenture,” which term shall have the meaning assigned to it in such instrument), between the Company and U.S. Bank Trust National Association, as Trustee (herein called the “Trustee,” which term includes any successor trustee under the Original Indenture), and the Supplemental Indenture, dated as of February 17, 2004, between the Company and the Trustee (herein called the “Supplemental Indenture,” which term shall have the meaning assigned to it in such instrument), and reference is hereby made to the Original Indenture, the Supplemental Indenture and all indentures supplemental thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $25,000,000 (except as otherwise provided in the Original Indenture and the Supplemental Indenture).

The Original Indenture and the Supplemental Indenture contain provisions for defeasance at any time of certain restrictive covenants, Events of Default or other circumstances with respect to this Security upon compliance with certain conditions set forth in the Original Indenture and the Supplemental Indenture. Certain of the Company’s obligations with respect to this Security are defeasible in accordance with Sections 1302 and 1303 of the Original Indenture and related provisions of the Supplemental Indenture.

Subject to the provisions of the Supplemental Indenture, the Holder of this Security is entitled, at its option, at any time prior to the close of business on February 17, 2007 (except that, if the Holder shall have exercised repurchase rights under Article Seven of the Supplemental Indenture, such conversion right shall terminate with respect to the portion of this Security to be repurchased on the last Trading Day prior to the later of (x) the date of such repurchase and (y) the date the Company pays or deposits in accordance with the Supplemental Indenture the applicable Repurchase Price, unless in any such case the Company shall default in payment due upon repurchase hereof) to convert the principal amount of this Security, or any portion of such principal amount which is at least $1,000 (or such lesser principal amount hereof as shall be outstanding at such time), into fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of this Security or portion hereof being converted by the Conversion Price in effect on the applicable Conversion Date, by giving a Conversion Notice in the manner provided in the Supplemental Indenture; provided, however, that, if at any time this Security is converted in whole or in part, the Company does not have available for issuance upon such conversion as authorized and unissued shares or in its treasury at least the number of shares of Common Stock required to be issued pursuant hereto, then, at the election of the Holder made by notice from the Holder to the Company, this Security (or portion hereof as to which conversion has been requested), to the extent that sufficient shares of Common Stock are not then available for issuance upon conversion, shall be converted into the right to receive from the Company, in lieu of the shares of Common Stock into which this Security or such portion hereof would otherwise be converted and which the Company is unable to issue, payment in an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock which the Company is unable to issue times (y) the arithmetic average of the Market Price for the Common Stock during the five

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consecutive Trading Days immediately prior to the applicable Conversion Date. Any such payment shall, for all purposes of this Security, be deemed to be a payment of principal in the principal amount of the Security converted, plus a premium equal to the total amount payable less the principal portion of this Security converted as to which such payment is required to be made because shares of Common Stock are not then available for issuance upon such conversion. In connection with conversion of a Note or portion thereof, the Holder shall be entitled to payment in respect of accrued and unpaid interest and accrued and unpaid Default Interest, if any, on such Note or portion thereof converted to the Conversion Date, provided, however, that in accordance with Section 307 of the Original Indenture where Notes are surrendered during a period between the close of business on a Regular Record Date and the opening of business on the next succeeding Interest Payment Date, funds equal to the interest to be paid on the next succeeding Interest Payment Date with respect to such Notes shall be paid by the Holder to the Company upon conversion. The Holder is not entitled to any rights of a holder of Common Stock until the Holder has converted this Security to Common Stock, and only to the extent this Security is deemed to have been converted to Common Stock under the Supplemental Indenture. The Conversion Rate is subject to adjustment as provided in the Supplemental Indenture.

If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Original Indenture and the Supplemental Indenture.

The Original Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Original Indenture at any time by the Company and the Trustee with the consent of the Holders of more than 50% in principal amount of the Securities at the time Outstanding of each series to be affected. The Original Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Original Indenture and the Supplemental Indenture and certain past defaults under the Original Indenture and the Supplemental Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

As provided in and subject to the provisions of the Original Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Original Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a

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direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.

No reference herein to the Original Indenture or the Supplemental Indenture and no provision of this Security or of the Original Indenture or the Supplemental Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Original Indenture and the Supplemental Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities of this series are issuable only in registered form without coupons. As provided in the Original Indenture and the Supplemental Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made to a Holder for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

All terms used in this Security which are defined in the Supplemental Indenture shall have the meanings assigned to them in the Supplemental Indenture.

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Section 2.04. Form of Conversion Notice. The Conversion Notice shall be in substantially the following form or, in the case of any particular conversion of a Note, in such other form as agreed by the Company and the converting Holder:

NOTICE OF CONVERSION OF

9% SENIOR SUBORDINATED CONVERTIBLE NOTE DUE 2007

OF ACCLAIM ENTERTAINMENT, INC.

To:	Acclaim Entertainment, Inc.
	One Acclaim Plaza
	Glen Cove, New York 11542
	Attention: Chief Financial Officer
	Facsimile No.: (516) 656-2045
	[Name and Address of Issuing Agent]
	Attention:
		Special Issuances
	Facsimile No.:

1. Pursuant to the terms of the 9% Senior Subordinated Convertible Note due 2007 (the “Note”), the undersigned hereby elects to convert $                         of the Note into shares of Common Stock of Acclaim Entertainment, Inc., a Delaware corporation, at a Conversion Price per share equal to $                    . Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note.

2. The number of shares of Common Stock issuable upon the conversion of the Note to which this Notice relates is                     .

3. Please issue a certificate or certificates for                      shares of Common Stock in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:

Name

Address

SS or Tax ID Number

Delivery Instructions for Common Stock:

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Date:                         

        Name

Signature of Registered Holder

(Must be signed exactly as name appears in the Note.)

ARTICLE THREE

THE NOTES

Section 3.01. Establishment of Series; Amount. There is hereby established a series of Securities entitled “9% Senior Subordinated Convertible Notes due 2007,” which shall be limited in aggregate principal amount to $25,000,000 (except as otherwise provided in the Original Indenture or this Supplemental Indenture). The Notes shall bear interest at the rate provided in the form of Notes and interest on the Notes shall be payable semi-annually on the Interest Payment Dates specified in the form of Notes to the Persons who are Holders of the Notes at the close of business on the fifth Business Day preceding each Interest Payment Date. The Notes shall not be Original Issue Discount Securities.

Section 3.02. Defeasance. Certain of the Company’s obligations with respect to the Notes shall be defeasible in accordance with Sections 1302 and 1303 of the Original Indenture. For purposes of any Defeasance of the Notes pursuant to Section 1302 of the Original Indenture, in addition to any obligations of the Company which shall survive as provided in Section 1302 of the Original Indenture until otherwise terminated or discharged, the Company’s obligations under Article Eight of this Supplemental Indenture shall survive until otherwise terminated or discharged as provided in this Supplemental Indenture. Any cash or property deposited by the Company with the Trustee pursuant to Section 1302 or 1303 of the Original Indenture in respect of the Notes shall constitute Collateral for purposes of this Supplemental Indenture.

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ARTICLE FOUR

REMEDIES

Section 4.01. Events of Default. “Event of Default,” whenever used in the Original Indenture or this Supplemental Indenture with respect to the Notes, means any of the following events:

(a) Failure to Pay Interest or Principal.

The Company fails (i) to pay any installment of interest on any Note when due and such failure continues for a period of five Business Days after the due date thereof or (ii) to pay principal on any Note upon Maturity; or

(b) Conversion and the Shares.

The Company fails to issue or cause to be issued shares of Common Stock to any Holder upon exercise by such Holder of such Holder’s conversion rights in accordance with this Supplemental Indenture and the Notes within ten Trading Days after the due date therefor in accordance with the terms of any Note or this Supplemental Indenture, as the case may be; or

(c) Breach of Certain Covenants or Warranties.

Default in the performance, or breach, of any covenant or warranty of the Company in Sections 5.01, 5.03, 5.04, 5.13, or 5.14 of this Supplemental Indenture; or

(d) Breach of Other Covenants or Warranties.

Default in the performance, or breach, of any covenant or warranty of the Company in this Supplemental Indenture (other than a covenant or warranty a default in the performance or breach of which is elsewhere in this Section specifically dealt with, and continuance of such default or breach for a period of 15 Business Days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of this series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(e) Breach of Representation or Warranty.

If any representation or warranty of the Company made herein or in any agreement or certificate given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect when made and there has been given, by facsimile transmission or registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of this series a written notice specifying such default or breach and stating that such notice is a “Notice of Default” hereunder; or

(f) Judgments.

Any court of competent jurisdiction shall enter one or more final judgments against the Company or any Subsidiary or any of their respective properties or other assets in an aggregate amount in excess of $2,000,000, which is not vacated, bonded, stayed, discharged, satisfied or waived for a period of 45 consecutive days; or

(g) Default Under Other Agreements and Instruments.

Any Indebtedness of the Company or any Subsidiary which has an outstanding principal amount in excess of $5,000,000 individually, or $10,000,000 in the aggregate, shall, in accordance with its terms, be declared to be due and payable, or required to be prepaid other than by a regularly scheduled or required payment prior to the stated maturity thereof; or

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(h) Original Indenture Events of Default.

Any Event of Default specified in Section 501(1) or 501(2) of the Original Indenture; or

(i) Security Interest; Pledged Securities; Mortgage.

All actions necessary (1) to create and perfect the Security Interest in the Collateral as a second priority perfected Security Interest, subject only to the Security Interest in favor of GMAC and (2) to grant to the Trustee for the benefit of the Holders of the Second Mortgage shall not have occurred on or before March 15, 2004; at any time after the perfection of the Security Interest in the Collateral the Trustee shall cease to have a second priority perfected Security Interest for the benefit of the Holders in any of the Collateral, second only to the Security Interest in favor of GMAC, other than Collateral that has been released from the Lien of this Supplemental Indenture in accordance with the terms of the Original Indenture and this Supplemental Indenture; at any time after the Mortgage is duly recorded, the Trustee shall cease to have pursuant to the Mortgage a valid and duly recorded mortgage on the Mortgaged Property that is junior to GMAC only; or any of the Pledged Securities shall not be duly and validly authorized, fully paid and non-assessable shares of capital stock of the issuer thereof.

ARTICLE FIVE

COVENANTS

So long as the Company shall have any obligation for any amount outstanding under any Note, unless otherwise consented to in advance by the Majority Holders:

Section 5.01. Limitations on Certain Indebtedness. The Company will not itself, and will not permit any Subsidiary to, create, assume, incur or in any manner become liable in respect of, including, without limitation, by reason of any business combination transaction (all of which are referred to herein as “incurring”), any Indebtedness other than Permitted Indebtedness.

Section 5.02. Investment Company Act. The Company will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended.

Section 5.03. Limitations on Asset Sales, Liquidations, Etc.; Certain Matters. The Company shall not, and shall not permit any of its Subsidiaries to,

(a) sell, convey or otherwise dispose of (including, without limitation, by way of lease or license) any assets which are material to the business or operations of the Company and its Subsidiaries, taken as a whole; or

(b) sell, convey, pledge, transfer or otherwise dispose of any of the Pledged Securities; or

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(c) liquidate, dissolve or otherwise wind up its affairs.

Section 5.04. Limitations on Liens. The Company will not itself, and will not permit any of its Subsidiaries to, create, assume or suffer to exist any Lien upon all or any part of its property of any character, whether owned at the date hereof or thereafter acquired, except Permitted Liens.

Section 5.05. Certain Obligations. The Company shall not enter into any agreement, arrangement or understanding, other than agreements with GMAC, with respect to (1) the Pledged Securities and (2) which would materially impair the rights and remedies of the Trustee with respect to the Collateral or the Mortgaged Property.

