SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 2928, 2003

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

For the transition period from to

Commission File Number 0-16986

ACCLAIM ENTERTAINMENT, INC.

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

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

One Acclaim Plaza, Glen Cove, New York		11542
(Address of principal executive offices)		(Zip Code)

(516) 656-5000

(Registrant’s telephone number)

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

None

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

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

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

As of ~~July~~November 3110, 2003, 113,~~084~~234,491 shares of common stock of the registrant were issued and outstanding.

ACCLAIM ENTERTAINMENT, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

		PageNo.
PART I		1
Item 1.	Consolidated financial statements (Unaudited, except where otherwise noted)	1
	Consolidated Balance Sheets—June 29, 2003 and March 31, 2003 (Audited)	1
	Consolidated Balance Sheets—September 28, 2003 and March 31, 2003 (Audited)	1
	Consolidated Statements of Operations—Three months ended June 29, 2003 and June 2, 2002	2
	Consolidated Statements of Operations—Three and six months ended September 28, 2003 and August 31, 2002	2
	Consolidated Statements of Stockholders’ Equity (Deficit)—Three months ended June 29, 2003 and Seven months ended March 31, 2003 (Audited)	3
	Consolidated Statements of Stockholders’ Equity (Deficit)—Six months ended September 28, 2003 and Seven months ended March 31, 2003 (Audited)	3
	Consolidated Statements of Cash Flows—Three months ended June 29, 2003 and June 2, 2002	5
	Consolidated Statements of Cash Flows—Six months ended September 28, 2003 and August 31, 2002	5
	Notes to consolidated financial statements	76
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2728
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5259
Item 4.	Controls and Procedures	5259
PART II		5360
Item 1.	Legal Proceedings	5360
Item 6.	Exhibits and Reports on Form 8-K	5461

PART I

Item 1. Consolidated financial statements

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	June 29, 2003			March 31, 2003
	September 28,2003			March 31,2003
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	27,~~165~~323		$	4,495
Accounts receivable, net		1219,~~064~~917			24,303
Other receivables		~~2,745~~598			3,360
Inventories		53,~~800~~655			7,711
Prepaid expenses and other current assets		5,~~880~~579			7,076
Capitalized software development costs, net		~~2,925~~405			6,944
Building held for sale		5,~~754~~628			5,424
Total Current Assets		3743,~~333~~105			59,313
Fixed assets, net		1817,~~539~~158			19,731
Other assets		~~567~~1,085			893
Total Assets	$	5661,~~439~~348		$	79,937
Liabilities and Stockholders' Deficit
Liabilities and Stockholders’ Deficit
Current Liabilities
Short-term borrowings	$	1614,~~465~~567		$	30,799
Trade accounts payable		2629,~~783~~723			28,477
Accrued expenses		2531,~~350~~435			28,751
Accrued selling expenses		2623,~~242~~001			26,649
Accrued stock-based expenses		4,~~290~~582			—
Accrued restructuring charges		1,383			2,299
Accrued restructuring costs		1,176			2,299
Mortgage payable		4,~~945~~678			4,600
Income taxes payable		1,~~275~~152			1,234
Total Current Liabilities		~~106~~110,~~733~~314			122,809
Long-Term Liabilities
Long-term debt		666			632
Obligations under capital leases		454			632
Convertible notes		2,948			—
Other long-term liabilities		2,654			2,654
Total Liabilities		~~110~~116,~~053~~370			126,095
Stockholders' Deficit
Stockholders’ Deficit
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued		—			—
Common stock, $0.02 par value; 200,000 shares authorized; 109,084 and 96,621 shares issued and outstanding		2,181			1,932
Common stock, $0.02 par value; 200,000 shares authorized; 109,084 and 96,621 shares issued and outstanding …		2,181			1,932
Additional paid-in capital		~~324~~327,~~134~~125			313,616
Accumulated deficit		(~~377~~381,~~960~~965	)		(359,911	)
Accumulated other comprehensive loss		(12,~~969~~363	)		(1,795	)
Total Stockholders' Deficit		(53,614	)		(46,158	)
Total Stockholders’ Deficit		(55,022	)		(46,158	)
Total Liabilities and Stockholders' Deficit	$	56,439		$	79,937
Total Liabilities and Stockholders’ Deficit	$	61,348		$	79,937

See notes to consolidated financial statements.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 29,2003			June 2,2002
	September 28,2003			August 31,2002			September 28,2003			August 31,2002
Net revenue	$	3341,~~070~~345		$	6254,~~863~~055		$	74,415		$	116,918
Cost of revenue		1920,~~905~~472			2633,~~691~~222			40,377			59,913
Gross profit		1320,~~165~~873			3620,~~172~~833			34,038			57,005
Operating expenses
Marketing and selling		6,~~725~~094			1318,~~068~~557			12,819			31,625
General and administrative (excluding stock-based compensation of $1,170 in fiscal 2004)		8,541			10,413
General and administrative		8,875			11,480			17,416			21,893
Research and development		117,~~325~~390			915,~~367~~928			18,715			25,295
Stock-based compensation		~~1,170~~80			—			1,250			—
Total operating expenses		27,761			32,848
Restructuring		205			—			205			—
(Loss) earnings from operations		(14,596	)		3,324
Total operating expenses		22,644			45,965			50,405			78,813
Other income (expense)
Loss from operations		(1,771	)		(25,132	)		(16,367	)		(21,808	)
Interest expense, net		(1,046	)		(974	)
Other income (expense)
Non-cash financing expense		(1,960	)		(193	)
Interest expense, net		(989	)		(1,169	)		(2,035	)		(2,143	)
Other (expense) income		(447	)		403
Non-cash financing expense		(1,828	)		(193	)		(3,788	)		(386	)
Total other expense		(3,453	)		(764	)
Other income (expense)		583			(1,512	)		136			(1,109	)
(Loss) earnings before income taxes		(18,049	)		2,560
Total other expense		(2,234	)		(2,874	)		(5,687	)		(3,638	)
Income tax provision		—			25
Loss before income taxes		(4,005	)		(28,006	)		(22,054	)		(25,446	)
Net (loss) earnings	$	(18,049	)	$	2,535
Income tax provision		—			224			—			249
Net (loss) earnings per share data:
Net loss	$	(4,005	)	$	(28,230	)	$	(22,054	)	$	(25,695	)
Basic	$	(0.19	)	$	0.03
Net loss per share data:
Diluted	$	(0.19	)	$	0.03
Basic	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)
Diluted	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)

See notes to consolidated financial statements.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS'’ EQUITY (DEFICIT)

(In thousands)

	PreferredStockIssued		Common StockIssued					~~Additional Paid~~AdditionalPaid-~~In Capital~~InCapital			~~Notes Receivable~~NotesReceivable
			Shares		Amount
Balance at August 31, 2002	$	—	92,471		$	1,849		$	318,405		$	(6,947	)
Net loss		—	—			—			—			—
Exercise of stock options and warrants		—	10			—			11			—
Issuance of common stock under employee stock purchase plan		—	140			3			118			—
Issuance of common stock to executive officers for providing collateral for credit agreement		—	4,000			80			1,480			—
Warrants issued to executive officers for providing collateral for credit agreement		—	—			—			305			—
Warrant modification charges in connection with common stock issuance to executive officers		—	—			—			165			—
Stock option compensation		—	—			—			79			—
Foreign currency translation gain		—	—			—			—			—
Balance at March 31, 2003		—	96,621			1,932			320,563			(6,947	)
Net loss		—	—			—			—			—
Issuance of common stock under employee stock purchase plan		—	80			1			56			—
Issuance of common stock in private placement, net		—	16,383			328			7,986			—
Reclassification of common stock issuance to accrued stock-based expenses		—	(4,000	)		(80	)		(1,480	)		—
Payment of notes receivable due from executive officers		—	—			—			—			36,~~956~~947
Foreign currency translation loss		—	—			—			—			—
Balance at June 29, 2003	$	—	109,084		$	2,181		$	327,125		$	(2,991	)
Balance at September 28, 2003*	$	—	109,084		$	2,181		$	327,125		$	—

* Amounts as of and for the ~~three~~six months ended ~~June~~September 2928, 2003 are unaudited.

See notes to consolidated financial statements.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

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

(In thousands)

	AccumulatedDeficit			~~Accumulated Other ComprehensiveLoss~~AccumulatedOtherComprehensiveLoss			Total			~~Comprehensive~~ComprehensiveIncome ~~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		(1822,~~049~~054	)		—			(1822,~~049~~054	)		(1822,~~049~~054	)
Issuance of common stock under employee stock purchase plan		—			—			57
Issuance of common stock in private placement, net		—			—			8,314
Reclassification of common stock issuance to accrued stock-based expenses		—			—			(1,560	)
Payment of notes receivable due from executive officers		—			—			36,~~956~~947
Foreign currency translation loss		—			(~~174~~568	)		(~~174~~568	)		(~~174~~568	)
Balance at June 29, 2003	$	(377,960	)	$	(1,969	)	$	(53,614	)	$	(18,223	)
Balance at September 28, 2003*	$	(381,965	)	$	(2,363	)	$	(55,022	)	$	(22,622	)

* Amounts as of and for the ~~three~~six months ended ~~June~~September 2928, 2003 are unaudited.