(b) The Company shall perform and comply in all material respects with the GMAC loan and security documents.

Section 5.06. Notice of Defaults. The Company shall notify the Trustee and the Holders promptly, but in any event not later than five Business Days after the Company becomes aware of the fact, of any failure by the Company to comply with this Article Five. If the Company fails to give a notice required by this Section 5.08 but nonetheless cures the failure to comply with this Article Five that gave rise to the Company’s obligation to give such notice within the cure period, if any, applicable to such failure to comply with this Article Five, from and after the time of such cure such failure to give such notice shall cease to be a default under this Section 5.08.

Section 5.07. Further Documentation; Pledge of Instruments and Chattel Paper. At any time and from time to time, upon the written request of the Trustee or Holders of at least 25% in principal amount of Notes that are at the time Outstanding, and at the sole expense of the Company, the Company will promptly and duly execute and deliver such further instruments and documents and take such further action as the Trustee or such Holders may reasonably request for the purpose of obtaining or preserving the full benefits of this Supplemental Indenture and of the rights and powers herein granted, including, without limitation, (i) the filing of any financing or continuation statements under the Code or similar laws in effect in any such jurisdiction with respect to the Liens created hereby and (ii) providing to the Trustee such documents or instruments as shall be necessary or desirable for the exercise by the Trustee on behalf of the Company of any and all rights relating to the Collateral or the Mortgaged Property. The Company also hereby authorizes the Trustee to file any such financing or continuation statement without the signature of the Company to the extent permitted by applicable law. The Company agrees that a carbon, photographic or other reproduction of this Supplemental Indenture may be filed as a financing statement or a mortgage or attached to a financing statement or a mortgage in any jurisdiction where permitted by applicable law for purposes of any filing to perfect or record the Lien in favor of the Trustee for the benefit of the Holders. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Trustee, duly endorsed in a manner satisfactory to the Trustee, to be held as Collateral pursuant to this Supplemental Indenture.

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Section 5.08. Indemnification. The Company agrees to indemnify and hold harmless the Trustee and each Holder from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and to reimburse the Trustee and each Holder for all costs and expenses, including reasonable attorneys’ fees and expenses, arising out of or resulting from this Supplemental Indenture, including, without limitation, any breach hereof or Event of Default hereunder, or the exercise by the Trustee or any Holder, as the case may be, of any right or remedy granted to it hereunder or under the other Transaction Documents under applicable law; provided, however, that the Company shall not be required to indemnify the Trustee or any Holder to the extent any claim, demand, loss, judgment, liability, cost or expense is determined by final judgment (not subject to further appeal) of a court of competent jurisdiction to have arisen primarily from the gross negligence or willful misconduct of the Trustee or such Holder, as the case may be. In no event shall the Trustee or any Holder be liable, in the absence of a determination of gross negligence or willful misconduct on its part by final judgment (not subject to further appeal) of a court of competent jurisdiction, for any matter or thing in connection with this Supplemental Indenture other than to account for moneys actually received by it in accordance with the terms hereof. If and to the extent that the obligations of the Company under this Section 5.11 are unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. In any suit, proceeding or action brought by the Trustee or any Holder under any Account or Contract that constitutes part of the Collateral for any sum owing thereunder, or to enforce any provisions of any such Account or Contract, the Company will save, indemnify and keep the Trustee and each Holder harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Company of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Company.

Section 5.09. Maintenance of Records. The Company will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Accounts that constitute part of the Collateral. For the further security of the Trustee for the ratable benefit of the Holders, the Company hereby grants to the Trustee, for the ratable benefit of the Holders, a security interest in all of the Company’s books and records pertaining to the Collateral, and the Company shall turn over any such books and records for inspection at the office of the Company to the Trustee or any Holder or to their respective representatives during normal business hours at the request of the Trustee upon reasonable prior notice from the Trustee or such Holder to the Company.

Section 5.10. Limitation on Liens on Collateral. The Company (x) will not create, incur or permit to exist, will defend the Collateral and the Mortgaged Property against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral or the Mortgaged Property, other than the Liens created hereby and Permitted Liens, and (y) will defend the right, title and interest of the Trustee in and to any of the Collateral and the Mortgaged Property against the claims and demands of all persons whomsoever other than Permitted Liens.

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Section 5.11. Limitations on Dispositions of Collateral. (a) Without the consent of the holders of a majority in principal amount of the Securities, the Company will not sell, transfer, lease, assign or otherwise dispose of any of the Collateral or the Mortgaged Property to any Person, including, without limitation, any Subsidiary, or attempt, offer or contract to do so, unless, by Board Resolution, it is determined that such Collateral or Mortgaged Property is no longer used or useful in the conduct of the business of the Company and its disposal is not materially disadvantageous to the Holders.

Section 5.12. Performance of Contracts and Agreements Giving Rise to Accounts. The Company will (i) exercise promptly and diligently each and every material right and perform each material obligation which it may have under each Contract that constitutes part of the Collateral and each agreement giving rise to an Account that constitutes part of the Collateral (other than any right of termination) except where the Company determines in its reasonable business judgment that the failure to exercise such right or perform such obligation is in the best interest of the Company.

Section 5.13. Further Identification of Collateral. The Company will furnish to the Trustee or any Holder from time to time, but no more than once within each six month period absent an Event of Default, upon the request of the Trustee or such Holder, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Trustee or such Holder may reasonably request, all in reasonable detail.

Section 5.14. Notices. The Company will advise the Trustee promptly, in reasonable detail, at its address in accordance with Section 11.11 (i) of any Lien (other than Liens permitted hereunder) on any of the Collateral or Mortgaged Property of which the Company has actual notice, and (ii) of any Event of Default or any event which, with notice or the lapse of time, or both, would become an Event of Default.

Section 5.15. Changes in Locations, Name, Etc. The Company will not (i) change the location of its chief executive office/chief place of business from One Acclaim Plaza, Glen Cove, New York, 11542 or remove its books and records from such location or (ii) change its name, identity or corporate structure to such an extent that any financing statement filed in connection with this Supplemental Indenture would become misleading, unless in the case of the preceding clauses (i) and (ii) it shall have given the Trustee at least 10 days prior written notice thereof and, prior to such action or event, shall have taken appropriate action to preserve and protect the Trustee’s security interest under this Supplemental Indenture.

Section 5.16. Additional Collateral in Respect of Pledged Securities. (1) In case any stock dividend shall be declared on any of the Pledged Securities, or any shares of stock or fractions thereof shall be issued pursuant to any stock split involving any of the Pledged Securities, or any distribution of capital shall be made on any of the Pledged Securities or from the issuer of any Pledged Securities, or any property shall be distributed upon or with respect to the Pledged Securities or from the issuer of any Pledged Securities pursuant to any

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recapitalization or reclassification of the capital of the issuer of any Pledged Securities, or pursuant to a reorganization thereof, the shares or other property so distributed shall be delivered to the Trustee as additional collateral security for the Obligations. The Company will forthwith deliver to the Trustee certificates therefor, accompanied by three undated stock powers duly executed in blank by the Company for each such certificate, with appropriate signature guarantees, in the case of capital stock or such other instruments of transfer as are acceptable to the Trustee, and will promptly thereafter deliver to the Trustee an Officers’ Certificate describing such stock and certifying that the same has been duly pledged to the Trustee and deposited with the Trustee hereunder. The delivery of such stock powers and such Officers’ Certificate shall not be deemed for any purpose to be acts required for creation of the Security Interest in such securities in favor of the Trustee for the benefit of the Holders.

(2) If an Event of Default occurs, then during any period in which an Event of Default is continuing, all cash dividends payable in respect of the Pledged Securities shall be paid to the Trustee and retained by it as part of the Collateral. The Trustee shall also be entitled to retain as part of the Collateral the following, all of which shall be received directly by the Trustee:

(A) all other or additional stock or securities or property (other than cash) paid or distributed by way of dividend or otherwise, as the case may be, in respect of the Pledged Securities;

(B) all other or additional stock or other securities or property (including cash) paid or distributed in respect of the Pledged Securities by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and

(C) all other or additional stock or other securities or property (including cash) which may be paid in respect of the Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation, dissolution, or similar corporate reorganization.

(3) All dividends, distributions or other payments which are received by the Company contrary to the provisions of this Section 5.16 shall be received in trust for the benefit of the Trustee, shall be segregated from other property or funds of the Company and shall be forthwith paid over to the Trustee by delivery to the Trustee as Collateral in the same form as so received (with any necessary endorsement). If, upon the dissolution or liquidation (in whole or in part) of any issuer of Pledged Securities, any sum shall be paid upon or with respect to any of the Pledged Securities, such sum shall be paid over to the Trustee to be held by the Trustee as additional collateral security for the Obligations.

Section 5.17. Limitations on Dividends and Other Share Payments.

The Company covenants and agrees that it will not declare or pay any dividends (other than dividends payable solely in shares of the Company on any shares of any class of its capital stock or make any payment on account of the purchase, redemption or other retirement or acquisition of any shares of such stock or make or declare any distribution in respect thereof, either directly or indirectly (such dividend payments, purchases, redemptions, retirements, acquisitions or distributions being herein called “Share Payments”).

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The Company shall not enter into any agreement or become bound by any obligation to make any Share Payment that would be prohibited by this Section 5.17.

The Company will not permit any of its Subsidiaries to purchase any shares of any class of the Company other than a purchase of newly issued shares from the Company for cash at a price per share equal to the Current Market Price on the date of purchase.

Section 5.18. Limitation on Certain Issuances of Securities. The Company shall not, and shall not permit any Subsidiary to (a) issue any Common Stock Equivalent that directly or indirectly is convertible into, exchangeable for, or otherwise entitles the holder to acquire, shares of Common Stock at a price that varies based on changes in the market price of the Common Stock, (b) directly or indirectly issue any Common Stock or Common Stock Equivalent under any agreement or arrangement that provides for re-pricing or adjusting the price at which Common Stock is issued in connection therewith or which adjusts the number of shares of Common Stock issued in connection therewith (other than customary anti-dilution provisions contained in the governing instrument) or (c) enter into any agreement for the issuance of shares of Common Stock under an arrangement for the Company to draw down from a commitment by any Person to issue shares of Common Stock or which allows the Company or such Subsidiary to exercise any put right with respect to shares of Common Stock or any similar transaction.

Section 5.19. Delisting of the Common Stock. If the Common Stock shall cease to be listed on any of the Nasdaq, the NYSE and AMEX, then from the effective date of such delisting until the Common Stock shall be relisted on any of the Nasdaq, the NYSE and AMEX, the Applicable Rate shall be 13 percent per annum.

ARTICLE SIX

PLEDGE, SECURITY INTEREST AND MORTGAGE; COLLATERAL

AND MORTGAGED PROPERTY

Subject to the execution of the GMAC Intercreditor Agreement, and to the rights of GMAC under the GMAC Credit Agreement, the Company and the Trustee shall enter into a Supplemental Indenture or other amendment to the Indenture to incorporate herein the provisions of Annex VI and Annex VII to the Note Purchase Agreement.

ARTICLE SEVEN

REPURCHASE UPON A REPURCHASE EVENT

Section 7.01. Repurchase Right. If a Repurchase Event occurs at any time when any Note is outstanding, in addition to any other right of the Holders, each Holder shall

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have the right, at such Holder’s option, to require the Company to repurchase at the Repurchase Price such Holder’s Notes, or any portion thereof specified by such Holder, by depositing an amount in cash with the Trustee equal to the applicable Repurchase Price payable to such Holder on or before the applicable Repurchase Date for such Repurchase Event.

Section 7.02. Notices; Method of Exercising Repurchase Rights, Etc. (a) On or before the fifth Business Day after the occurrence of a Repurchase Event, the Company shall give to the Trustee and each Holder a Company Notice of the occurrence of the Repurchase Event and of the repurchase right set forth herein arising as a result thereof. Such Company Notice shall set forth:

(i) the date by which the repurchase right must be exercised, and

(ii) a description of the procedure (set forth in this Section 7.02) which a Holder must follow to exercise the repurchase right.

No failure of the Company to give a Company Notice or defect therein shall limit any Holder’s right to exercise the repurchase right or affect the validity of the proceedings for the repurchase of any Note or portion thereof pursuant to this Article Seven.

(b) To exercise the repurchase right, a Holder shall deliver to the Company, with a copy to the Trustee, on or before the 20th day after a Company Notice (or if no such Company Notice has been given, within 40 days after such Holder first learns of the Repurchase Event) a Holder Notice setting forth the name of such Holder and the principal amount of Notes to be repurchased from such Holder. A Holder Notice may be revoked by the Holder giving such notice at any time prior to the applicable Repurchase Date or, if later, the time the Company deposits the applicable Repurchase Price with the Trustee for payment to such Holder.

(c) If a Holder shall have given a Holder Notice with respect to a Repurchase Event, then on or before the applicable Repurchase Date for such Repurchase Event the Company shall deposit with the Trustee in immediately available funds an amount equal to the aggregate Repurchase Price payable to the Holders, which amount shall be held in trust by the Trustee and applied by the Trustee as provided in this Section 7.02. On the applicable Repurchase Date, (or such later date as a particular Holder surrenders the Note or Notes to be repurchased to the Trustee duly endorsed for transfer to the Trustee of the portion of the outstanding principal amount thereof to be repurchased), the Trustee shall pay the applicable Repurchase Prices to the respective Holders who have so exercised repurchase rights (x) for amounts of $1,000,000.00 or greater, by wire transfer of immediately available funds to such accounts as specified by such Holder in writing to the Trustee at least one Business Day prior to the applicable payment date and (y) in all other cases, by check mailed to such Holder on the applicable payment date at its registered address; provided, however, that if the aggregate amount deposited by the Company with the Trustee to pay the Repurchase Prices in connection with a particular Repurchase Event shall be less than the aggregate amount of the Repurchase Prices payable to all such Holders, then the amount paid to each such Holder shall be an amount equal to the product obtained by multiplying (x) the total amount so deposited by the Company with the Trustee in respect of the exercise of repurchase rights by the Holders by reason of such

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Repurchase Event times (y) a fraction of which the numerator is the amount of the Repurchase Price so payable to such Holder and the denominator is the aggregate amount of Repurchase Prices so payable to all such Holders who have exercised repurchase rights.

Section 7.03. Other. (a) If the Company fails to deposit with the Trustee on or before the applicable Repurchase Date the Repurchase Price of any Note (or portion thereof) as to which the repurchase right has been properly exercised pursuant to this Article Seven, then the Repurchase Price for such Note (or the portion thereof) which is required to have been so repurchased shall bear interest to the extent not prohibited by applicable law from the applicable date the Company was required to make such deposit with the Trustee until so deposited at the Default Rate.

(b) A Holder Notice given by a Holder shall be deemed for all purposes to be in proper form unless the Company notifies such Holder within one Business Day after such Holder Notice has been given (which notice from the Company shall specify all defects in such Holder Notice) and any Holder Notice containing any such defect shall nonetheless be effective on the date given if such Holder promptly undertakes in writing to correct all such defects. No such claim of error shall limit or delay performance of the Company’s obligation to repurchase such portion of the Notes which is not in dispute

Section 7.04. Form of Company Notice. A Company Notice shall be in the following form:

ACCLAIM ENTERTAINMENT, INC.

COMPANY NOTICE

(9% Senior Subordinated Convertible Note due 2007

TO:
	(Name of Holder)

(1) A Repurchase Event described in clause _____ of the definition of that term for the 9% Senior Subordinated Convertible Notes due 2007 (the “Notes”) of Acclaim Entertainment, Inc., a Delaware corporation (the “Company”), occurred on ________. As a result of such Repurchase Event, the Holders are entitled to exercise repurchase rights pursuant to Article Seven of the Supplemental Indenture, dated February 17, 2004, relating to the Notes (the “Supplemental Indenture”).

(2) Each Holder’s repurchase right must be exercised on or before ________.

(3) At or before the date set forth in the preceding paragraph (2), a Holder must deliver to the Company a Holder Notice, in the form set forth in Section 7.05 of the Supplemental Indenture.

(4) In order to receive payment of the Repurchase Price, such Holder must also surrender to the Trustee the Note or Notes to be repurchased, duly endorsed for transfer to the Trustee of the portion of the principal amount to be repurchased.

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(5) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note, the Original Indenture and the Supplemental Indenture.

	ACCLAIM ENTERTAINMENT, INC.
Date	By:
		Title:

cc: U.S. BANK TRUST NATIONAL ASSOCIATION,

    as Trustee

100 Wall Street

16^th Floor

New York, New York 10005

Attention: Ms. Beverly Freeney, Vice President

Section 7.05. Form of Holder Notice. A Holder Notice shall be in substantially the following form or such other form as the Company may agree with a particular Holder giving such Holder Notice:

ACCLAIM ENTERTAINMENT, INC.

HOLDER NOTICE

9% Senior Subordinated Convertible Note due 2007

TO: ACCLAIM ENTERTAINMENT, INC.

(1) Pursuant to the terms of the 9% Senior Subordinated Convertible Note due 2007 (the “Note”), the undersigned Holder hereby elects to exercise its right to require repurchase by the Company pursuant to Article Seven of the Supplemental Indenture of $______ principal amount of the Note, accrued and unpaid interest on such principal amount and, if applicable, Default Interest thereon, at the Repurchase Price provided in the Supplemental Indenture.

(2) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note, the Original Indenture and the Supplemental Indenture.

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Date:	NAME OF HOLDER:
	By
		Signature of Registered Holder (Must be signed exactly as name appears in the Note.)

cc: U.S. BANK TRUST NATIONAL ASSOCIATION,

    as Trustee

100 Wall Street

16^th Floor

New York, New York 10005

Attention: Ms. Beverly Freeney, Vice President

ARTICLE EIGHT

CONVERSION

Section 8.01. Right to Convert. Subject to and upon compliance with the provisions of this Supplemental Indenture, the Holders shall have the right, at the Holders’ option, at any time prior to the close of business on the Maturity Date (except that, if a Holder shall have exercised repurchase rights under Article Seven of this Supplemental Indenture, such conversion right shall terminate with respect to the portion of such Holder’s Note or Notes to be repurchased on the last Trading Day prior to the later of (x) the date of such repurchase and (y) the date the Company pays or deposits in accordance with Section 11.14 the applicable Repurchase Price, unless in any such case the Company shall default in payment due upon repurchase thereof) to convert the principal amount of such Holder’s Note, or any portion of such principal amount which is at least $1,000 (or such lesser principal amount thereof as shall be outstanding at such time) into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing (1) the principal amount of such Note or portion thereof being converted by (2) the Conversion Price in effect on the applicable Conversion Date, by giving a Conversion Notice in the manner provided in Section 8.02 of this Supplemental Indenture; provided, however, that, if at any time any Note is converted in whole or in part pursuant to this Section 8.01, the Company does not have available for issuance upon such conversion as authorized and unissued shares or in its treasury at least the number of shares of Common Stock required to be issued pursuant hereto, then, at the election of the converting Holder made by notice from such Holder to the Company, such Note (or portion thereof as to which conversion has been requested), to the extent that sufficient shares of Common Stock are not then available for issuance upon conversion, shall be converted into the

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right to receive from the Company, in lieu of the shares of Common Stock into which such Note or such portion thereof would otherwise be converted and which the Company is unable to issue, payment in an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock which the Company is unable to issue times (y) the arithmetic average of the Market Price for the Common Stock during the five consecutive Trading Days immediately prior to the applicable Conversion Date. Any such payment shall, for all purposes of such Note, be deemed to be a payment of principal in the principal amount of the Security converted, plus a premium equal to the total amount payable less the principal portion of this Security converted as to which such payment is required to be made because shares of Common Stock are not then available for issuance upon such conversion. In connection with conversion of a Note or portion thereof, the Holder shall be entitled to payment in respect of accrued and unpaid interest and accrued and unpaid Default Interest, if any, on such Note or portion thereof converted to the Conversion Date, provided, however, that in accordance with Section 307 of the Original Indenture where Notes are surrendered during a period between the close of business on a Regular Record Date and the opening of business on the next succeeding Interest Payment Date, funds equal to the interest to be paid on the next succeeding Interest Payment Date with respect to such Notes shall be paid by the Holder to the Company upon conversion. A Holder is not entitled to any rights of a holder of Common Stock until such Holder has converted a Note to Common Stock, and only to the extent such Note is deemed to have been converted to Common Stock under this Article Eight. For purposes of Sections 8.05 and 8.06, whenever a provision references the shares of Common Stock into which a Note (or a portion thereof) is convertible or the shares of Common Stock issuable upon conversion of a Note (or a portion thereof) or words of similar import, any determination required by such provision shall be made as if a sufficient number of shares of Common Stock were then available for issuance upon conversion in full of the Notes.

Section 8.02. Exercise of Conversion Right; Issuance of Common Stock on Conversion. (a) In order to exercise the conversion right with respect to a Note, the Holder shall give a Conversion Notice (or such other notice which is acceptable to the Company) to the Company and the Trustee or to the office or agency designated by the Company for such purpose by notice to the Holders. A Conversion Notice may be given by telephone line facsimile transmission to the numbers set forth on the form of Conversion Notice. In case of any conversion of Notes by a Holder for which the Conversion Notice is given on or after the date the Company gives an Optional Redemption Notice and on or prior to the Optional Redemption Date for such redemption, such Holder shall have the right, exercisable by notice to the Company, to condition the conversion of Notes to which such Conversion Notice relates on the Company satisfying all of the requirements for such redemption, in which case the Conversion Date shall be deemed to occur immediately prior to redemption of such Note on the applicable Optional Redemption Date.

(b) As promptly as practicable, but in no event later than three Trading Days (if the converting Holder has requested delivery through the facilities of The Depository Trust Company), after a Conversion Notice in proper form is given as provided in Section 8.02(a) by a Holder, the Company shall issue and shall deliver to such Holder or such Holder’s designee the number of full shares of Common Stock issuable upon such conversion of such Holder’s Note or portion thereof in accordance with the provisions of this Article and deliver a check or cash in

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respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided in Section 8.02(f) and, if applicable, accrued and unpaid interest and Default Interest, if any, to the Conversion Date and any cash payment required pursuant to the proviso to the first sentence of Section 8.01 (which payment, if any, shall be paid no later than three Trading Days after the applicable Conversion Date).

(c) Each conversion of a Note (or portion thereof) shall be deemed to have been effected on the applicable Conversion Date, and the person in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on such Conversion Date the holder of record of the shares represented thereby; provided, however, that if a Conversion Date is a date on which the stock transfer books of the Company shall be closed such conversion shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the applicable Conversion Date.