See notes to consolidated financial statements.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended
	Six Months Ended
	June 29,2003			June 2,2002
	September 28,2003			August 31,2002
	(Unaudited)
Cash flows from operating activities:
Net (loss) earnings	$	(18,049	)	$	2,535
Net loss	$	(22,054	)	$	(25,695	)
Adjustments to reconcile net (loss) earnings to net cash used in operating activities:
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		12,~~520~~987			24,~~206~~384
Non-cash financing expense		13,~~960~~788			~~193~~386
Provision for price concessions and returns, net		713,~~811~~611			955,~~741~~139
Amortization of capitalized software development costs		47,~~462~~084			14,~~405~~862
Write-off of capitalized software development costs		~~177~~304			—2,478
Non-cash compensation expense		1,~~170~~250			—
Gain from recovery of paid royalties		(531	)		—
Gain on fixed assets disposals		(4952	)		—
Other non-cash items		1830			5489
Change in operating assets and liabilities:
Accounts receivable		(6,~~119~~380	)		(657,~~507~~042	)
Other receivables		13,~~441~~178			(13,~~277~~263	)
Other assets		100			—75
Inventories		24,~~133~~189			~~2,520~~(663	)
Prepaid expenses		(~~359~~1,723	)		(~~1,689~~93	)
Capitalized software development costs		(~~519~~836	)		(614,~~818~~136	)
Accounts payable		~~(2,295~~804	)		110,~~994~~947
Accrued expenses		(56,~~242~~751	)		(715,~~986~~905	)
Income taxes payable		(55131	)		~~(14~~646	)
Other long-term liabilities		—			(91141	)
Net cash used in operating activities		(188	)		(3,783	)
Net cash (used in) provided by operating activities		(1,133	)		804
Cash flows from investing activities:
Acquisition of fixed assets		(~~106~~226	)		(13,~~956~~352	)
Proceeds from disposal of fixed assets		8183			12
Other assets		18			102
Net cash used in investing activities		(7125	)		(13,~~945~~348	)
Cash flows from financing activities:
Proceeds from issuance of convertible notes		5,500			—
Repayment of promissory notes		(268	)		—
Payment of mortgages		(89	)		(486	)
Proceeds from payment of notes receivable		6,947			—
(Payment of) proceeds from short-term bank loans, net		(16,024	)		9,718
Proceeds from exercises of stock options and warrants		—			1,537
Payment of obligations under capital leases		(520	)		(351	)
Payment of private placement fees		—			(2,025	)
Net proceeds from issuances of common stock		8,314			—
Proceeds from issuance of common stock under employee stock purchase plan		57			294
Net cash provided by financing activities		3,917			8,687
Effect of exchange rate changes on cash		169			766
Net increase in cash and cash equivalents		2,828			6,909
Cash and cash equivalents: beginning of period		4,495			44,095
Cash and cash equivalents: end of period	$	7,323		$	51,004
Supplemental schedule of non-cash financing activities:
Acquisition of equipment under capital leases	$	166		$	947
Cash paid during the period for:
Interest	$	2,144		$	3,200
Income taxes	$	123		$	—

See notes to consolidated financial statements.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(In thousands)

	Three Months Ended
	June 29,2003			June 2,2002
	(Unaudited)
Cash flows from financing activities:
Repayment of promissory notes		(201	)		—
Payment of mortgages		—			(293	)
Proceeds from payment of notes receivable		3,956			—
(Payment of) proceeds from short-term bank loans, net		(14,330	)		3,009
Proceeds from exercises of stock options and warrants		—			1,483
Payment of obligations under capital leases		(233	)		(109	)
Payment of private placement fees		—			(1,715	)
Proceeds from issuances of common stock, net		8,314			—
Proceeds from issuance of common stock under employee stock purchase plan		57			—
Net cash (used in) provided by financing activities		(2,437	)		2,375
Effect of exchange rate changes on cash		302			(38	)
Net decrease in cash and cash equivalents		(2,330	)		(3,391	)
Cash and cash equivalents: beginning of period		4,495			44,095
Cash and cash equivalents: end of period	$	2,165		$	40,704
Supplemental schedule of non-cash financing activities:
Acquisition of equipment under capital leases	$	197		$	—
Cash paid during the period for:
Interest	$	1,139		$	1,222
Income taxes	$	34		$	526

See notes to consolidated financial statements.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation

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

B. Change in Fiscal Year

In January 2003, our Board of Directors approved a plan to change our fiscal year end from August 31 to March 31. Our new fiscal year commenced on April 1, 2003 and will end on March 31, 2004. Our quarterly closing dates will occur on the Sunday closest to the last day of the calendar quarter, which encompasses the following quarter ending dates for fiscal 2004.

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

The accompanying consolidated financial statements include our results of operations for the three and six month ~~period~~periods ended ~~June~~September 2928, 2003, ~~our first quarter of fiscal 2004,~~ and the most comparable reported ~~quarter~~periods of the prior year, the three and six month ~~quarter~~periods ended ~~June~~August 231, 2002. We have presented the ~~quarter~~three and six month periods ended ~~June~~August 231, 2002 as a prior year ~~comparative~~comparatives to the current year ~~quarter~~periods because the seasonal factors affecting both periods are similar, the data is comparable and recasting our prior year results of operations and related supporting schedules would not have been practicable nor cost justified.

C. Business and Liquidity

We develop, publish, distribute and market video and computer game software for interactive entertainment consoles and, to a lesser extent, personal computers. We internally develop our software products through our five software development studios located in the United States and the United Kingdom. Additionally, we contract with independent software developers to create software products for us.

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

~~Our accompanying~~6 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

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. As of March 31, 2003, our independent auditors’ report, as prepared by KPMG LLP and dated May 20, 2003, included an explanatory paragraph relating to the substantial doubt as to our ability to continue as a going concern due to working capital and stockholders’ deficits as of March 31, 2003 and the recurring use of cash in operating activities. For the ~~three~~six months ended ~~June~~September 2928, 2003 we had a net loss of $1822,~~049~~054 and used $~~188~~1,133 of cash in operating activities. As As of ~~June~~September 2928, 2003, we had a stockholders’ deficit of $5355,~~614~~022, a working capital deficit of $6967,~~400~~209 and ~~$2,165 of~~ cash and cash equivalents of $7,323. These factors have continued to raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty and, based on management’s plans described below, have been prepared on a going concern basis.

Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with our primary lender. To enhance our short-term liquidity, during fiscal 2003, we implemented targeted expense reductions through a business restructuring. In connection with the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff related expenses and lowered our overall marketing expenditures. Additionally, on March 31, 2003, our primary lender had advanced to us a supplemental discretionary loan of ~~up to~~ $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. ~~The~~and ~~remaining~~as ~~$5,000~~ of ~~the~~September ~~supplemental~~26, ~~discretionary~~2003, ~~loan~~we ~~will~~repaid ~~continue~~the toremaining be$5,000. ~~available~~During tothe ussix ~~through~~ months ended September 2928, 2003~~. In June 2003~~, ~~two of~~ our ~~executive~~Co-chairmen ~~officers~~fully ~~prepaid~~repaid a total of $36,~~956~~947 of their outstanding loans ~~that are due to us on August 31, 2003~~ and ~~$828 of~~ related accrued interest of $873. Additionally, in June 2003, we completed a private placement of 16,383 shares of our common stock to a limited group of private investors, resulting in net proceeds to us of $8,314. ~~Furthermore,~~In toSeptember ~~meet~~and ~~our~~October ~~liquidity needs~~2003, we ~~have~~completed ~~included~~the asale ~~proposal~~of in our ~~forthcoming~~10% ~~2003~~convertible ~~Proxy~~subordinated ~~Statement~~notes, ~~seeking the~~resulting ~~authorization~~in ~~from~~gross ~~our~~proceeds ~~stockholders~~of to$11,863 ~~issue~~of ~~securities~~which in$5,500 ~~connection~~was ~~with~~received ~~our~~as ~~continuing~~of ~~efforts~~September to28, ~~raise additional financing from outside investors~~2003.

Our future liquidity will significantly depend in whole or in part on our ability to (1) ~~obtain additional supplemental financing from outside investors, (2)~~ timely develop and market new software products that meet or exceed our operating plans, ~~and~~ (32) realize long-term benefits from our implemented expense reductions, asand ~~well as~~ (43) continue to enjoy the support of our primary lender and vendors. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, ~~nor~~ continue to realize additional benefits from the expense reductions we have implemented, and wetimely ~~are~~close ~~unable~~on tothe ~~obtain additional~~new ~~supplemental~~domestic ~~discretionary~~loan ~~financing~~facility ~~from~~with our primary lender ~~to fund operations~~, ~~or obtain additional supplemental financing from outside investors,~~ we will either need to make further significant expense reductions, including, without limitation, the sale of certain assets or the consolidation or closing of certain operations, ~~staff~~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 ~~that~~those ~~such~~ consents or approvals ~~can~~will be obtained.

In the event that we do not ~~meet~~achieve ~~or exceed~~ our ~~operating~~ business operating plan, ~~and~~ continue to derive significant expense savings from our implemented expense reductions, ~~obtain~~and ~~additional~~timely ~~financing~~close ~~from~~on ~~outside~~the ~~investors~~new ~~or,~~domestic ifloan facility with 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 our stockholders that our future operating cash flows will be sufficient to meet our operating requirements, ~~our~~and debt service requirements ~~or to repay our indebtedness at maturity, including without limitation, repayment of the remaining outstanding balance of the supplemental discretionary loan~~. If any of the preceding events were to occur, our operations and liquidity ~~could~~would be materially and adversely affected, weand ~~may be forced to seek legal relief from our debts or~~ we ~~may~~could be forced to cease operations.

DOn January 24, 2003 we received a letter from The Nasdaq Stock Market, Inc. ~~Net~~ ~~Revenue~~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

We7 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

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Marketplace Rule 4310(c)(4), and we had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in accordance with Marketplace Rule 4310(c)(8)(D) we were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the ~~customer~~minimum ~~receivable~~bid requirement. If at any time prior to January 20, 2004 the closing bid price of our common stock is ~~deemed~~$1.00 ~~probable~~or more for a minimum of 10 consecutive trading days, then we will again be in compliance with such rule. WeThe letter also states that if compliance cannot be demonstrated by January 20, 2004, Nasdaq will determine whether we meet the initial listing standards for The Nasdaq SmallCap Market, and if we do ~~not~~meet ~~customize~~that ~~our~~criteria ~~software~~we orwill ~~provide~~be ~~postcontract~~granted ~~support~~an additional 90 day grace period in which to demonstrate compliance. If, after January 20, 2004 compliance cannot be demonstrated and we do not meet the initial listing standards then our ~~customers~~securities would be subject to delisting. At that time, we may appeal such determination; however, there can be no assurances that such an appeal would be successful.

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

D. Net Revenue

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

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

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

~~Allowances~~8 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:

	June 29,2003		March 31,2003
Gross accounts receivable (please see note 2)	$	27,379	$	50,980
Allowances:
Accounts receivable allowance (please see note 2)	$	15,315	$	26,677
Accrued price concessions (please see note 10)		18,589		19,623
Accrued rebates (please see note 10)		3,746		2,010
Total allowances	$	37,650	$	48,310

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

channel customers. If the consumers’ demand for a specific title falls below expectations or significantly declines below previous rates of sell-through, then, we may provide a price concession or credit to spur further sales by the retailer to maintain the customer relationship. We record revenue net of an allowance for estimated price concessions and returns. We must make significant estimates and judgments when determining the appropriate allowance for price concessions and returns in any accounting period. In order to derive and evaluate those estimates, we analyze historical price concessions and returns, current sell-through of product and retailer inventory, current economic trends, changes in consumer demand and acceptance of our products in the marketplace, among other factors.