(d) A Conversion Notice shall be deemed for all purposes to be in proper form unless the Company notifies the Holder giving such Conversion Notice by telephone line facsimile transmission within two Trading Days after such Conversion Notice has been given (which notice from the Company shall specify all defects in such Conversion Notice) and any Conversion Notice containing any such defect shall nonetheless be effective on the date given if such Holder promptly undertakes to correct all such defects. No such claim of error shall limit or delay performance of the Company’s obligation to issue upon such conversion the number of shares of Common Stock which are not in dispute. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock or other securities or property on conversion of any Note in a name other than that of the Holder converting such Note, and the Company shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons requesting the issuance thereof shall have paid to the Company the amount of any such tax or shall have established to the reasonable satisfaction of the Company that such tax has been paid. A Holder shall be responsible for the amount of any withholding tax payable in connection with any conversion of such Holder’s Note.

(e) (1) If a Holder shall have given a Conversion Notice in accordance with the terms of this Supplemental Indenture, the Company’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of any action or inaction by the Trustee or such Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the Trustee or the Holders, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Trustee, any Holder or any other person of any obligation to the Company or any violation or alleged violation of law by the Trustee, any Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to such Holder in connection with such conversion; provided, however, that nothing herein shall limit or prejudice the right of the Company to pursue any such claim in any other manner permitted by applicable law. The occurrence of an event which requires an

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adjustment of the Conversion Price as contemplated by Section 8.03 shall in no way restrict or delay the right of the Holders to receive certificates for Common Stock upon conversion of Notes and the Company shall use its best efforts to implement such adjustment on terms reasonably acceptable to the Holders within three Trading Days of such occurrence.

(2) If the Company fails to issue and deliver the shares of Common Stock to a converting Holder in connection with a particular conversion of a Note promptly, but in no event later than three Trading Days (if the converting Holder has requested delivery through the facilities of The Depository Trust Company), after such Holder gives (as provided in Section 8.02(a)) the Conversion Notice in proper form for such conversion, in addition to any other liabilities the Company may have hereunder and under applicable law (A) the Company shall pay or reimburse such Holder on demand for all out-of-pocket expenses, including, without limitation, reasonable fees and expenses of legal counsel, incurred by such Holder as a result of such failure, (B) if as a result of such failure such Holder shall suffer any direct damages or liabilities from such failure (including, without limitation, margin interest and the cost of purchasing securities to cover a sale (whether by such Holder or such Holder’s securities broker) or borrowing of shares of Common Stock by such Holder for purposes of settling any trade involving a sale of shares of Common Stock made by such Holder during the period beginning on the Issuance Date and ending on the date the Company delivers or causes to be delivered to such Holder such shares of Common Stock, then the Company shall upon demand of such Holder pay to such Holder an amount equal to the actual direct, out-of-pocket damages and liabilities suffered by such Holder by reason thereof which such Holder documents to the reasonable satisfaction of the Company, and (C) such Holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing) to the Company, with a copy to the Trustee, given at any time prior to delivery to such Holder of the shares of Common Stock issuable in connection with such exercise of such Holder’s conversion right, rescind such exercise and the Conversion Notice relating thereto, in which case such Holder shall thereafter be entitled to convert that portion of such Note as to which such exercise is so rescinded and to exercise its other rights and remedies with respect to such failure by the Company. Notwithstanding the foregoing the Company shall not be liable to any Holder under clause (B) of the immediately preceding sentence to the extent the failure of the Company to deliver or to cause to be delivered such shares of Common Stock results from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, or any similar event outside the control of the Company. A converting Holder shall notify the Company in writing (or by telephone conversation, confirmed in writing) as promptly as practicable following the third Trading Day after such Holder gives a Conversion Notice if such Holder becomes aware that such shares of Common Stock so issuable have not been received as provided herein, but any failure so to give such notice shall not affect such Holder’s rights under the Original Indenture, this Supplemental Indenture, the Notes or otherwise.

(f) No fractional shares of Common Stock shall be issued upon conversion of any Note but, in lieu of any fraction of a share of Common Stock which would otherwise be issuable in respect of such conversion, the Company may round the number of shares of Common Stock issued on such conversion up to the next highest whole share or may pay lawful money of the United States of America for such fractional share, based on a value of one share of

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Common Stock being equal to the Market Price of the Common Stock on the applicable Conversion Date.

Section 8.03. Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time by the Company as follows:

(a) Adjustments for Certain Dividends or Distributions in Common Stock.

In case the Company shall on or after the Issuance Date pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the Record Date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Record Date. If any dividend or distribution of the type described in this Section 8.03(a) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared.

(b) Weighted Adjustments for Issuance of Certain Rights or Warrants.

In case the Company shall on or after the Issuance Date issue rights or warrants (other than any rights or warrants (including the Preferred Share Purchase Rights) referred to in Section 8.03(d)) to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within 45 days after the date fixed for the determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price on the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Record Date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and the denominator shall be the number of shares of Common Stock outstanding on the close of business on the Record Date plus the total number of additional shares of Common Stock so offered for subscription or purchase. Such adjustment shall become effective immediately after the opening of business on the day following the Record Date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of

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stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holder to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors.

(c) Adjustments for Certain Subdivisions of the Common Stock.

In case the outstanding shares of Common Stock shall on or after the Issuance Date be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the earlier of the day following the day upon which such subdivision becomes effective and the day on which “ex-” trading of the Common Stock begins with respect to such subdivision shall be proportionately reduced, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the earlier of the day following the day upon which such combination becomes effective and the day on which “ex-” trading of the Common Stock with respect to such combination begins shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the earlier of the day following the day upon which such subdivision or combination becomes effective and the day on which “ex-” trading of the Common Stock begins with respect to such subdivision or combination.

(d) Adjustments for Certain Dividends and Distributions.

In case the Company shall on or after the Issuance Date, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 8.03(a) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants referred to in Section 8.03(b) and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation to which Section 8.04 applies) (the foregoing hereinafter in this Section 8.03(d) called the “Securities”)), then, in each such case, subject to the second paragraph of this Section 8.03(d), the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price on such date less the Fair Market Value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on such date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Record Date; provided, however, that in the event the then Fair Market Value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that the Holders shall have the right to receive upon conversion of the Notes (or any portion thereof) the amount of Securities each Holder would have received had the Holder converted the Notes (or such portion thereof) immediately prior to such Record Date. In the event that such dividend or distribution is not so paid or made,

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the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the Fair Market Value of any distribution for purposes of this Section 8.03(d) by reference to the actual or when issued trading market for any Securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price, to the extent possible.

Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company’s capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events (a “Trigger Event”): (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall not be deemed to have been distributed for purposes of this Section 8.03 (and no adjustment to the Conversion Price under this Section 8.03 will be required) until the occurrence of the earliest Trigger Event. If any such rights or warrants, including any such existing rights or warrants distributed prior to the Issuance Date (including the Preferred Share Purchase Rights), are subject to Trigger Events, upon the satisfaction of each of which such rights or warrants shall become exercisable to purchase different securities, evidences of indebtedness or other assets, then the occurrence of each such Trigger Event shall be deemed to be such date of issuance and Record Date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants without exercise by the holder thereof) (so that, by way of illustration and not limitation, the dates of issuance of any such rights shall be deemed to be the dates on which such rights become exercisable to purchase capital stock of the Company, and not the date on which such rights may be issued, or may become evidenced by separate certificates, if such rights are not then so exercisable). In addition, in the event of any distribution of rights or warrants, or any Trigger Event with respect thereto (including the Preferred Share Purchase Rights), that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 8.03 was made (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants (including the Preferred Share Purchase Rights) which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.

For purposes of this Section 8.03(d) and Sections 8.03(a) and (b), any dividend or distribution to which this Section 8.03(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock to which Section 8.03(b) applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock or rights or warrants to which Section 8.03(b) applies (and any Conversion Price reduction required by this Section 8.03(d) with respect to such dividend or

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distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 8.03(a) and (b) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as “the date fixed for the determination of stockholders entitled to receive such dividend or other distribution”, “Record Date fixed for such determination” and “Record Date” within the meaning of Section 8.03(a) and as “the date fixed for the determination of stockholders entitled to receive such rights or warrants”, “the Record Date fixed for the determination of the stockholders entitled to receive such rights or warrants” and “such Record Date” within the meaning of Section 8.03(b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed “outstanding at the close of business on the Record Date fixed for such determination” within the meaning of Section 8.03(a).

(e) Adjustments for Certain Issuances of Newly Issued Shares.

(1) In case at any time on or after the Issuance Date the Company shall issue shares of its Common Stock or 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 Specified Market Value of the Common Stock at the time of such issuance and (y) the Conversion Price in effect at the time of such issuance, then following such issuance of Newly Issued Shares the Conversion Price shall be adjusted as provided in this Section 8.03(e). 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 greater of (x) the Specified Market Value of the Common Stock at the time of such issuance and (y) the Conversion Price in effect 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 Section 8.03(e) may be expressed as the following mathematical formula:

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

where:

C = aggregate consideration received by the Company for the Newly Issued Shares

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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
P	=	the greater of (x) the Specified Market Value of the Common Stock at the time of issuance of the Newly Issued Shares and (y) the Conversion Price in effect 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

(2) Notwithstanding the foregoing, no adjustment shall be made under this Section 8.03(g) 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 by Section 8.03(a) is made and (ii) the Company shall have given notice of such issuance thereof to the Holders pursuant to Section 8.06;

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

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

(3) In case at any time on or after the Issuance Date the Company shall issue shares of Common Stock or Common Stock Equivalents to any Subsidiary, the Conversion Price shall be subject to adjustment as and to the extent provided in this Section 8.03(e) by reason of such issuance. In case at any time on or after the Issuance Date any Subsidiary shall sell any shares of Common Stock or Common Stock Equivalents, such sale shall be deemed for purposes of this Section 8.03(e) to be the issuance of such shares of Common Stock or Common Stock Equivalents by the Company, and the Conversion Price shall also be subject to further adjustment as and to the extent provided in this Section 8.03(e) by reason of such sale of shares of Common Stock or Common Stock Equivalents by such Subsidiary.

(f) Adjustment for Failure to Obtain Registration.

If the effective date (the “SEC Effective Date”) for the Registration Statement relating to the

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resale of all of the Notes issued or issuable pursuant to the Note Purchase Agreement and the resale of all shares of Common Stock issued or issuable upon conversion of all such Notes and exercise of all Warrants issued or issuable pursuant to the Note Purchase Agreement, which Registration Statement shall meet the requirements of the Note Purchase Agreement, shall not have occurred on or before the date that is 182 days after the Issuance Date, then immediately after the close of business on the date that is 182 days after the Issuance Date the Conversion Price shall be reduced to the Conversion Price that would be in effect at that time if the Conversion Price had been $.60 on the Issuance Date and thereafter adjusted in accordance with Sections 8.03(a), (b), (c), (d), and (e) to such date that is 182 days after the Issuance Date.

(g) De Minimus Adjustments.

No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 8.03(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article Eight shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be.

No adjustment need be made for a change in the par value of the Common Stock or from par value to no par value or from no par value to par value.

(h) Company Notice of Adjustments.

Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly, but in no event later than five Business Days thereafter, give a notice to the Holders, with a copy to the Trustee, setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, but which statement shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to deliver such notice shall not affect the effectiveness, legality or validity of any such adjustment. Notwithstanding the immediately preceding sentence, unless and until the Trustee has received the notice setting forth an adjustment of the Conversion Price, the Trustee may assume that no such adjustment has been made and that the last Conversion Price of which it has knowledge remains in effect.

(i) Effectiveness of Certain Adjustments.

In any case in which this Section 8.03 provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event (i) issuing to the Holders in connection with any conversion of Notes after such Record Date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such Holder any amount in cash in lieu of any fraction pursuant to Section 8.02(f).

(j) Outstanding Shares.

For purposes of this Section 8.03, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares

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issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company other than dividends or distributions payable only in shares of Common Stock.

(k) Additional Reductions in Conversion Price.

The Company may make such reductions in the Conversion Price, in addition to those required by Sections 8.03(a), (b), (c), (d), and (e) as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes.

Section 8.04. Effect of Reclassification, Consolidation, Merger or Sale. (a) If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation, merger or combination of the Company with another Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other Person as a result of or in connection with which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then prior to such reclassification, change, consolidation, merger, combination or sale the Company or the successor, surviving or purchasing Person, as the case may be, in such transaction shall execute

(A) with the Trustee an indenture supplemental to the Indenture and this Supplemental Indenture providing that:

(x) the Notes shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon conversion of the Notes immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder’s rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 8.04 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares), and

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(y) in the case of any such successor, surviving or purchasing Person, upon such consolidation, merger, combination, sale or conveyance such successor, surviving or purchasing Person shall be jointly and severally liable with the Company for the payment and performance of all of the Company’s obligations under the Original Indenture, this Supplemental Indenture, the Notes and the other Transaction Documents including, without limitation, the registration provisions of Section 8 of the Note Purchase Agreement, and

(B) if registration or qualification is required under the 1933 Act or applicable state law for (i) the modification of the Notes as contemplated by the indenture supplemental to the Indenture and this Supplemental Indenture provided for in the immediately preceding clause (A), (ii) the modification of the Warrants as provided therein, (iii) the issuance to the Holders or the holders of the Warrants of such shares of stock and other securities so issuable upon conversion of the Notes or exercise of the Warrants following such transaction, or (iv) the public resale by the Holders of the Notes or such shares of stock or other securities so issuable upon conversion of the Notes or exercise of the Warrants following such transaction,

then in any such case in the immediately preceding clause (i), (ii), (iii) or (iv) such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, combination or sale. Such indenture supplemental to the Indenture and this Supplemental Indenture shall provide for adjustments in the Conversion Price which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. If, in the case of any such reclassification, change, consolidation, merger, combination, sale or conveyance, the stock or other securities and assets receivable thereupon by a holder of shares of Common Stock includes shares of stock or other securities and assets of a Person other than the successor or purchasing corporation, as the case may be, in such reclassification, change, consolidation, merger, combination, sale or conveyance, then such indenture supplemental to the Indenture and this Supplemental Indenture shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holders as the Board of Directors shall reasonably consider necessary by reason of the foregoing, including, to the extent practicable, the provisions providing for the repurchase rights set forth in Article Seven herein.

(b) The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

(c) If this Section 8.04 applies to any event or occurrence, Section 8.03 shall not apply to such event or occurrence.

(d) The Trustee shall not be under any responsibility to determine the correctness of any provisions contained in any such supplemental indenture to the Indenture and this Supplemental Indenture relating either to the kind or amount of shares of stock or other securities or property or cash receivable by the Holders upon the conversion of the Notes or exercise of the Warrants after any such consolidation, merger, conveyance, transfer, sale or lease or to any such adjustment, but may accept as conclusive evidence of the correctness of any such

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provisions, and shall be protected in relying upon, an Opinion of Counsel with respect thereto, which the Company shall cause to be furnished to the Trustee upon request.

Section 8.05. Reservation of Shares; Shares to Be Fully Paid; Listing of Common Stock.

(a) The Company shall reserve and keep available, free from preemptive rights, out of its authorized but unissued shares of Common Stock or shares of Common Stock held in treasury, solely for issuance upon conversion of the Notes, and in addition to the shares of Common Stock required to be reserved by the terms of the Warrants, sufficient shares to provide for the conversion of the Notes from time to time as the Notes are converted.

(b) Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Notes, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price.

(c) The Company covenants that all shares of Common Stock issued upon conversion of the Notes will be fully paid and non-assessable by the Company and free from all taxes, Liens and charges with respect to the issue thereof.

(d) The Company covenants that if any shares of Common Stock to be provided for the purpose of conversion of the Notes hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be.

(e) The Company covenants that, so long as the Common Stock shall be listed on the Nasdaq, the NYSE, the AMEX or any other national securities exchange, the Company shall seek to obtain and, so long as the Common Stock shall be so listed on such market or exchange, shall seek to maintain approval for listing thereon of all Common Stock issuable upon conversion of or in payment of interest on the Notes.

Section 8.06. Notice to Holders Prior to Certain Actions. In case on or after the Issuance Date:

(a) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than in cash out of retained earnings); or

(b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or

(c) the Board of Directors shall authorize any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par

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value), or any consolidation or merger or other business combination transaction to which the Company is a party and for which approval of any stockholders of the Company is required, or the sale or transfer of all or substantially all of the assets of the Company; or

(d) there shall be pending the voluntary or involuntary dissolution, liquidation or winding-up of the Company;

the Company shall give the Holders, as promptly as possible but in any event at least ten Trading Days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or 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 or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record who shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up shall be determined. Such notice shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. In the case of any such action of which the Company gives such notice to the Holders or is required to give such notice to the Holders, the Holders shall be entitled to give Conversion Notices which are contingent on the completion of such action.

Section 8.07. Limitation on Conversions. (a) Notwithstanding anything to the contrary contained in the Indenture or this Supplemental Indenture, the number of shares of Common Stock that may be acquired at any time by a Holder upon conversion of any Note shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such Holder (other than by virtue of the ownership of securities or rights to acquire securities (including, without limitation, other Notes and the Warrants) that have limitations on the right of the holder thereof to convert, exercise or purchase similar to the limitation set forth herein (the “Excluded Shares”)), together with all shares of Common Stock beneficially owned at such time (other than by virtue of the ownership of Excluded Shares) by Persons whose beneficial ownership of Common Stock would be aggregated with the beneficial ownership by such Holder for purposes of determining such Holder’s beneficial ownership or determining whether a group exists or for purposes of determining the Holder’s beneficial ownership (the “Aggregation Persons”), in either such case for purposes of Section 13(d) of the 1934 Act and Regulation 13D-G thereunder (including, without limitation, as the same is made applicable to Section 16 of the 1934 Act and the rules promulgated thereunder), would result in beneficial ownership by such Holder or such group of more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or Section 16 of the 1934 Act and the rules promulgated thereunder (as the same may be modified as provided herein, the “Restricted Ownership Percentage”). The Restricted Ownership Percentage shall be reduced from time to time immediately upon, and only to the extent that, Section 16 of the 1934 Act or the rules promulgated thereunder (or any successor statute or rules) is changed to reduce the beneficial

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ownership percentage threshold thereunder to a percentage less than 10%, in which case the Restricted Ownership Percentage shall be reduced to a percentage that is 0.1% below such threshold. If at any time the limits in this Section 8.07 make any Note held by any Holder inconvertible in whole or in part, the Corporation shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter upon conversion of such Note as and when shares of Common Stock may be issued in compliance with such restrictions.

(b) For purposes of this Section 8.07, in determining the number of outstanding shares of Common Stock at any time a Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s then most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a public announcement by the Company that is later than any such filing referred to in the preceding clause (1), (3) any other notice by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding and (4) knowledge the Holder may have about the number of shares of Common Stock issued upon conversions or exercises of Notes, Warrants or other Common Stock Equivalents by any Person, including the such Holder, which are not reflected in the information referred to in the preceding clauses (1) through (3). Upon the written request of any Holder, the Company shall within three Business Days confirm in writing to such Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of Common Stock Equivalents, including, without limitation, the Notes and the Warrants, by the Holder or its affiliates, in each such case subsequent to, the date as of which such number of outstanding shares of Common Stock was reported.

ARTICLE NINE

OPTIONAL REDEMPTION

Section 9.01. Optional Redemption Right. At any time during the Optional Redemption Period, the Company shall have the right to redeem at any one time all or from time to time any part of the principal amount of the Notes Outstanding at the Optional Redemption Price pursuant to this Article Nine on any Optional Redemption Date, so long as the following conditions are met:

(1) during a period of 20 consecutive Trading Days ending on or after the commencement of the Optional Redemption Period and ending not more than five Trading Days prior to the date the Company gives a particular Optional Redemption Notice, on each such Trading Day the Market Price of the Common Stock shall be at least equal to the applicable Optional Redemption Threshold Price for such Trading Day;

(2) on the date such Optional Redemption Notice is given and at all times thereafter to and including the applicable Optional Redemption Date, no Event of Default shall have occurred or be continuing;

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(3) on the date such Optional Redemption Notice is given and at all times thereafter to and including the applicable Optional Redemption Date, no Repurchase Event shall have occurred with respect to which any Holder has the right to exercise repurchase rights pursuant to Article Seven or with respect to which any Holder has exercised such repurchase rights and the Repurchase Price has not been paid to such Holder;

(4) on the first day in such period of 20 consecutive Trading Days and at all times thereafter to and including the applicable Optional Redemption Date, (x) the Registration Statement shall be effective and available for use by the Holders and the holders of the Warrants for the resale of the Notes and the shares of Common Stock issued and issuable upon conversion of the Notes and upon exercise of the Warrants, as the case may be, and is reasonably expected to remain effective and available for such use for at least 30 days after the applicable Optional Redemption Date; and

(5) during such period of 20 consecutive Trading Days during which the Market Price is at least equal to the Optional Redemption Price and at all times thereafter to and including the applicable Optional Redemption Date, the Common Stock shall be listed and traded on Nasdaq, the NYSE or AMEX and no suspension of trading in the Common Stock shall be in effect.

Section 9.02. Optional Redemption Notice. (a) In order to exercise its right of redemption under this Article Nine, the Company shall give an Optional Redemption Notice to the Holders not less than 15 Trading Days or more than 20 Trading Days prior to the Optional Redemption Date stating that: (1) the Company is exercising its right to redeem a specified portion (which may be all, if so specified by the Company) of the Note(s) Outstanding in accordance with this Article Nine, (2) the principal amount of each Holder’s Note to be redeemed, (3) the Optional Redemption Price, (4) the Optional Redemption Date and (5) that all of the conditions of the Indenture and this Supplemental Indenture entitling the Company to call the Notes for redemption have been met.

(b) An Optional Redemption Notice shall be in the following form:

ACCLAIM ENTERTAINMENT, INC.

OPTIONAL REDEMPTION NOTICE

(Article Nine of 9% Senior Subordinated Convertible Note due 2007)

TO:
	(Name of Holder)

(1) Pursuant to the terms of the 9% Senior Subordinated Convertible Note due 2007 (the “Note”), Acclaim Entertainment, Inc., a Delaware corporation (the “Company”), hereby notifies the above-named Holder that the Company is exercising its right to redeem the Note identified below in accordance with Article Nine of the Supplemental Indenture as set forth below:

(i) The principal amount of the Note to be redeemed is $                    .

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(ii) The Optional Redemption Price is $                    .

(iii) The Optional Redemption Date is                     .

(2) All of the conditions specified in the Supplemental Indenture and the Indenture entitling the Company to call the Note (or a portion thereof) for redemption have been satisfied.

(3) The 20 consecutive Trading Days on which the Market Price exceeded the Optional Redemption Threshold Price by reason of which the Company is entitled to give this Notice of Redemption are as follows:

	Trading Day	Optional Redemption Threshold Price	Market Price
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

(4) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note, the Indenture and the Supplemental Indenture.