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

	September 28, 2003		March 31, 2003
Gross accounts receivable (please see note 2)	$	35,884	$	50,980

Allowances:
Accounts receivable allowance (please see note 2)	$	15,967	$	26,677
Accrued price concessions (please see note 10)		16,213		19,623
Accrued rebates (please see note 10) …		3,251		2,010

Total allowances	$	35,431	$	48,310

E. Interest Expense, Net

Interest expense, net is comprised of:

	Three Months Ended						Six Months Ended
	June 29,2003			June 2,2002
	September 28,2003			August 31,2002			September 28,2003			August 31,2002
Interest income	$	9454		$	~~226~~792		$	148		$	1,018
Interest expense		(1,~~140~~043	)		(1,~~200~~961	)		(2,183	)		(3,161	)
	$	(~~1,046~~989	)	$	(~~974~~1,169	)	$	(2,035	)	$	(2,143	)

F. Shipping and Handling Costs

We record shipping and handling costs as a component of general and administrative expenses. We do not invoice our customers for and have no revenue related to shipping and handling costs. These costs amounted to $969 for the three months ended September 28, 2003, $1,~~060~~482 for the three months ended August 31, 2002, $2,028 for the six months ended ~~June~~September 2928, 2003 and $12,~~150~~632 for the ~~three~~six months ended ~~June~~August 231, 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.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

assets and liabilities, the disclosures for contingent assets and liabilities on the date of the financial statements and the amounts of revenue and expenses during the reporting period. Actual results could differ from our estimates. Among the more significant estimates we included in these financial statements is our allowance for price concessions and returns, valuation allowances for inventory and valuation allowances for the recoverability of prepaid royalties.

H. Stock-Based Compensation

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

We used the Black Scholes option-pricing model to calculate the fair values of the stock options we granted with the following weighted-average assumptions:

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

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

~~The~~We ~~per~~account ~~share~~for ~~weighted~~our ~~average~~stock ~~fair~~option ~~value~~grants ofto ~~stock~~employees ~~options~~under ~~granted~~APB ~~was~~Opinion $0No.51 ~~during~~25 using the ~~three months~~intrinsic ~~ended~~value ~~June~~method 29and, ~~2003~~accordingly, ~~and~~have ~~$1.67~~recognized ~~during~~no compensation cost for those stock option grants we made which had an exercise price equal to or greater than the ~~three~~market ~~months~~value ~~ended~~of ~~June~~our 2,common ~~2002~~stock on the dates of grant. WeHad ~~used~~we applied the ~~Black~~fair ~~Scholes~~value method ~~option-pricing~~under ~~model~~SFAS toNo. ~~calculate~~123, ~~the~~our ~~fair~~net ~~values~~loss ofand ~~the~~net ~~stock~~loss ~~options~~per weshare ~~granted~~on ~~with~~a pro forma basis would have been the following ~~weighted-average assumptions~~:

	Three Months Ended						Six Months Ended
	June 29,2003		June 2,2002
	September 28,2003			August 31,2002			September 28,2003			August 31,2002
Expected dividend yield	0%		0%
Net loss:
Risk free interest rate	1.8%		4.0%
As reported	$	(4,005	)	$	(28,230	)	$	(22,054	)	$	(25,695	)
Expected stock volatility	128%		52%
Add: Stock-based compensation expense included in net loss (please seenote 11)		80			—			1,250			—
Expected option life	3 yrs		3 yrs
Deduct: Total stock-based employee compensation expense using fair value method		(878	)		(1,168	)		(2,881	)		(2,308	)
Pro forma	$	(4,803	)	$	(29,398	)	$	(23,685	)	$	(28,003	)
Diluted net loss per share:
As reported	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)
Pro forma	$	(0.04	)	$	(0.32	)	$	(0.23	)	$	(0.30	)

WeStock-based ~~account~~compensation ~~for~~of ~~our~~$80 for ~~stock~~the ~~option~~three ~~grants~~months toended ~~employees~~September ~~under~~28, ~~APB~~2003 ~~Opinion No. 25 using the intrinsic value method~~ and, ~~accordingly~~$1,250 ~~have recognized no compensation cost~~ for ~~those~~the ~~stock~~six ~~option~~months ~~grants~~ended weSeptember ~~made~~28, ~~which~~2003 ~~had~~was anexcluded ~~exercise~~from ~~price~~general ~~equal~~and toadministrative orexpenses ~~greater~~and ~~than~~classified ~~the~~separately ~~fair market value of our common stock~~ on the ~~dates~~statements of ~~grant~~operations. ~~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:~~

	Three Months Ended
	June 29,2003			June 2,2002
Net (loss) earnings:
As reported	$	(18,049	)	$	2,535
Add: Stock-based compensation expense included in net (loss) earnings (please see note 13A).		1,170			—
Deduct: Total stock-based employee compensation expense using fair value method.		(2,003	)		(1,135	)
Pro forma	$	(18,882	)	$	1,400
Diluted net (loss) earnings per share:
As reported	$	(0.19	)	$	0.03
Pro forma	$	(0.19	)	$	0.01

I. New Accounting Pronouncements

In ~~May~~January 2003, the FASB issued ~~SFAS~~FASB Interpretation No. ~~150~~46, (FIN 46) “~~Accounting~~Consolidation ~~for Certain Financial Instruments with Characteristics~~ of ~~Both~~Variable ~~Liabilities~~Interest ~~and Equity~~Entities.” ~~SFAS~~The ~~No.~~objective ~~150~~of ~~establishes~~FIN ~~standards~~46 ~~for~~is ~~how~~to animprove ~~issuer classifies~~financial ~~and~~reporting ~~measures~~by ~~certain~~companies ~~financial~~involved ~~instruments~~ with ~~characteristics~~variable ofinterest ~~both liabilities and equity~~entities. ~~Many~~The ofInterpretation ~~these~~requires ~~instruments~~variable ~~were~~interest ~~previously~~entities ~~classified~~to asbe ~~equity.~~consolidated ~~SFAS~~by ~~No. 150 requires that an issuer classify~~ a company ~~financial~~if ~~instrument~~ that company is ~~within~~ ~~its~~subject ~~scope~~to as a ~~liability,~~majority orof asthe anrisk ~~asset in some circumstances. This Statement applies to three types~~ of ~~freestanding~~loss ~~financial~~from ~~instruments,~~the ~~other~~variable ~~than~~interest ~~outstanding~~entity’s ~~shares.~~activities ~~One~~or ~~type~~ is ~~mandatorily~~entitled ~~redeemable shares, which the issuing company is obligated~~ to ~~buy~~receive ~~back in exchange for cash or assets;~~ a ~~second~~majority ~~type~~of ~~includes~~the ~~put~~entity’s ~~options~~residual ~~and~~returns ~~forward purchase contracts that require~~ or ~~may~~both. ~~require~~We ~~the~~do ~~issuer~~not tocurrently ~~buy~~have ~~back~~any ~~some of its shares in exchange for cash or other assets; the third type is~~variable ~~obligations~~interest ~~that~~entities ~~can~~and, ~~be settled with shares~~therefore, the ~~monetary~~adoption ~~value~~ of ~~which~~FIN is46 ~~fixed,~~will ~~tied~~not ~~solely~~affect orour ~~predominantly~~financial ~~to a variable such as a market index, or varies inversely with the value of the issuers’ shares~~statements.

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

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

SFAS No. 150 ~~does~~is ~~not~~effective ~~apply~~for tofinancial ~~features~~instruments ~~embedded~~entered ininto aor ~~financial~~modified ~~instrument~~after ~~that~~May ~~are~~31, ~~not~~2003 awith one ~~derivative~~exception, inand ~~their~~otherwise ~~entirety~~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.

~~SFAS No~~J. ~~150~~Comprehensive isLoss effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. For us, it will be implemented in our second quarter of fiscal 2004 by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of that period. Restatement is not permitted. The adoption of this Statement is not expected to have a material impact on our financial statements.

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

Comprehensive income (loss) for the fiscal 2004 period is presented in the accompanying Consolidated Statement of Stockholders’ Equity (Deficit) and was ($18,223) for the three months ended June 29, 2003 and $2,264 for the three months ended June 2, 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:

	June 29,2003			March 31, 2003
	September 28,2003			March 31,2003
Assigned receivables due from factor	$	2030,~~557~~158		$	42,704
Unfactored accounts receivable		65,~~822~~726			8,276
		27,379			50,980
		35,884			50,980
Allowance for price concessions and returns		(15,~~315~~967	)		(26,677	)
	$	1219,~~064~~917		$	24,303

We and our primary lender are parties to a factoring agreement that expires on August 31, 2004. The factoring agreement provides for automatic renewals for additional one-year periods, unless terminated by either party upon 90 days’ prior notice. Under the factoring agreement, we assign to our primary lender and our primary lender purchases from us, our U.S. accounts receivable on the approximate dates that our accounts receivable are due from our customers. Our primary lender remits payments to us for the assigned U.S. accounts receivable that are within the financial parameters set forth in the factoring agreement. Those financial parameters include requirements that invoice amounts meet approved credit limits and that the customer does not dispute the invoices. The purchase price of our accounts receivable that we assign to the factor equals the invoiced amount, which is adjusted for any returns, discounts and other customer credits or allowances.

Before our primary lender purchases our U.S. accounts receivable and remits payment to us for the purchase price, it may, in its discretion, provide us cash advances under our North American credit agreement (please see note 1313B) taking into account the assigned receivables due from our customers, among other factors. As of ~~June~~September 2928, 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.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

3. OTHER RECEIVABLES

Other receivables are comprised of:

	June 29,2003		March 31,2003
	September 28,2003		March 31,2003
Foreign value added tax	$	~~220~~164	$	—
Notes receivable and accrued interest due from officers (please see note 17)		335		1,469
Notes receivable and accrued interest due from officers(please see note 16)		298		1,469
Licensing fee recovery		~~1,945~~—		1,415
Other		~~245~~136		476
	$	~~2,745~~598	$	3,360

We received payment of the licensing fee recovery of $1,945 in July 2003.

4. INVENTORIES

Inventories are comprised of:

	June 29,2003		March 31,2003
	September 28,2003		March 31,2003
Raw material and work-in-process	$	78124	$	131
Finished goods		53,~~722~~531		7,580
	$	53,~~800~~655	$	7,711

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are comprised of:

	June 29,2003		March 31,2003
	September 28,2003		March 31,2003
Prepaid advertising costs	$	231	$	414
Prepaid advertising	$	291	$	414
Prepaid insurance		2,403		3,122
Prepaid product		2,122		28
Prepaid taxes		120		326
Prepaid insurance		1,566		3,122
Royalty advances		160		754
Prepaid taxes		242		326
Financing costs (please see note 13)		1,498		1,724
Royalty advances		541		754
Other prepaid expenses		1,468		736
Financing costs (please see note 13)		—		1,724
	$	5,880	$	7,076
Other prepaid expenses		817		708
	$	5,579	$	7,076

6. BUILDING HELD FOR SALE AND MORTGAGE PAYABLE

In March 2003, we committed ourselves to a plan to sell our building located in the United Kingdom. ~~The~~Since then the building ishas not ~~currently~~been in use. As of ~~June~~September 2928, 2003, the net carrying value of the building of $5,~~754~~628 (£3,448) which was equal to its fair value as determined by an independent appraisal in fiscal 2003, was classified as a current asset and its associated mortgage payable of $4,~~945~~678 was classified as a current liability, as we expect to sell the building within a year. We are required to make quarterly principal payments of $229 (£137.5) toward repayment of the mortgage pursuant to the associated U.K. secured credit facility. The U.K. bank charges us interest at 2.00% above LIBOR (5.6867% as of ~~June~~September 2928, 2003; 5.94% atas of March 31, 2003).