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Date _________________________________________		ACCLAIM ENTERTAINMENT, INC.
		By:
		Title:
cc:	U.S. Bank Trust National Association,   as Trustee 100 Wall Street 16th Floor New York, New York 10005 Attention: Ms. Beverly Freeney, Vice President

Section 9.03. Payment of Optional Redemption Price. On the applicable Optional Redemption Date (or such later date as a particular Holder surrenders such Holder’s Note to the Company) the Company shall pay to or upon the order of each Holder, by wire transfer of immediately available funds to such account as shall be specified for such purpose by such Holder at least one Business Day prior to the Optional Redemption Date, an amount equal to the Optional Redemption Price of the portion (which may be all) of such Holder’s Note to be redeemed.

Section 9.04. Redemption to Be Pro Rata; Minimum Amount. Any redemption of Notes pursuant to this Article Nine shall be made at the same time as a redemption by the Company of a pro rata portion (based on the Outstanding principal amounts) of all Notes and in the case of each such redemption the aggregate principal amount of Notes to be so redeemed shall be at least $1,000,000.00 or such lesser aggregate principal amount of the Notes as shall remain Outstanding at the time an Optional Redemption Notice is given.

Section 9.05. Effect of Conversions; Limitation on Redemptions. (a) Any conversion of a Note by a Holder pursuant to Article Eight for which the Conversion Date is on or after the date the Company gives an applicable Optional Redemption Notice shall reduce the principal amount of such Note to be redeemed on such Optional Redemption Date by the principal amount of such Note so converted.

(b) Notwithstanding any other provision of the Indenture, this Supplemental Indenture, the Notes or applicable law to the contrary, in case the Company shall give an Optional Redemption Notice to the Holders, and on the date the Company gives such an Optional Redemption Notice or at any time thereafter to and including the applicable Optional Redemption Date, any Holder shall be restricted in converting any Note held by such Holder by reason of such Holder’s Restricted Ownership Percentage (the “Inconvertible Notes”), then the Optional Redemption Date for all Inconvertible Notes (or the portion thereof that is so restricted) held by such Holder, so called for redemption by the Company and with respect to which such Holder is restricted in exercising such Holder’s conversion right at any time during such period

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from the date the Company gives such Optional Redemption Notice to the applicable Optional Redemption Date shall be extended to be the Extended Redemption Date. On the applicable Optional Redemption Date, the Company shall deposit in accordance with Section 11.12 the Optional Redemption Price of all Notes or portions thereof that are redeemable on any Extended Redemption Date, to be held and paid to the respective Holders whose Notes are to be redeemed on Extended Redemption Dates upon redemption of the Note or Notes redeemed on each such Extended Redemption Date. Any Note or portion thereof for which there is an Extended Redemption Date shall remain convertible by the Holder in accordance with Section 10 at any time to and including 5:00 p.m., New York City time, on the applicable Extended Redemption Date.

(c) Notwithstanding anything to the contrary contained in Section 8.07, solely for the purposes of calculating a Holder’s Restricted Ownership Percentage for purposes of this Section 9.05, the shares of Common Stock issuable upon exercise of the Warrants held by such Holder shall not be deemed to be Excluded Shares and shall be taken into account in calculating such Holder’s Restricted Ownership Percentage to determine the amount of such Holder’s Inconvertible Notes.

Section 9.06. No Prepayment. Except as specifically provided in Article Seven or this Article Nine, the Notes may not be prepaid or redeemed at the option of the Company prior to the Maturity Date.

ARTICLE TEN

SUBORDINATION

Section 10.01. Agreement to Subordinate. The Company agrees, and each Holder by accepting a Note agrees, that the indebtedness and other payment obligations of the Company to the Holders under this Supplemental Indenture or the Notes, including, without limitation, all indemnification obligations of the Company under Section 5.11, are subordinated in right of payment, to the extent and in the manner provided in this Article Ten, to the prior indefeasible payment in full in cash of the Senior Indebtedness, and that this 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).

Section 10.02 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 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 Supplemental Indenture; and

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

Section 10.03 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 Supplemental Indenture or acquire or redeem any Notes for cash or property 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, however, that, so long as the Company is not in default under the Senior Indebtedness on the Maturity of the Notes, the Company shall pay the Holders the principal of and the interest accrued on the Notes in full satisfaction thereof. The restrictions of this Section 10.03 are subject to the exemptions stated in Section 10.15. Nothing in this Article Ten shall restrict or limit the conversion rights of the Holders or the obligation of the Company to issue shares of Common Stock upon conversion of Notes in accordance with this Supplemental Indenture.

Section 10.04. Acceleration of Payment of Notes and Exercise of Remedies. Until the Senior Indebtedness shall have been paid in full in cash, if, and during the continuance of any Event of Default described in Section 4.01 hereof or any Event of Default described in the Indenture that is applicable to the Notes, all or any portion of the unpaid principal amount of the Notes shall have been declared due and payable pursuant to the provisions of the Indenture or this Supplemental Indenture hereof, the Company shall not make payment of the principal of or interest on the Notes so accelerated until the date on which the Senior Indebtedness has been paid in full in cash.

Section 10.05. When Distribution Must Be Paid Over. Without limiting the other provisions of this Article Ten, if any Note is declared due and payable before its 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 Holders shall be 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 Article Ten should not have been made pursuant to this Article Ten to such Holder, the Holder who receives such distribution shall upon request of the holders of the Senior Indebtedness hold such distribution in trust and pay it to such holders of Senior Indebtedness as their interests may appear.

Section 10.06. 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

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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 Article Ten to holders of Senior Indebtedness which otherwise would have been made to the Holders except for the provisions of this Article Ten shall 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 Article Ten 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.

Section 10.07. Relative Rights. This Article Ten defines the relative rights of the Holders and holders of Senior Indebtedness. Nothing in this Supplemental Indenture 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 clause (1) is not intended to limit the restrictions on payments on the Notes set forth in Section 10.03 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 clause (2) is not intended to limit the provisions of Section 10.04.

Section 10.08. 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 provided herein shall be impaired by any act or failure to act by the Company or by its failure to comply with this Supplemental Indenture.

Section 10.09. 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.

Section 10.10. Proofs of Claim. If, while any Senior Indebtedness is outstanding, any Event of Default under Section 4.01, with respect to the Company only, occurs the Trustee, on behalf of the Holders, shall, to the extent permitted by applicable law, duly and promptly take such action as the holders of a majority of the outstanding principal amount of the 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

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appropriate claims or proofs of claim in respect of the Indenture, this Supplemental Indenture and the Notes. Upon the failure of the Trustee timely to take any such action after due notice thereof and request therefor by the holders of Senior Indebtedness, the holders of the Senior Indebtedness are hereby irrevocably authorized and empowered (in their 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 Note and to file claims and proofs of claim with respect to the Indenture, this Supplemental Indenture and the Notes and the Trustee hereby appoints the holder of the Senior Indebtedness as attorney-in-fact for the Trustee to take any and all actions permitted by this paragraph to be taken by the Trustee; provided, however, that the holders of the Senior Indebtedness shall only be permitted to file such proofs of claim upon prior notice to the Trustee and to the extent that the Trustee has failed to make such filings by the date which is ten (10) days prior to the last date on which the Trustee is permitted to make such filings as a matter of applicable Bankruptcy Law.

Section 10.11. 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 Article Ten:

(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 (but in no event to a principal amount at any time outstanding in excess of $20,000,000), 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.

Section 10.12. No Modification. The provisions of this Article Ten and the terms “GMAC,” “GMAC Credit Agreement” and “Senior Indebtedness” used in this Article Ten 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 except upon obtaining the prior written consent of the holders of the Senior Indebtedness.

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Section 10.13. 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 Article Ten 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.

Section 10.14. 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 Article Ten or for judgment at law and any other relief whatsoever appropriate to such action or procedure.

Section 10.15. Prohibition of Payment of Notes. The Holder and the Company hereby acknowledge that, pursuant to the terms of the GMAC 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, semi-annual 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 GMAC Credit Agreement) exists or would exist under the GMAC Credit Agreement.

Section 10.16 Trustee Not Charged with Knowledge of Prohibition. Notwithstanding the provisions of this Article Ten or any other provision of this Indenture, the Trustee and any paying agent shall not be charged with knowledge of the existence of any Senior Indebtedness, or of any default in the payment of the principal of or premium, if any, or interest on any Senior Indebtedness, or of any facts which would prohibit the making of any payment of moneys to or by the Trustee or any such paying agent, unless and until the Trustee or such paying agent shall have received at its Corporate Trust Office written notice thereof, five Business Days prior to the making of any such payment, from the Company or from a holder of Senior Indebtedness who shall have been certified by the Company or otherwise established to the reasonable satisfaction of the Trustee or such paying agent to be such a holder, nor shall the Trustee or such paying agent be charged with knowledge of the curing of any such default or of the elimination of the fact or condition preventing any such payment unless and until the Trustee or such paying agent shall have received an Officers’ Certificate to such effect.

Section 10.17 Rights of Trustee as Holder of Senior Indebtedness. The Trustee shall be entitled to all the rights set forth in this Article Ten with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article Ten shall apply to claims of, or payments to, the Trustee under or pursuant to Section 5.11 hereof or Section 607 of the Original Indenture.

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Section 10.18 Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall mistakenly pay over or distribute to Holders or the Company or any other person moneys or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article Ten or otherwise.

ARTICLE ELEVEN

SUNDRY PROVISIONS

Section 11.01. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representation as to the validity of this Supplemental Indenture.

Section 11.02. Effect of Headings and Table of Contents. The Article and Section headings herein are for convenience only and shall not affect the construction hereof.

Section 11.03. Successors and Assigns. All covenants and agreements in this Supplemental Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

Section 11.04. Separability Clause. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

Section 11.05. Benefits of Supplemental Indenture. Nothing in this Supplemental Indenture, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Note Registrar and their successors under the Original Indenture and the Holders of Notes, any benefit or any legal or equitable right, remedy or claim under the Original Indenture.

Section 11.06. Governing Law. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York.

Section 11.07. Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

Section 11.08. Enforceable Obligation. The Company represents and warrants that at the time of the original issuance of each Note it received the full purchase price payable pursuant to the Note Purchase Agreements pursuant to which such Note is being issued in an amount at least equal to the original principal amount of such Note, and that each Note is an enforceable obligation of the Company which is not subject to any offset, reduction, counterclaim or disallowance of any sort.

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Section 11.09. Certain Performance. The Company acknowledges and agrees that, by reason of, among other things, the conversion rights of the Holders, there shall be no adequate remedy at law for the Company’s willful failure to comply with the Original Indenture, this Supplemental Indenture or the Notes, and that the repayment of principal of and interest on the Notes, and payment by the Company of the other amounts payable by the Company, in connection with an Event of Default will not adequately compensate the Holders for any loss or impairment of the conversion rights. The Company agrees that, in addition to any other rights or remedies, the Trustee and the Holders shall be entitled to specific performance by the Company of its obligations under, and an injunction against any action that would constitute a failure by the Company to comply with, the Original Indenture, this Supplemental Indenture and the Notes.

Section 11.10. Amendments and Waivers. In addition to the requirements of Section 902 of the Original Indenture, (1) no supplemental indenture shall, without the consent of the Holder of each Outstanding Note affected thereby, change the obligations of the Company to redeem or repurchase Notes pursuant to Article Seven of this Supplemental Indenture or (2) no supplemental indenture or waiver shall increase or eliminate the Restricted Ownership Percentage, whether permanently or temporarily, unless, in addition to complying with the other requirements of the Indenture and this Supplemental Indenture, such supplemental indenture or waiver shall have been approved in accordance with the General Corporation Law of the State of Delaware and the Company’s By-laws by holders of the outstanding shares of Common Stock entitled to vote at a meeting or by written consent in lieu of such meeting.