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

7. FIXED ASSETS

Fixed assets are comprised of:

	June 29,2003			March 31,2003
	September 28,2003			March 31,2003
Buildings and improvements	$	20,~~160~~163		$	20,155
Furniture, fixtures and equipment		40,~~452~~459			43,405
Automotive equipment		~~403~~396			394
		61,015			63,954
		61,018			63,954
Accumulated depreciation		(4243,~~476~~860	)		(44,223	)
	$	1817,~~539~~158		$	19,731

8. OTHER ASSETS

Other assets are comprised of:

	June 29,2003		March 31,2003
	September 28,2003		March 31,2003
Deferred financing costs	$	~~137~~654	$	320
Deposits		~~430~~431		473
Notes receivable due from officers (please see note 17)		—		100
Notes receivable due from officers (please see note 16)		—		100
	$	~~567~~1,085	$	893

9. ACCRUED EXPENSES

Accrued expenses are comprised of:

	June 29,2003		March 31,2003
	September 28,2003		March 31,2003
Accrued advertising and marketing	$	~~317~~389	$	300
Accrued consulting and professional fees		12,~~399~~308		1,201
Accrued excise and other taxes		1,~~371~~955		1,197
Accrued duty and freight		923		887
Accrued liabilities for derivatives (Please see Note 13A)		2,552		—
Accrued litigation		1,578		1,535
Accrued convertible note placement agent fees		120		—
Accrued payroll		2,529		4,002
Accrued duty and freight		990		887
Accrued purchases		3,503		4,893
Accrued litigation		1,378		1,535
Accrued royalties payable and licensing obligations		10,859		12,188
Accrued payroll		3,613		4,002
Other accrued expenses		2,871		2,548
Accrued purchases		6,467		4,893
	$	25,350	$	28,751
Accrued royalties payable and licensing obligations		8,446		12,188
Other accrued expenses		3,217		2,548
	$	31,435	$	28,751

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

10. ACCRUED SELLING EXPENSES

Accrued selling expenses are comprised of:

	June 29,2003		March 31,2003
	September 28,2003		March 31,2003
Accrued cooperative advertising	$	21,~~025~~661	$	3,187
Accrued price concessions		1816,~~589~~213		19,623
Accrued sales commissions		1,~~882~~876		1,829
Accrued rebates		3,~~746~~251		2,010
	$	2623,~~242~~001	$	26,649

11. ACCRUED STOCK-BASED EXPENSES

Accrued stock-based expenses is comprised of liabilities that are expected to be settled through the issuance of 5,500 shares of our common stock (4,000 shares to two executive officers and 1,500 shares to our newly appointed CEO), but which require stockholder approval prior to such issuances under NASD Rules. The fair value of the shares which are reflected as accrued stock-based expenses as of September 28, 2003 are $3,332 and $1,250, respectively. The Compensation Committee and the Board of Directors have approved the issuance of 1,500 common shares to an executive officer for his promotion to CEO in May 2003 and 4,000 common shares to two other executive officers in March 2003 (please see note ~~13A~~13B), respectively, but stockholder ratification of those issuances is required. Until our Annual Meeting of Stockholders, where our stockholders will vote on whether to approve these stock issuances, the liabilities associated with these issuances will fluctuate with the ~~trading~~market ~~price~~value of ~~our~~the related common stock, which was $.83 per share on September 28, 2003. The $1,~~170~~250 ~~fair~~ market value, as of ~~June~~September 2928, 2003, of the 1,500 common shares for our newly appointed CEO was recorded as stock-based compensation expense during the ~~three~~six months ended ~~June~~September 2928, 2003.

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

No restructuring charges were incurred for the three months ended June 29, 2003 or June 2, 2002.

The following table presents the components of the change in the balance of accrued restructuring charges for the three months ended June 29, 2003:

	(in thousands)
Beginning balance as of March 31, 2003	$	2,299
Less: costs paid		(916	)
Ending balance as of June 29, 2003	$	1,383

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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

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

Ending balance as of September 28, 2003	$	1,176		$	1,176

13. DEBT

Debt is comprised of:

	June 29,2003		March 31,2003
	September 28,2003		March 31,2003
Short term debt:
Obligations under capital leases	$	~~682~~567	$	736
Supplemental bank loan (A)		4,212		11,000
Supplemental bank loan (B)		—		11,000
Advances from International factor (B)		1,535		4,110
Advances from International factors (C)		2,617		4,110
Advances from North American factor (A) (please see note 2)		—		4,154
Advances from North American factor (B) (please see note 2)		891		4,154
Bank participation advance (C)		9,500		9,500
Bank participation advance (D)		9,500		9,500
Promissory notes (D)		536		737
Promissory note (E)		469		737
Bank overdraft		—523		562
		16,465		30,799
		14,567		30,799
Long term debt:
Obligations under capital leases		666		632
10% convertible subordinated notes (A)		2,948		—
	$	17,131	$	31,431
Obligations under capital leases		454		632
		3,402		632
	$	17,969	$	31,431

A. ~~North~~ ~~American~~10% Convertible ~~Credit~~Subordinated ~~Agreement~~Notes

~~Our~~During ~~primary~~September ~~lender~~ and October 2003, we ~~are~~raised ~~parties~~gross toproceeds aof ~~North American credit agreement~~$11,863 ~~which~~in ~~expires~~connection onwith ~~August~~the 31sale, ~~2004.~~to ~~This~~a ~~agreement~~limited ~~automatically~~group ~~renews~~of ~~for~~private ~~additional one-year periods~~investors, ~~unless~~of our ~~primary~~10% ~~lender~~convertible orsubordinated ~~we terminate~~notes (the ~~agreement~~“Notes”), ~~with~~due 90in ~~days’ prior notice~~2010. ~~Under~~The ~~the~~Notes ~~agreement,~~are ~~our~~initially ~~primary~~convertible ~~lender~~into ~~generally~~16,385 shares ~~advances~~of ~~cash~~our tocommon usstock, based onupon a ~~borrowing~~conversion ~~formula~~price ~~that primarily takes into account the balance~~ of ~~our~~$0.724 ~~eligible~~per Ushare.S. ~~receivables~~The ~~that~~conversion ~~the primary~~price ~~lender~~is ~~expects~~based toupon ~~purchase in~~ the ~~future,~~10 ~~and~~day totrailing aaverage ~~lesser~~closing ~~extent~~price of our ~~finished~~common ~~goods~~stock ~~inventory~~ending ~~balances.~~on ~~Advances~~September to23, us2003. ~~under~~In the ~~North~~event ~~American~~we ~~credit~~obtain ~~agreement~~the ~~bear~~authorization from ~~interest~~our atstockholders, ~~1.50%~~the ~~per~~conversion ~~annum~~price ~~above~~for ~~our~~the ~~primary~~Notes ~~lender’s~~will ~~prime~~be ~~rate (5.94%~~adjusted asto of$0.57 ~~June~~per 29share, ~~2003;~~a ~~5.75~~21% asdiscount offrom ~~March~~the ~~31,~~$0.724 ~~2003)~~conversion price. ~~Borrowings~~Accordingly, ~~that~~the ~~our~~Notes ~~primary~~would ~~lender~~then ~~may~~be ~~provide~~convertible usinto in20,812 ~~excess~~shares of ~~an availability formula bear interest at 2.00% above~~ our ~~primary~~common ~~lender’s prime rate~~stock. ~~Under~~Interest ~~the~~on ~~North American credit~~the ~~agreement,~~Notes weis ~~may~~due ~~not~~semi-annually ~~borrow~~on ~~more~~each ~~than~~April ~~$30,000~~15 orand ~~the~~October ~~amount calculated using the availability formula~~15, ~~whichever~~commencing isApril ~~less~~15, ~~unless~~2004. ~~our~~The ~~primary~~purchasers ~~lender~~of ~~approves~~the aNotes ~~supplemental~~have ~~discretionary~~also ~~loan.~~received ~~Our~~warrants ~~primary~~to ~~lender~~purchase ~~has~~approximately ~~secured~~4,096 ~~all~~shares of our ~~obligations under~~common ~~the~~stock, ~~North~~at ~~American~~an ~~credit~~exercise ~~agreement~~price ~~with substantially all~~ of ~~our assets~~$0.724 ~~Under~~per ~~the~~share, which ~~terms~~exercise ofprice ~~the~~will ~~North~~also ~~American~~adjust ~~credit~~to ~~agreement,~~$0.57 weif ~~are~~stockholder ~~required~~approval tois ~~maintain~~obtained. ~~specified~~If ~~levels~~we ofdo ~~working~~not ~~capital~~receive ~~and~~stockholder ~~tangible net worth~~approval, ~~among~~then ~~other~~additional ~~financial covenants.~~warrants Aswill ofbe ~~June~~issued ~~29,~~to ~~2003~~the ~~and~~purchasers ~~March~~of ~~31,~~the ~~2003~~Notes, weto ~~were~~purchase ~~not~~an inadditional ~~compliance~~4,096 ~~with~~shares ~~respect~~at tothe market ~~some~~price of ~~the~~our ~~financial~~common ~~covenants~~stock ~~contained~~at in the ~~agreement~~time ~~and~~of ~~received waivers from our primary lender~~issuance.

On March 31, 2003, our North American credit agreement was amended to allow for supplemental discretionary loans of up to $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. The remaining $5,000 of the supplemental discretionary loan will continue to be available to us through September 29, 2003. 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 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

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

~~fairness~~Subject ~~opinion~~to ~~obtained~~the ~~from~~consent anof ~~independent~~the ~~financial~~holders ~~advisor,~~of onany ~~March~~senior ~~31,~~indebtedness ~~2003,~~and ~~the~~our ~~Audit~~common ~~Committee~~stock ~~approved~~price ~~and~~closing at ~~the~~an ~~Board~~average of ~~Directors~~200% ~~authorized~~of the ~~issuance~~ toNotes’ ~~each~~conversion ~~Affiliate~~price ofduring ~~2,000~~a ~~shares~~specified ofperiod, ~~our~~as ~~common~~defined ~~stock~~in ~~with~~the anagreement, ~~aggregate~~we ~~market~~may, ~~value~~at ofour $1option,~~560~~ ~~and~~redeem athe ~~warrant~~Notes toin ~~purchase~~whole ~~500~~but ~~shares~~not ofin ~~our~~part ~~common~~on ~~stock~~any date on or after April 5, 2005, at ana ~~exercise~~redemption price, ofpayable in ~~$0.50~~cash, ~~per~~equal ~~share~~to ~~with~~the anoutstanding ~~aggregate~~principal ~~fair~~amount ~~value~~ of ~~$305.~~the WeNotes ~~have also~~plus ~~entered~~accrued ~~into~~and anunpaid ~~agreement~~interest ~~with~~thereon to the ~~Affiliates~~applicable ~~which~~redemption ~~stipulates~~date ~~that~~if in the ~~event~~requirements ~~the~~as ~~deposit~~documented isin ~~applied~~the byagreement ~~our~~are ~~primary~~satisfied. ~~lender~~In addition, subject to the ~~repayment~~consent of the holders ~~outstanding~~of ~~supplemental~~any ~~loan~~senior ~~obligations~~indebtedness, ~~and~~the ~~not~~purchasers ~~returned~~of to the ~~Affiliates,~~Notes wehave ~~will~~a ~~either repay~~put ~~such~~option ~~amount~~ to ~~the~~require ~~Affiliates~~us orto ~~apply~~repurchase the ~~amount~~notes asat ana ~~offset,~~redemption amount equal to the ~~extent~~greater ~~permitted~~of bythe ~~applicable~~principal ~~law,~~amount ~~against~~of the ~~balance~~Notes ofplus ~~any~~accrued ~~net~~interest ~~amounts~~thereon, ~~due~~or tothe usmarket value byof the ~~Affiliates~~underlying ~~(please~~stock, ~~see~~if ~~note~~we ~~17)~~experience a change in control.

In ~~June~~the ~~2003,~~event ~~Nasdaq~~our ~~advised~~common usstock ~~that~~price ~~their~~closes ~~then~~at ~~unpublished~~200% ~~internal interpretation~~ of ~~NASD Marketplace Rule 4350(i)(1)(a) requires us to obtain stockholder ratification of~~ the ~~issuance~~Notes’ ofconversion ~~the~~price ~~shares~~in toeffect ~~the~~at ~~Affiliates. Therefore,~~ the ~~issuance~~time offor ~~the~~10 ~~4,000~~consecutive ~~common~~trading ~~shares are subject to stockholder approval~~days, aswe ~~included in~~have ~~our forthcoming 2003 Proxy Statement, and variable accounting is being applied to~~ the ~~issuance.~~right ~~Nasdaq has subsequently published a proposed amendment~~ to ~~Marketplace~~require ~~Rule 4350(i)(1)(a) which addresses this issue. Since~~ the ~~common~~holders ~~shares are now forfeitable, as~~ of ~~June 29, 2003, we reclassified~~ the ~~$1,560~~warrants ~~aggregate~~to ~~market~~exercise ~~value of~~ the ~~shares~~warrants atin ~~issuance from stockholders’ equity to accrued stock-based expenses and recorded an increase of $1~~full,~~560~~ ~~to the $3,120 market value of such shares~~within as10 ofbusiness ~~June~~days ~~29,~~following ~~2003.~~notification ~~We will continue~~ to ~~revalue~~ the ~~common~~warrant ~~shares~~holders atof ~~each quarter-end, until~~ the ~~market~~forced ~~value is fixed if and when the stockholders approve the share issuance~~exercise.

WeAs ~~are~~of ~~expensing~~September ~~the~~28, ~~fair~~2003, ~~value~~we had received $5,500 of the ~~stock-based~~total ~~and~~gross ~~warrant-based~~proceeds ~~consideration~~raised ~~provided~~in toconnection with the ~~Affiliates~~sale asof athe ~~non-cash financing~~Notes. ~~expense~~These ~~over~~Notes ~~the~~are ~~period~~convertible ~~between~~into ~~the~~7,597 ~~date~~shares ~~the~~of ~~initial~~our ~~supplemental~~common ~~loans~~stock, ~~were~~based ~~advanced,~~on ~~February~~a ~~2003,~~conversion price ~~and~~of ~~the~~$0.724 ~~date~~per ~~they~~share, ~~are~~which ~~required~~may be adjusted to be$0.57 ~~fully~~per ~~repaid~~share inas ~~September~~discussed ~~2003~~above. ~~During~~Additionally, in connection with the ~~three~~$5,500 ~~months~~of ~~ended~~Notes, ~~June~~as 29of September 28, 2003, we ~~expensed~~were $obligated to issue warrants to purchase 1,~~702~~899 shares of our common stock to the private investors, at an exercise price of $0.724 per share, which iswould ~~included~~be inadjusted ~~non-cash~~to ~~financing~~$0.57 ~~expense~~per share upon stockholder approval as discussed above.

~~There~~The ~~were~~securities ~~no advances~~offered ~~outstanding~~have ~~within~~not ~~the~~been ~~standard~~registered ~~borrowing formula~~ under the ~~North~~Securities ~~American~~Act ~~credit~~of ~~agreement~~1933, as ofamended, ~~June~~or 29state securities laws, ~~2003.~~and Asmay ofnot ~~March~~be ~~31,~~offered ~~2003,~~or ~~advances~~sold ~~outstanding~~in the United States absent registration with the Securities and Exchange Commission (“SEC”) under the ~~North~~Securities ~~American~~Act ~~credit~~of ~~agreement~~1933, ~~within~~or an applicable exception therefrom. We have agreed to register the ~~standard~~shares ~~borrowing~~of ~~formula~~our common stock underlying the ~~amounted~~Notes toand ~~$4,154~~warrants within 120 days following the closing. ~~The~~If ~~supplemental~~the ~~discretionary~~registration ~~loan~~statement ~~outstanding~~is ~~amounted~~not toeffective $4within 120 days of closing,~~212~~ aswe must pay a penalty of ~~June~~1% ~~29,~~of ~~2003~~the ~~and~~proceeds ~~$11,000~~to asthe purchasers of ~~March~~the ~~31,~~Notes ~~2003~~each month it is not thereafter effective.

~~During~~Based ~~fiscal~~on ~~2002~~the ~~and~~accounting ~~fiscal~~guidance ~~2001,~~in ~~our~~SFAS ~~primary~~No. ~~lender~~133 “Accounting ~~advanced~~for toDerivative usInstruments and weHedging ~~repaid~~Activities,” ~~supplemental~~and ~~discretionary~~EITF ~~loans~~Issue ~~above~~No. ~~the~~00-19 ~~standard~~“Accounting ~~formula~~ for ~~short-term~~ ~~funding~~Derivative ~~under~~Financial ~~our~~Instruments ~~North~~Indexed ~~American~~to, ~~credit~~and ~~agreement.~~Potentially AsSettled ~~additional~~in, ~~security~~a ~~for~~Company’s Own Stock,” (1) the conversion ~~supplemental~~option ~~loans~~of the Notes, ~~two~~(2) ofthe ~~our~~warrants ~~executive~~issued ~~officers~~with ~~personally~~those ~~pledged~~Notes asand ~~collateral~~(3) anthe ~~aggregate~~put ofoption ~~1,568~~held ~~shares~~by the purchasers of ~~our~~the ~~common~~Notes ~~stock.~~are Ifderivative instruments because we have contractually agreed to register the ~~market~~common ~~value~~shares of underlying them and the conversion ~~pledged~~option ~~stock~~is ~~(based~~not onat a ~~ten~~fixed ~~trading~~rate. ~~day~~We ~~average~~have ~~reviewed~~recorded bythese ~~our~~derivative ~~primary~~instruments ~~lender~~as ~~monthly)~~liabilities, ~~decreases~~included ~~below~~in ~~$5,000~~accrued ~~while~~expenses wein ~~have~~the aaccompanying ~~supplemental~~balance ~~discretionary~~sheet, ~~loan~~at ~~outstanding~~their ~~and~~fair ~~our~~values ~~officers~~as dodetermined ~~not~~by ~~deliver~~an ~~additional~~independent valuation. Until the underlying shares ofare ~~our~~registered ~~common~~and, ~~stock~~additionally ~~to cover~~for the ~~shortfall~~conversion option, ~~then~~until ~~our~~the ~~primary~~shareholders’ ~~lender~~meeting ~~would~~has beoccurred ~~entitled~~which towill ~~reduce~~result ~~the~~in ~~outstanding~~a ~~supplemental~~fixed ~~loan~~conversion byrate, anthe ~~amount~~instruments ~~equal~~are toconsidered derivatives and therefore the ~~shortfall.~~related liabilities ~~Our~~each ~~primary~~reporting ~~lender~~period will ~~release~~be ~~the~~adjusted ~~1,568~~to ~~shares~~their offair ~~common~~value. ~~stock~~We ~~the~~will ~~affiliates~~record ~~pledged~~adjustments ~~following~~to ~~a 30-day~~the liabilities each reporting period inas ~~which~~non-cash wefinancing ~~are~~expense ~~not~~or income in anthe ~~overformula~~statement ~~position~~of ~~exceeding~~operations ~~$1,000~~until ~~and~~the instruments are ~~not~~no ~~otherwise~~longer considered inderivatives ~~default~~and ~~under~~the then fair value of the ~~North~~instruments ~~American~~will ~~credit~~be ~~agreement~~reclassified from a liability to additional paid-in capital.