Section 11.11. Reference to and Effect on Original Indenture. This Supplemental Indenture shall be construed as supplemental to the Original Indenture and all the terms and conditions of this Supplemental Indenture shall be deemed to be part of the terms and conditions of the Original Indenture. Except as set forth herein, the Original Indenture heretofore executed and delivered is hereby ratified, approved and confirmed. The provisions of this Supplemental Indenture shall for the purposes of this series of Securities supersede the provisions of the Original Indenture heretofore executed and delivered to the extent such Original Indenture heretofore executed and delivered is inconsistent herewith. This Supplemental Indenture is subject to the provisions of the Trust Indenture Act, and shall, to the extent applicable, be governed by such provisions.

Section 11.12. Notices. Notwithstanding Sections 105 and 106 of the Original Indenture, whenever under the provisions of the Original Indenture, this Supplemental Indenture or the Notes any notice is required or permitted to be given, such notice shall be in writing (except as otherwise specifically provided in the Original Indenture, this Supplemental Indenture or the Notes) and shall be sent by telephone line facsimile transmission to such telephone line facsimile transmission number as shall be set forth below or shall have been provided for purposes hereof by the Person entitled to such notice or, if no such telephone line facsimile transmission number shall have been so provided, may be sent by first class mail (postage prepaid), personal delivery or courier (charges prepaid) addressed as follows:

If to the Company:

Acclaim Entertainment, Inc.

One Acclaim Plaza

Glen Cove, New York 11542

Attention: Chief Financial Officer

Facsimile No.: (516) 656-2045

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If to the Trustee:

U.S. Bank Trust National Association,

    as Trustee

100 Wall Street

16^th Floor

New York, New York 10005

Attention: Ms. Beverly Freeney, Vice President

Facsimile No.: (212) 509-3384

and if to any Holder, at such Holder’s telephone line facsimile transmission number or address set forth in the Security Register for the Notes. Any notice so sent by telephone line facsimile transmission, personal delivery or courier shall be effective upon receipt, and any such notice sent by mail shall be effective three Business Days after being deposited with the facilities of the United States Postal Service. The Company or the Trustee may change its telephone line facsimile transmission number or address for purposes of notices under the Original Indenture and hereunder by giving three Business Days’ notice to the other, in each case with similar notice to all of the Holders. Any Holder may change its telephone line facsimile transmission or address for purposes of notices under the Original Indenture or hereunder by giving three Business Days’ notice to the Trustee. Whenever under the provisions of this Supplemental Indenture a Holder is required or permitted to give any notice to the Company and such provision also calls for giving a copy of such notice to the Trustee, if such Holder gives such notice to the Company but fails to give such notice to the Trustee, such failure shall not affect the validity of such notice.

Section 11.13. Payment of Notes on Repurchase; Deposit of Repurchase Price, Etc. If any Note or any portion of any Note is to be repurchased as provided in Article Seven and any notice required in connection therewith shall have been given as provided therein and the Company shall have otherwise complied with the requirements of this Supplemental Indenture with respect thereto, then the Note or Notes or the portion or portions thereof to be so repurchased and with respect to which any such notice has been given shall become due and payable on the date stated in such notice at the applicable Repurchase Price. On and after the repurchase date so stated in such notice, provided that the Company shall have deposited with

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the Trustee on or prior to such repurchase date, an amount sufficient to pay the applicable Repurchase Price interest on such Note or Notes or the portion or portions thereof to be so redeemed or repurchased shall cease to accrue, and such Note or Notes or such portion thereof shall be deemed not to be Outstanding and shall not be entitled to any benefit with respect to principal of or interest on the portion to be so repurchased except to receive payment of the applicable Repurchase Price. On presentation and surrender of such Note or Notes or such portion or portions thereof, such Note or Notes or the specified portion or portions thereof shall be paid and repurchased at the applicable Repurchase Price. If a portion of any Note is to be repurchased, upon surrender of such Note to the Trustee in accordance with the terms hereof, the Company shall execute and deliver to the Holder of such note without service charge, a new Note or Notes, having the same date as the Note so surrendered and containing identical terms and conditions, in such denomination or denominations as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unrepurchased portion of the principal amount of the Note so surrendered.

Section 11.14 Certain Determinations. The Trustee shall be under no obligation to ascertain the occurrence of a Fundamental Change, a Repurchase Event or a Trigger Event or to give notice with respect thereto. The Trustee may conclusively assume, in the absence of written notice to the contrary from the Company or the Holders, that no Fundamental Change, Repurchase Event or Trigger Event has occurred.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written.

ACCLAIM ENTERTAINMENT, INC.
By:	/S/    GERARD F. AGOGLIA
	Name:    Gerard F. Agoglia Title:      Chief Financial Officer

U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee
By:	/S/    PATRICK J. CROWLEY
	Name:    Patrick J. Crowley Title:      Vice President

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SCHEDULE I

Indebtedness Referred to in Clause (1)

of the Definition of “Permitted Indebtedness”

Description	Amount
GMAC Debt Facility limit, plus	$5,000,000

I-1

SCHEDULE II

Certain Pledged Securities*

Capital Stock of Acclaim Distribution, Inc.

Class of Stock: Common Stock

Par value per share: $.02

Total No. of authorized shares of class or series: 200 shares of common stock

Total No. of outstanding shares of class or series: 200 shares of common stock

Stock certificate No. 1 for 200 shares registered in the name of Acclaim Entertainment, Inc.

Restrictive Legend: 1933 Act legend for unregistered securities. Legend stating that the securities are subject to a pledge to the Company’s lender.

Capital Stock of LJN Toys, Ltd.

Class of Stock: Common Stock

Par value per share: $.02

Total No. of authorized shares of class or series: 200 shares of common stock

Total No. of outstanding shares of class or series: 200 shares of common stock

Stock certificate No. 1 for 200 shares registered in the name of Acclaim Entertainment, Inc.

Restrictive Legend: 1933 Act legend for unregistered securities. Legend stating that the securities are subject to a pledge to the Company’s lender.

Capital Stock of Acclaim Entertainment Canada, Ltd.

Class of Stock: Common Stock

Par value per share: $.02

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* Based upon information and belief on the date hereof and without independent verification.

Total No. of authorized shares of class or series: 200 shares of common stock

Total No. of outstanding shares of class or series: 200 shares of common stock

Stock certificate No. 1 for 200 shares registered in the name of Acclaim Entertainment, Inc.

Restrictive Legend: 1933 Act legend for unregistered securities. Legend stating that the securities are subject to a pledge to the Company’s lender.

Capital Stock of Arena Entertainment, Inc.

Class of Stock: Common Stock

Par value per share: $.02

Total No. of authorized shares of class or series: 200 shares of common stock

Total No. of outstanding shares of class or series: 200 shares of common stock

Stock certificate No. 1 for 200 shares registered in the name of Acclaim Entertainment, Inc.

Restrictive Legend: 1933 Act legend for unregistered securities. Legend stating that the securities are subject to a pledge to the Company’s lender.

* Based upon information and belief on the date hereof and without independent verification.

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SCHEDULE III

Subordination of Indebtedness

Any Indebtedness to be issued as permitted by clause (viii) of the definition of Permitted Indebtedness in the Supplemental Indenture shall contain the following provisions and no provision inconsistent with the following provisions:

ARTICLE         

SUBORDINATION

Section __.1. Agreement of Subordination. The Company covenants and agrees, and each holder of the indebtedness created by this instrument (this “Indebtedness”) by its acceptance hereof or thereof covenants and agrees, expressly for the benefit of holders of Senior Indebtedness, that this Indebtedness shall be issued subject to the provisions of this Article; and each person holding this Indebtedness, whether upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions.

The payment of the principal of, premium, if any, and interest on this Indebtedness (including, without limitation, upon any redemption or repurchase of this Indebtedness) shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full of all Senior Indebtedness in cash or other payment satisfactory to the holders of such Senior Indebtedness.

No provision of this Article shall prevent the occurrence of any default or event of default with respect to this Indebtedness.

Section __.2. Payments to Holders of this Indebtedness. (a)(1) No payment shall be made with respect to the principal of, premium, if any, or interest on this Indebtedness (including, without limitation, the redemption price with respect to any of this Indebtedness to be called for redemption in accordance with its terms or any repurchase of this Indebtedness or any payment or deposit for defeasance, or in the nature of defeasance, of this Indebtedness) if:

(i) a default in the payment of principal, premium, if any, interest or other obligations in respect of the Senior Indebtedness occurs and is continuing beyond any applicable grace period (a “Payment Default”), unless and until such Payment Default shall have been cured or waived or shall have ceased to exist; or

(ii) a default, other than a Payment Default, on any Senior Indebtedness occurs and is continuing that then permit holders of such Senior Indebtedness to accelerate its maturity and the holder of this Indebtedness (or indenture trustee or other representative thereof) receives a notice of the default (a “Payment Blockage Notice”) from a holder of Senior Indebtedness, a representative of the holder of such Senior

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Indebtedness or the Company (a “Non-Payment Default”).

If the holder of this Indebtedness (or indenture trustee or representative thereof) receives any Payment Blockage Notice pursuant to the immediately preceding clause (ii), no subsequent Payment Blockage Notice shall be effective for purposes of this Section __.2 unless and until (A) at least 365 days shall have elapsed since the initial effectiveness of the immediately prior Payment Blockage Notice and (B) all scheduled payments of principal, premium, if any, and interest on this Indebtedness that have become due and are required by the terms of this Indebtedness to be paid in cash have been paid in full in cash. No Non-Payment Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the holder of this Indebtedness (or indenture trustee or other representative thereof) shall be, or be made, the basis for a subsequent Payment Blockage Notice, unless such Non-Payment Default is based upon facts or events arising after the date of delivery of such Payment Blockage Notice.

(2) The Company may and shall resume payments on and distributions in respect of this Indebtedness upon:

(i) in the case of a Payment Default, the date upon which any such Payment Default is cured or waived or ceases to exist, or

(ii) in the case of a Non-Payment Default, the earlier of (a) the date upon which such default is cured or waived or ceases to exist or (b) 179 days after the applicable Payment Blockage Notice is received by the holder of this Indebtedness (or indenture trustee or other representative thereof) if the maturity of such Senior Indebtedness has not been accelerated and no Payment Default with respect to any Senior Indebtedness has occurred which has not been cured or waived (in which case clause (A) shall be applicable),

unless this Article          otherwise prohibits the payment or distribution at the time of such payment or distribution.

(b) A “Reorganization” shall include and mean any dissolution, winding up, total or partial liquidation or reorganization of the Company, or any similar transaction resulting in any payment or distribution of cash, securities or other property (“Distributions”) to creditors, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or similar proceedings.

(c) Upon any Reorganization, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, or payment thereof provided for in cash or other payment satisfactory to the holders of such Senior Indebtedness, before any Distribution is made to, for, or on account of this Indebtedness or any portion thereof (including, without limitation, any Distribution in connection with a payment of principal, interest or premium or the redemption or repurchase of all or any portion of this Indebtedness or any payment or deposit for defeasance, or in the nature of defeasance, of this Indebtedness).

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(d) Upon any Reorganization, all Distributions on account of this Indebtedness shall be made by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent, assignee for the benefit of creditors or other person making such Distribution directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, or as otherwise required by law or a court order or the terms of any subordination as between or among such Senior Indebtedness) or their respective representative or representatives, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any Distribution is made on account of this Indebtedness.