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

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 (4.16% as of June 29, 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 days’ prior notice. Our U.K bank (GMAC) has secured the international facility with the accounts receivable and assets of our international subsidiaries that participate in the facility. We had an outstanding balance under the international facility of $1,535 as of June 29, 2003 and $4,110 as of March 31, 2003.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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

InWe ~~March~~incurred ~~2001,~~placement ~~our~~agent ~~primary~~fees ~~lender~~of ~~entered~~$654 ~~into~~in ~~junior~~connection ~~participation agreements~~ with ~~some~~the ~~investors.~~Notes transaction, Ascomprised aof ~~result~~warrants ofto ~~the~~purchase ~~participation~~328 ~~agreements,~~shares of our ~~primary~~common ~~lender~~stock ~~advanced~~at usan ~~$9,500~~exercise ~~for~~price ~~working~~of ~~capital purposes~~$0.724 Weper ~~are~~share ~~required~~with toa ~~repay~~fair ~~the~~value of $9120,~~500~~ ~~bank~~and ~~participation~~a ~~advance~~cash topayment ~~our~~of ~~primary~~$534. ~~lender~~We ~~upon~~will ~~the~~amortize ~~earlier~~these ~~to occur~~fees ofon ~~the~~a ~~termination~~straight-line ofbasis over the ~~North~~term ~~American~~of ~~credit~~the Notes ~~agreement~~or, ~~currently~~if ~~August 31~~earlier, ~~2004,~~upon ortheir ~~March~~conversion ~~12,~~to ~~2005~~common stock. ~~Our~~Similar ~~primary~~to ~~lender~~the iswarrants ~~required~~issuable to ~~purchase~~ the ~~participation~~private ~~agreements~~investors, ~~from~~because the ~~investors~~shares onunderlying the ~~earlier~~warrants toare ~~occur~~not ~~of March 12~~registered, ~~2005,~~they ~~or the~~are ~~date~~considered wederivative ~~repay~~instruments ~~all amounts outstanding~~ under ~~the~~EITF ~~North~~Issue ~~American~~No. 00-19 ~~credit~~and ~~agreement~~therefore ~~and~~until the ~~agreement~~date isthe ~~terminated.~~shares Ifare registered, we ~~were~~are ~~not~~required ~~able~~ to ~~repay~~revalue the ~~bank~~warrants ~~participation~~on ~~advance,~~a ~~the~~quarterly ~~junior~~basis ~~participants~~and ~~would~~classify ~~have~~them ~~subordinated~~in ~~rights~~accrued ~~assigned~~expenses. toThe ~~them under~~unamortized ~~the~~portion ~~North~~of ~~American~~these ~~credit~~fees ~~agreement~~is ~~for~~included ~~the~~in ~~unpaid~~other ~~balance~~assets as of September 28, 2003.

DB. ~~Promissory~~ ~~Note~~North American Credit Agreement

InOur primary lender and we are parties to a North ~~March~~American ~~2003~~credit agreement, which expires on August 31, 2004. This agreement automatically renews for additional one-year periods, unless our primary lender or we ~~provided~~terminate athe ~~promissory~~agreement ~~note~~with 90 days’ prior notice. Under the agreement, our primary lender generally advances cash to anus ~~independent~~based ~~software~~on ~~developer~~a inborrowing formula that primarily takes into account the ~~amount~~balance of ~~$804~~our eligible U.S. ~~The~~receivables ~~balance~~that ofthe primary lender expects to purchase in the ~~note~~future, ~~was~~and ~~$536~~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 ~~June~~September 2928, 2003; ~~and~~5.75% ~~$737~~ as of March 31, 2003). ~~The~~Borrowings ~~note~~that ~~bears~~our primary lender may provide us in excess of an availability formula bear interest at a2.00% above our primary lender’s prime rate. ofUnder 8%the ~~per~~North ~~annum~~American ~~and~~credit agreement, we may not borrow more than $30,000 or the amount calculated using the availability formula, whichever is ~~due~~less, unless our primary lender approves a supplemental discretionary loan. Our primary lender has secured all of our obligations under the North American credit agreement with substantially all of our assets. Under the terms of the North American credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other financial covenants. As of September 28, 2003 and March 31, 2003, we were not in compliance bewith ~~fully~~respect ~~paid~~to bysome ~~February~~of ~~2004~~the financial covenants contained in the agreement and received waivers from our primary lender.

EOn 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. ~~Our~~ ~~debt~~In ~~matures~~accordance with the terms of the amended credit agreement that afforded us the supplemental discretionary loan, as ~~follows:~~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

Fiscal years ending March 31,
2004	$	16,382
2005		503
2006		219
2007		27
Thereafter		—
	$	17,131

14. EARNINGS (LOSS) PER SHARE

	Three Months Ended
	June 29,2003			June 2,2002
Basic EPS Computation:
Net (loss) earnings	$	(18,049	)	$	2,535
Weighted average common shares outstanding		97,056			91,595
Basic net (loss) earnings per share	$	(0.19	)	$	0.03
Diluted EPS Computation:
Net (loss) earnings	$	(18,049	)	$	2,535
Weighted average common shares outstanding		97,056			91,595
Dilutive potential common shares:
Stock options and warrants		—			5,717
Diluted common shares outstanding		97,056			97,312
Diluted net (loss) earnings per share	$	(0.19	)	$	0.03

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

We advice ~~have~~of, ~~excluded~~and ~~the~~a ~~effect~~fairness ofopinion ~~stock~~obtained ~~options~~from ~~and~~an ~~warrants~~independent infinancial ~~our~~advisor, ~~calculation~~on ofMarch ~~diluted~~31, ~~loss~~2003, ~~per share~~the ~~for~~Audit Committee approved and the ~~three~~Board ~~months~~of ~~ended~~Directors authorized ~~June~~the 29issuance to each Affiliate of 2,000 ~~2003~~shares ~~because~~of ~~their~~our ~~impact~~common ~~would~~stock ~~have~~with ~~been~~a ~~antidilutive.~~then Asaggregate market value of ~~June~~$1,560 29($3,332 ~~2003~~as of September 28, 2003) and a warrant to purchase 500 shares of our common stock ~~equivalents~~at ~~excluded~~an ~~from~~exercise ~~earnings~~price ~~(loss)~~of ~~per~~$0.50 per share ~~amounted~~with toan ~~13,871~~aggregate ~~options~~fair ~~and~~value ~~5,265~~of ~~warrants~~$305.

15In 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. ~~STOCK~~ ~~OPTION~~Therefore, ~~AND~~the ~~PURCHASE~~issuance ~~PLANS~~of the 4,000 common shares are subject to stockholder approval, as included in our forthcoming 2003 Proxy Statement, and variable accounting is being applied to the issuance. Nasdaq has subsequently published a proposed amendment to Marketplace Rule 4350(i)(1)(a) which addresses this issue. Since the common shares are now forfeitable, as of June 29, 2003, we reclassified the $1,560 aggregate market value of the shares at issuance from stockholders’ equity to accrued stock-based expenses. We are required to revalue the common shares at each quarter-end, until the market value is fixed if and when the stockholders approve the share issuance. Accordingly, during the six month period ended September 28, 2003 we increased accrued stock-based expenses by $1,772 to the market value of the common shares of $3,332 as of September 28, 2003.

AWe 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. ~~Stock~~ ~~Option~~Non-cash ~~Plan~~financing expense was $1,630 for the three months ended September 28, 2003 and $3,332 for the six months ended September 28, 2003.

~~Our~~There ~~1988~~were ~~stock~~advances ~~option~~outstanding ~~plan~~within ~~provided~~the ~~for~~standard ~~the~~borrowing ~~grant~~formula ofunder the upNorth toAmerican ~~25,000~~credit ~~shares~~agreement of ~~our~~ ~~common~~$891 ~~stock~~as toof ~~employees~~September 28, ~~directors~~2003 and ~~consultants. That plan expired in May 1998. On October 1~~$4,154 ~~1998,~~as ~~our stockholders authorized the adoption~~ of ~~the~~March ~~1998~~31, ~~stock incentive plan~~2003. ~~Based~~The onsupplemental ~~our~~discretionary ~~stockholders’~~loan ~~authorization~~outstanding onwas ~~January~~fully ~~17, 2002,~~repaid ~~under~~as ~~the~~of ~~1998~~September ~~stock option plan we are permitted to grant up to 15~~28,~~442~~ ~~shares~~2003 ofand ~~our~~amounted ~~common stock~~ to ~~our employees~~$11,000 ~~directors~~as ~~and consultants through the grant~~ of ~~incentive~~March ~~stock options~~31, ~~non-incentive stock options, stock appreciation rights and other stock awards~~2003.

~~For~~During ~~the~~fiscal ~~incentive~~2002 ~~stock~~and ~~options~~fiscal ~~we granted to employees under the plans~~2001, ~~the~~our ~~exercise~~primary ~~price~~lender ~~per~~advanced ~~share was equal~~ to ~~the~~us ~~market~~and we ~~price~~repaid ofsupplemental ~~our~~discretionary ~~common~~loans ~~stock~~above on the ~~dates~~standard offormula ~~grant,~~for orshort-term ~~110%~~funding ofunder ~~the~~our ~~market~~North ~~price~~American ~~for~~credit ~~certain employees~~agreement. ~~For~~As ~~non-incentive~~additional ~~stock~~security ~~options~~for ~~granted to employees under~~ the ~~plans~~supplemental loans, ~~the~~two ~~exercise~~of ~~price~~our ~~per~~executive ~~share~~officers ~~was~~personally ~~not~~pledged ~~less~~as ~~than~~collateral an ~~85%~~aggregate of ~~the~~1,568 ~~market~~shares ~~price~~ of our common stock. onIf the ~~dates~~market value of ~~grant.~~the ~~Generally,~~pledged ~~outstanding~~stock ~~options~~(based ~~become~~on ~~exercisable equally over~~ a ~~three-year~~ten ~~period~~trading ~~starting~~day onaverage ~~the~~reviewed ~~date~~by ofour ~~grant~~primary ~~(although this~~lender ~~may~~monthly) bedecreases ~~accelerated~~below ~~due to retirement~~$5,000 ~~disability~~while orwe ~~death).~~have ~~Normally,~~a ~~employees,~~supplemental ~~directors~~discretionary ~~and~~loan ~~consultants must exercise their~~ outstanding ~~options within ten years from the date they were granted. Some employees who were granted incentive~~ ~~options~~and ~~must~~our ~~exercise~~officers ~~their~~do ~~outstanding~~not ~~options~~deliver ~~within~~additional ~~five~~shares ~~years from the date they were granted. As~~ of ~~June~~our ~~29,~~common ~~2003,~~stock ~~option holders were able~~ to ~~purchase~~cover ~~approximately~~the 8shortfall,~~966~~ ~~shares~~then of our ~~common~~primary ~~stock~~lender ~~from~~would ~~exercisable~~be ~~options~~entitled atto ~~a weighted-average~~reduce ~~exercise~~the ~~price~~outstanding ofsupplemental ~~$3.63~~loan ~~per~~by ~~share~~an ~~and~~amount weequal ~~had~~to ~~available~~the ~~for~~shortfall. ~~future~~Our ~~grant~~primary ~~4,246~~lender ~~options~~will torelease the ~~purchase~~1,568 shares of ~~our~~ common stock. ~~Other~~the ~~than~~affiliates ~~100~~pledged ~~shares~~following ofa ~~our~~30-day ~~common~~period ~~stock~~in which we ~~issued~~are tonot in an ~~employee,~~overformula ~~through~~position ~~June~~exceeding 29$1,000 ~~2003~~and weare ~~have~~ not ~~issued~~ ~~any~~otherwise ~~stock~~in ~~appreciation~~default ~~rights or shares of common stock~~ under ~~our~~the ~~1998~~North ~~stock~~American ~~incentive~~credit ~~plan~~agreement.

~~Option~~C. ~~transactions~~Advances ~~under~~from ~~the~~International ~~1988~~Factors ~~and 1998 stock option plans for the three months ended June 29, 2003 are summarized below:~~

	Shares Under Option		Weighted Average Exercise Price
Outstanding, March 31, 2003	14,978		$	3.32
Granted	217		$	0.69
Exercised	—		$	—
Canceled	(1,324	)	$	3.71
Outstanding, June 29, 2003	13,871		$	3.25

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

~~Options~~ days’ ~~outstanding~~prior ~~under~~notice. Our U.K. bank (GMAC) has secured the ~~1988~~international facility with the accounts receivable and ~~1998~~assets ~~stock~~of ~~option~~our ~~plans~~international subsidiaries that participate in the facility. We had an outstanding balance under the international facility of $1,608 as of ~~June~~September 2928, 2003 ~~are~~and ~~summarized~~$4,110 ~~in ranges~~ as ~~follows:~~of March 31, 2003.

Range ofExercise Price	WeightedAverageExercisePrice		Number ofOptionsOutstanding	WeightedAverageRemainingLife
$0.39 – $0.58	$	0.43	1,502	9.7 years
0.62 – 0.91		0.75	493	9.7 years
1.03 – 1.53		1.18	2,648	8.9 years
1.56 – 2.33		2.10	1,405	8.1 years
2.50 – 3.73		3.37	1,800	5.9 years
3.79 – 5.58		4.24	4,955	6.4 years
5.75 – 7.94		7.31	717	4.2 years
8.69 – 12.13		10.55	145	3.1 years
16.38 – 24.00		20.50	206	1.2 years
			13,871

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

BD. ~~Employee~~ ~~Stock~~Bank ~~Purchase~~Participation ~~Plan~~Advance

~~Effective~~In ~~May~~March 42001, ~~1998,~~our weprimary ~~adopted~~lender anentered ~~employee~~into ~~stock~~junior ~~purchase~~participation ~~plan~~agreements towith ~~provide~~some ~~employees~~investors. ~~who~~As ~~meet~~a ~~eligibility~~result ~~requirements~~of anthe ~~opportunity~~participation toagreements, ~~purchase~~our primary ~~shares~~lender ofadvanced ~~our~~us ~~common~~$9,500 ~~stock~~for ~~through~~working ~~payroll~~capital ~~deductions~~purposes. ofWe upare required to ~~10%~~repay ofthe ~~eligible compensation. Bi-annually~~$9,500 webank ~~use~~participation ~~participant~~advance ~~account balances~~ to ~~purchase shares of~~ our ~~common~~primary ~~stock~~lender atupon athe ~~per~~earlier ~~share~~to ~~price~~occur of ~~85%~~the termination of the ~~lesser~~North ofAmerican ~~the~~credit ~~fair~~agreement, ~~market~~currently August ~~value~~31, ~~per~~2004, ~~share~~or onMarch ~~the~~12, ~~exercise~~2005. ~~date~~Our orprimary ~~the~~lender ~~price~~is onrequired to purchase the ~~offering~~participation ~~date.~~agreements ~~The~~from ~~plan~~the ~~will~~investors ~~remain~~on ~~in effect~~the ~~for~~earlier ato ~~term~~occur of 20March ~~years~~12, ~~unless~~2005, ~~terminated~~or ~~sooner~~the bydate ~~our~~we ~~Board~~repay ofall ~~Directors.~~amounts Aoutstanding ~~total~~under ofthe ~~3,000~~North ~~shares~~American ofcredit agreement ~~our~~and ~~common~~the ~~stock~~agreement ~~are~~is ~~available~~terminated. ~~for~~If ~~employees~~we were not able to ~~purchase~~repay ~~under~~the bank participation advance, the ~~plan.~~junior ~~Employees~~participants ~~purchased~~would 80have ~~shares~~subordinated ofrights ~~our~~assigned ~~common~~to ~~stock~~them inunder the ~~three months~~North ~~ended~~American ~~June~~credit ~~29,~~agreement ~~2003~~for ~~under~~ the ~~plan.~~unpaid balance.

16E. ~~EQUITY~~ Promissory Note

In ~~June~~ March 2003, we ~~received~~provided ~~net proceeds of $8,314 from~~ a ~~private~~promissory ~~placement~~note ~~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~~independent ~~20%~~software developer ~~discount~~in to the ~~then-recent~~amount ~~public trading price~~ of ~~our common stock~~$804. WeThe ~~have~~balance ~~filed a registration statement with the SEC covering the resale by the investors~~ of ~~all~~ the ~~common~~note ~~stock~~was ~~issued~~$469 inas ~~the offering. We are obligated to pay each investor an amount equal to 1%~~ of ~~the~~September ~~purchase price paid for the shares purchased by investors each 30-day period that passes from August 3~~28, 2003 ~~that~~and ~~the~~$737 ~~registration~~as ~~statement is not declared effective. As~~ of ~~August~~March 1331, 2003~~, the SEC had not yet declared our registration statement effective~~. ~~Amounts~~ ~~paid,~~The ifnote ~~any,~~bears ~~will~~interest beat ~~recorded~~a asrate ~~an expense in the statement~~ of ~~operations.~~8% Inper ~~connection~~annum ~~with~~and ~~the~~is ~~private~~due ~~placement, we issued warrants~~ to ~~purchase~~be ~~478~~fully ~~shares~~paid ofby ~~our~~February ~~common stock with an exercise price of $0~~2004.50 ~~per share to certain of the private placement investors and the placement agent.~~

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 13A) 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 $0F.39 ~~per~~Our ~~share.~~debt Wematures ~~are amortizing the excess of the fair value of the total modified warrants over the fair value of the original warrants of $165,~~ as ~~calculated~~follows: ~~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~~

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

	$	17,969

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

~~date on which the discretionary supplemental loan is due to be repaid~~14. ~~For~~LOSS ~~the~~PER ~~three~~SHARE ~~months ended June 29, 2003, we amortized $83.~~

As of June 29, 2003 and March 31, 2003, we had common shares reserved for issuance for the following warrants:

	Three Months Ended						Six Months Ended
	September 28, 2003			August 31, 2002			September 28, 2003			August 31, 2002
Basic and Diluted EPS Computation:
Net loss	$	(4,005	)	$	(28,230	)	$	(22,054	)	$	(25,695	)

Weighted average common shares outstanding		109,084			92,463			103,104			92,014

Basic and Diluted net loss per share	$	(0.04	)	$	(0.31	)	$	(0.21	)	$	(0.28	)

	June 29, 2003			March 31, 2003
Issuance Purpose	Number	Exercise Price		Number	Exercise Price		Expiration Date
Junior participation	1,270	$	1.25	1,270	$	1.25	March, 2006
2002 officer	1,250		2.88	1,250		2.88	April, 2012
2003 officer	1,000		0.50	1,000		0.50	March, 2008
1997 financing	569		0.39	569		0.39	February, 2006
2000 financing	210		0.39	210		0.39	July, 2005
2002 financing	255		0.39	255		0.39	October, 2006
2001 private placement	233		3.46	233		3.46	July, 2004
2003 private placement	478		0.50	—		—	June, 2008
	5,265		1.36	4,787		1.44

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

Please see note 13A 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 obligations15. EQUITY

17In 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. ~~RELATED~~50 ~~PARTY~~to ~~TRANSACTIONS~~$0.60 per share. The per share price represented an approximate 20% discount to the current recent public trading price of our common stock. In August 2003, our registration statement covering the shares of common stock issued in the offering became effective. Based on the purchase agreement, we were obligated to pay each investor an amount equal to 1% of the purchase price paid for the shares for every 30-day period which passed commencing August 3, 2003 that the registration statement was not declared effective. Because the registration statement was declared effective subsequent to August 3, 2003, we recorded a charge of $90 which is included in other income (expense) for the three and six months ended September 28, 2003 and accrued expenses as of September 28, 2003. In connection with the private placement, we issued warrants to purchase 478 shares of our common stock with an exercise price of $0.50 per share to certain of the private placement investors and the placement agent. In addition, as a result of the private placement and anti-dilution provisions included in certain warrants then outstanding, the number of shares issuable under the warrants increased and the exercise price of the warrants decreased to $0.50 per share. The following table summarizes the warrant modifications:

	Modified			Original			Expiration Date
Issuance Purpose	Number	Exercise Price		Number	Exercise Price		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 March 31, 2003, as a result of the 4,000 common shares authorized to be issued to the Affiliates in connection with the amendment to the North American credit agreement with our primary lender (please see note 13B) and the anti-dilution provisions associated with certain warrants outstanding on the date of our authorization to issue the shares unrelated to the Affiliates, the number of shares issuable under the warrants increased and the exercise price decreased to $0.39 per share. We have amortized the excess of the fair value of the total modified warrants over the fair value of the original warrants of $165, as calculated using the Black-Scholes option pricing model, as a non-cash financing expense on a straight-line basis over the period between March 31, 2003 through September 26, 2003, the date on which we fully repaid the discretionary supplemental loan. The related non-cash financing expense amounted to $82 for the three months ended September 28, 2003 and $165 for the six months ended September 28, 2003.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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

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

	7,060		0.58	4,787		1.44

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

16. RELATED PARTY TRANSACTIONS

Fees for services

We pay sales commissions to a firm which is owned and controlled by one of our co-chairmen. That firm earns these sales commissions based on the amount of our software sales that firm generates. Commissions earned by that firm amounted to $19(32) for the three months ended ~~June~~September 2928, 2003, $100 for the three months ended August 31, 2002, $(13) for the six months ended September 28, 2003 and $~~139~~239 for the ~~three~~six months ended ~~June 2~~August 31, 2002. We owed that firm $~~488~~366 as of ~~June~~September 2928, 2003 and $498 as of March 31, 2003.