(e) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (including, without limitation, by way of set-off or otherwise), prohibited by the foregoing, shall be received by any holder of this Indebtedness (or indenture trustee or other representative thereof), whether from the Company or from the holder (or indenture trustee or other representative thereof) of any indebtedness subordinated to this Indebtedness or otherwise, before all Senior Indebtedness is paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, or provision is made for such payment in accordance with its terms in cash or other payment satisfactory to the holders of such Senior Indebtedness, such payment or distribution shall be held by the recipient or recipients thereof in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representative or representatives, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution (or provision therefor) to or for the holders of such Senior Indebtedness.

(f) In the event of the acceleration of this Indebtedness because of an event of default or any amount of principal of or premium on this Indebtedness becomes due prior to the maturity date of this Indebtedness, no payment or distribution shall be made to any holder of this Indebtedness (or indenture trustee or other representative thereof) in respect of the principal of, premium, if any, or interest on this Indebtedness (including, without limitation, any redemption or repurchase price of any of this Indebtedness called for redemption in accordance with its terms or submitted for redemption or repurchase at the option of the holder of this Indebtedness in accordance with its terms, as the case may be, or any payment or deposit for defeasance, or in the nature of defeasance, of this Indebtedness), until all Senior Indebtedness has been paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness or such acceleration is rescinded in accordance with the terms of this Indebtedness. If payment of this Indebtedness is accelerated because of an event of default, the Company, the holder of this Indebtedness (or indenture trustee or other representative thereof) shall promptly notify holders of the Senior Indebtedness of such acceleration.

(g) Except as shall be specifically prohibited by this Section _.2, nothing contained in this Article shall prevent the Company from making any scheduled payment of principal of or premium, if any, or interest on this Indebtedness.

III-3

Section __.3. Subrogation of this Indebtedness. Subject to the payment in full of all Senior Indebtedness in cash or other payment satisfactory to the holders of such Senior Indebtedness, the rights of the holders of this Indebtedness shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to Senior Indebtedness to substantially the same extent as this Indebtedness is subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on this Indebtedness shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the holders of this Indebtedness would be entitled except for the provisions of this Article, and no payment over pursuant to the provisions of this Article, to or for the benefit of the holders of Senior Indebtedness by holders of this Indebtedness (or indenture trustee or other representative thereof), shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the holders of this Indebtedness, be deemed to be a payment by the Company to or on account of the Senior Indebtedness; and no payments or distributions of cash, property or securities to or for the benefit of the holders of this Indebtedness pursuant to the subrogation provisions of this Article, which would otherwise have been paid to the holders of Senior Indebtedness, shall be deemed to be a payment by the Company to or for the account of this Indebtedness.

Section __.4. Provisions Solely to Define Relative Rights. It is understood that the provisions of this Article are and are intended solely for the purposes of defining the relative rights of the holders of this Indebtedness, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing contained in this Article or in the terms of this Indebtedness is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness, and the holders of this Indebtedness, the obligation of the Company, which is absolute and unconditional, to pay to the holders of this Indebtedness the principal of (and premium, if any) and interest on this Indebtedness as and when the same shall become due and payable in accordance with its terms, or is intended to or shall affect the relative rights of the holders of this Indebtedness and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent any holder of this Indebtedness from exercising all remedies otherwise permitted by applicable law upon default under this Indebtedness, subject to the rights, if any, under this Article of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy.

Section __.5. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the holders of this Indebtedness shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, dissolution, winding-up, liquidation, reorganization or similar case or proceeding is pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, custodian, agent, assignee for the

III-4

benefit of creditors, or other person making such payment or distribution, delivered to the holders of this Indebtedness (or indenture trustee or other representative thereof), for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article.

Section __.6. No Impairment of Subordination. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of the Notes or the documents, agreements and instruments relating thereto or to this Indebtedness, regardless of any knowledge thereof which any such holder may have or otherwise be charged with.

Section __.7. Certain Conversions Deemed Payment. If this Indebtedness is convertible into securities of the Company, for the purposes of this Article only, (1) the issuance and delivery of junior securities upon conversion of this Indebtedness in accordance with such conversion rights shall not be deemed to constitute a payment or distribution on account of the principal of (or premium, if any) or interest on this Indebtedness or on account of the purchase or other acquisition of this Indebtedness, and (2) the payment, issuance or delivery of cash, property or securities (other than junior securities) upon conversion of this Indebtedness shall be deemed to constitute payment on account of the principal of (and premium, if any) and interest on this Indebtedness. For the purposes of this Section, the term “junior securities” means (a) shares of any stock of any class of the Company, (b) securities of the Company that are subordinated in right of payment to all Senior Indebtedness to substantially the same extent as, or to a greater extent than, this Indebtedness is so subordinated as provided in this Article and (c) securities, if any, into which this Indebtedness becomes convertible in connection with any business combination transaction if so provided in the terms of this Indebtedness. Nothing contained in this Article or elsewhere in the terms of this Indebtedness is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the holders of this Indebtedness, the right, if any, which is absolute and unconditional, of the holder of this Indebtedness, if by the terms of this Indebtedness this Indebtedness is convertible into securities of the Company, to convert this Indebtedness in accordance with the terms of this Indebtedness.

Section __.8 Senior Indebtedness Entitled to Rely. The holders of Senior Indebtedness shall have the right to rely upon this Article, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto.

Section __.9 Definitions. As used in this Article, the following terms shall have the following meanings:

“Company” means Acclaim Entertainment, Inc., a Delaware corporation, and shall include its successors and assigns.

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“Indenture” shall have the meaning provided in the Notes.

“Note Purchase Agreement” means the Note Purchase Agreement, dated February 17, 2004, by and between the Company and the buyer named therein, as amended from time to time.

“Notes” means the 9% Senior Subordinated Convertible Notes due 2007 at any one time outstanding not in excess of the original aggregate authorized amount of $25,000,000, issued by the Company pursuant to the Note Purchase Agreement, including any such notes issued upon transfer thereof or in lieu of any such notes that are mutilated, destroyed, lost or stolen.

“Senior Indebtedness” means the principal of, premium, if any, and interest on (including any interest accruing after the filing of a petition by or against the Company under any bankruptcy law, whether or not allowed as a claim after such filing in any proceeding under such bankruptcy law), and any other payment (including, without limitation, the Repurchase Price (as defined in the Indenture)) due pursuant to, any of the following, whether outstanding at the time of issuance of this Indebtedness or thereafter incurred or created:

(a) the Notes; and

(b) all renewals, extensions, refundings, deferrals, amendments or modifications of the Notes;

unless in the case of any such renewal, extension, refunding, amendment, modification or supplement, the instrument or other document creating or evidencing the same or the assumption or guarantee of the same expressly provides that such renewal, extension, refunding, amendment, modification or supplement is not superior in right of payment to, or is pari passu with, this Indebtedness.

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EX-10.46

EXHIBIT 10.46

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.

February 17, 2004

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”), Alexandra Global Master Fund Ltd. (the “Holder”), subject to the terms and conditions of this Warrant, is hereby granted the right to purchase, at the initial exercise price of $0.65 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 February 17, 2009, other than as provided herein, in the aggregate, 4,615,385 shares of Common Stock (the “Shares”) subject to adjustment as provided herein.

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) 9.9% Limitation.

(1) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired at any time by the Holder upon exercise of the Warrant shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such Holder (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the holder’s right to convert, exercise or purchase similar to the limitation set forth herein (the “Excluded Shares”)), together with all shares of Common Stock beneficially owned at such time (other than by virtue of the ownership of Excluded Shares) by Persons whose beneficial ownership of Common Stock would be aggregated with the beneficial ownership by such Holder for purposes of determining whether a group exists or for purposes of determining the Holder’s beneficial ownership (the “Aggregation Parties”), in either such case for purposes of Section 13(d) of the Exchange Act and Regulation 13D-G thereunder (including, without limitation, as the same is made applicable to Section 16 of the Exchange Act and the rules promulgated thereunder), would result in beneficial ownership by such Holder or such group of more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or Section 16 of the Exchange Act and the rules promulgated thereunder (as the same may be modified by a particular Holder as provided herein, the “Restricted Ownership Percentage”). A Holder shall have the right at any time and from time to

2

time to reduce its Restricted Ownership Percentage immediately upon notice to the Company in the event and only to the extent that Section 16 of the Exchange Act or the rules promulgated thereunder (or any successor statute or rules) is changed to reduce the beneficial ownership percentage threshold thereunder to a percentage less than 9.9%. If at any time the limits in this Section 1(b) make the Warrant unexercisable in whole or in part, the Company shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter upon exercise of the Warrant as and when shares of Common Stock may be issued in compliance with such restrictions.

(2) For purposes of this Section 1(b), in determining the number of outstanding shares of Common Stock at any time the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s then most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a public announcement by the Company that is later than any such filing referred to in the preceding clause (1) or (3) any other notice by the Company or its transfer agent setting forth the number shares of Common Stock outstanding and knowledge the Holder may have about the number of shares of Common Stock issued upon conversions or exercises of the Notes or other Common Stock Equivalents by any Person, including the Holder, which are not reflected in the information referred to in the preceding clauses (1) through (3). Upon the written request of any Holder, the Company shall within three Business Days confirm in writing to such Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of Common Stock Equivalents by the Holder or its affiliates, in each such case subsequent to the date as of which such number of outstanding shares of Common Stock was reported.

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) (A) good funds in respect of the Purchase Price (as defined in Section 4(b) hereof) pursuant to Section 4 hereof or (B) surrender of the Warrant as provided in Section 1(a) in connection with a “cashless” exercise, for the shares so exercised and such certificates shall be issued in the name of the Holder hereof.

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

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representing the Shares underlying this Warrant shall bear a legend as set forth at the head hereof.

(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 and copies of the Company’s Quarterly Reports on Form 10-Q for the quarters ended June 29, 2003 and September 28, 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 Note Purchase 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 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

4

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 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

5

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 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.

(j) Effect of Reclassification, Consolidation, Merger or Sale.

(i) If any of the following events occur, namely (A) any reclassification or change of the outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (B) any consolidation, merger statutory exchange or combination of the Company

6

with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (C) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing Person, as the case may be, shall execute with the Holder a written agreement providing that (x) this Warrant shall thereafter entitle the Holder to purchase the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon exercise of this Warrant (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to exercise this Warrant) immediately prior to such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder’s rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 6 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares), (y) in the case of any such successor or purchasing Person, upon such consolidation, merger, statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company’s obligations under this Warrant (z) if registration or qualification is required under the 1933 Act or applicable state law for the public resale by the Holder of such shares of stock and other securities so issuable upon exercise of this Warrant, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, statutory exchange, combination or sale. Such written agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. If, in the case of any such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance, the stock or other securities or other property or assets receivable thereupon by a holder of shares of Common Stock includes shares of stock, other securities, other property or assets of a Person other than the Company or any such successor or purchasing Person, as the case may be, in such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance, then such written agreement shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holder as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing.

(ii) The above provisions of this Section 5(j) shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

(iii) If this Section 5(j) applies to any event or occurrence, Section 5(c) shall not apply to such event or occurrence.

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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:	/S/    GERARD F. AGOGLIA

Name:	Gerard F. Agoglia
Title:	Executive Vice President and Chief Financial Officer

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-23.1

EXHIBIT 23.1

Independent Auditors’ Consent

Board of Directors

Acclaim Entertainment, Inc.:

We consent to the use in this registration statement on Form S-1 of Acclaim Entertainment, Inc. and Subsidiaries of our report dated May 20, 2003, included herein, and to the reference to our firm under the heading “Experts” in the prospectus. Our report dated May 20, 2003, contains an explanatory paragraph that states that the Company has working capital and stockholders’ deficits at March 31, 2003 and a recurring use of cash in operating activities which raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of that uncertainty.

New York, New York

March 5, 2004 KPMG LLP