During previous fiscal years we received legal services from two separate law firms of which two members of our Board of Directors are partners~~, respectively~~. WeIn connection with the one firm which continues to represent us, we incurred fees of $227 for the three months ended ~~June~~September 2928, 2003, $181 for the three months ended August 31, of2002, $~~292~~447 tofor the ~~one~~six months ended September 28, 2003 and $347 for the six months ended August 31, 2002. For the firm ~~which~~that ~~continues~~no tolonger ~~represent~~represents us, ~~and~~we ~~had~~ incurred fees of $595 tofor ~~both~~the ~~law~~three ~~firms~~months ended August 31, 2002 and $10 for the ~~three~~six months ended August ~~June 2~~31, 2002. We ~~owe~~owed the firm that ~~one~~continues ~~firm~~to represent us, legal fees of $~~283~~263 as of ~~June~~September 2928, 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 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. 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 ~~three~~six months ended ~~June~~September 2928, 2003, we expensed $92119 of the unamortized principal balance. The unamortized principal balance under the loan, included in other receivables, was $7548 as of ~~June~~September 2928, 2003 and $167 as of March 31, 2003.

2122

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

In October 2001, we issued a total of 1,125 shares of our common stock to two of our executive officers when they exercised their warrants with an exercise price of $3.00 per share. For the shares we issued, we received cash of $23 for their par value and two promissory notes totaling $3,352 for the unpaid portion of the exercise price of the warrants. The principal amount and accrued interest ~~are~~were 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~~provided ~~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~~bore interest at our primary lender’s prime rate plus 1.50% per annum. As ~~During~~of ~~the~~September ~~three months ended June 29~~26, 2003, the two executive officers ~~repaid~~had ~~$361~~fully ofrepaid the principal balance and ~~$364 of the~~ related accrued interest ~~then outstanding~~ under the notes. ~~The~~As ~~total~~of March 31, 2003, the principal balance outstanding under the notes was $23,~~991 as of June 29~~352, ~~2003~~classified ~~and~~as ~~$3,352~~a contra-equity asbalance ofin ~~March~~additional 31paid-in-capital, ~~2003.~~and ~~Other receivables included~~ accrued interest receivable on the notes ofamounted ~~$10~~to ~~as of June 29, 2003 and~~ $324 ~~as of March 31~~, ~~2003. The~~included ~~notes receivable are classified as a contra-equity balance~~ in ~~additional~~other ~~paid-in capital~~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 ~~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 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. ~~Other~~As ~~receivables~~of ~~included~~March ~~accrued~~31, ~~interest~~2003, ~~receivable on~~ the ~~notes~~principal ofbalance ~~$426~~outstanding asunder ~~of March~~the ~~31, 2003. The~~ notes ~~were~~was $3,595, classified as a contra-equity balance in additional paid-in -capital, asand ofaccrued ~~March~~interest 31receivable on the notes amounted to $426, included ~~2003~~in other receivables.

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

In August 1998, relating to an officer’s employment agreement, we loaned one of our officers $500 under a promissory note. We reduced the note balance by $50 in August 1999, relating to the officer’s employment agreement, and by $200 in January 2000 relating to the employee’s termination. The note bears no interest and must be repaid on the earlier to occur of the sale or transfer of the former officer’s personal residence or August 11, 2003. ~~As of June 29~~Currently, ~~2003~~we ~~and~~are actively ~~March~~pursuing ~~31,~~collection ~~2003,~~of the ~~balance~~$250 outstanding ~~under~~balance of the ~~loan,~~note included in other receivables~~, was $250~~.

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

Warrants

In October 2001, we issued to two of our executive officers warrants to purchase a total of 1,250 shares of our common stock at an exercise price of $2.88 per share, the fair market value of our common stock on the grant date. We issued the warrants to the officers in consideration for their services and personal pledge of 1,250 shares of our common stock to our primary lender, as additional security for our supplemental discretionary loans (please see note ~~13A~~13B).

2223

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

1817. SEGMENT INFORMATION

Our chief operating decision-maker is our Chief Executive Officer. We have two reportable segments, North America and Europe and Pacific Rim, which we organize, manage and analyze geographically and which operate in one industry segment: the development, marketing and distribution of entertainment software. We have presented information about our operations for the three and six months ended ~~June~~September 2928, 2003 and ~~June~~August 231, 2002 below:

	NorthAmerica			Europe andPacific Rim			Eliminations			Total
Three Months Ended June 29, 2003
Three Months Ended September 28, 2003
Net revenue from external customers	$	1523,~~562~~240		$	1718,~~508~~105		$	—		$	3341,~~070~~345
Intersegment revenue		—			2,512			(2,512	)		—
Intersegment sales		5			—			(5	)		—
Total net revenue	$	1523,~~562~~245		$	2018,~~020~~105		$	(~~2,512~~5	)	$	3341,~~070~~345
Interest income	$	6539		$	2915		$	—		$	9454
Interest expense		~~948~~879			~~192~~164			—			1,~~140~~043
Depreciation and amortization		1,~~276~~229			~~244~~238			—			1,~~520~~467
Operating loss		(13,764	)		(832	)		—			(14,596	)
Operating profit (loss)		2,518			(4,289	)		—			(1,771	)
Identifiable assets as of June 29, 2003		31,004			25,435			—			56,439
Three Months Ended August 31, 2002
Three Months Ended June 2, 2002
Net revenue from external customers	$	29,501		$	24,554		$	—		$	54,055
Net revenue from external customers	$	43,912		$	18,951		$	—		$	62,863
Intersegment sales		45			1,854			(1,899	)		—
Intersegment revenue		26			4,129			(4,155	)		—
Total net revenue	$	29,546		$	26,408		$	(1,899	)	$	54,055
Total net revenue	$	43,938		$	23,080		$	(4,155	)	$	62,863
Interest income	$	766		$	26		$	—		$	792
Interest income	$	215		$	11		$	—		$	226
Interest expense		1,687			274			—			1,961
Interest expense		984			216			—			1,200
Depreciation and amortization		1,718			460			—			2,178
Depreciation and amortization		1,831			375			—			2,206
Operating loss		(18,669	)		(6,463	)		—			(25,132	)
Operating profit (loss)		3,488			(164	)		—			3,324
Six Months Ended September 28, 2003
Identifiable assets as of June 2, 2002		135,875			38,420			—			174,295
Net revenue from external customers	$	38,801		$	35,614		$	—		$	74,415
Intersegment revenue		5			—			(5	)		—
Total net revenue	$	38,806		$	35,614		$	(5	)	$	74,415
Interest income	$	104		$	44		$	—		$	148
Interest expense		1,827			356			—			2,183
Depreciation and amortization		2,505			482			—			2,987
Operating loss		(8,735	)		(7,632	)		—			(16,367	)
Identifiable assets as of September 28, 2003		35,651			25,697			—			61,348
Six Months Ended August 31, 2002
Net revenue from external customers	$	73,414		$	43,504		$	—		$	116,918
Intersegment revenue		71			5,984			(6,055	)		—
Total net revenue	$	73,485		$	49,488		$	(6,055	)	$	116,918
Interest income	$	981		$	37		$	—		$	1,018
Interest expense		2,672			489			—			3,161
Depreciation and amortization		3,549			835			—			4,384
Operating loss		(19,537	)		(2,271	)		—			(21,808	)
Identifiable assets as of August 31, 2002		139,543			43,352			—			182,895

2324

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

Our gross revenue was derived from the following product categories:

	Three Months Ended					Six Months Ended
	June 29,2003		June 2,2002
	September 28,2003			August 31,2002		September 28,2003		August 31,2002
Cartridge-based software:
Nintendo Game Boy	3%	%	9%	6	%	3	%	7	%
Subtotal for cartridge-based software	3%	%	9%	6	%	3	%	7	%
Disc-based software:
Sony PlayStation 2: 128-bit	~~43%~~61	%	~~38%~~	51	%	52	%	45	%
Sony PlayStation 1: 32-bit	5%3	%	3%	2	%	4	%	2	%
Microsoft Xbox: 128-bit	~~31%~~22	%	~~18%~~	21	%	26	%	20	%
Nintendo GameCube: 128-bit	~~15%~~9	%	~~30%~~	19	%	12	%	24	%
Subtotal for disc-based software	~~94%~~95	%	~~89%~~	93	%	94	%	91	%
PC software	3%2	%	2%	1	%	3	%	2	%
Total	100%	%	~~100%~~	100	%	100	%	100	%
Gross revenue by studio:
Internal	49	%		72	%	40	%	58	%
External	51	%		28	%	60	%	42	%
Total	100	%		100	%	100	%	100	%
Gross revenue by segment:
Domestic	55	%		69	%	49	%	69	%
International	45	%		31	%	51	%	31	%
Total	100	%		100	%	100	%	100	%

1918. COMMITMENTS AND ~~CONTINGENCIES~~ INDEMNIFICATION

A. Legal Proceedings

On July 11, 2003, we were notified by the Securities and Exchange Commission (the “Commission”) that we have been included in a formal, non-public inquiry entitled “In the Matter of Certain Videogame Manufacturers” that the Commission is conducting. In connection with that inquiry we ~~are~~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 ~~are~~have ~~cooperating~~and ~~fully~~are ~~with~~continuing ~~the~~to ~~inquiry.~~fully Itcooperate iswith ~~too soon to determine~~ the ~~impact, if any, of this~~ inquiry ~~on our business, financial condition or results of operations~~.

AsEarlier ofthis ~~June 29~~year, ~~2003,~~ fourteen class action complaints, ~~containing~~asserting ~~similar~~violations ~~allegations,~~of ~~have~~federal ~~been~~securities laws were filed against usthe Company and certain of ~~our~~ its officers and/or directors. ~~Each~~By ~~complaint~~order ~~asserts~~dated ~~violations~~July ~~of federal securities laws. The actions are entitled as follows: Purvis~~3, ~~et al. v. Acclaim Entertainment~~2003, ~~Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in~~ the ~~U.S. District~~ Court ~~for~~consolidated ~~the~~all ~~Eastern~~fourteen ~~District~~actions ofinto ~~New~~one ~~York,~~action ~~Central Islip~~entitled ~~Division~~In ~~(Civil~~re ~~Action No. CV 03-1270); DMS, et al. v.~~ Acclaim Entertainment, Inc., ~~Rodney~~Securities ~~Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York~~Litigation, ~~Brooklyn~~Master ~~Division~~File ~~(Civil Action~~ No. ~~CV 03-1322); Nach~~2, ~~et al. v. Acclaim Entertainment, Inc., Rodney Cousens and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV~~ 03-1363); Baron, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-~~1541);~~1270 ~~Traube, et al~~(E. vD. ~~Acclaim Entertainment, Inc~~N.~~, Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U~~Y.S.) ~~District Court for the Eastern District of New York, Central Islip Division~~ (~~Civil Action No. CV 03-1487~~JS); Hildal, et al. v. Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (~~Civil Action No. CV 03-1640~~ETB)~~; Hicks~~, etand ~~al. v. Acclaim~~appointed ~~Entertainment,~~class ~~Rodney~~members ~~Cousens~~Penn ~~and~~Capital ~~Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York~~Management, ~~Brooklyn~~Robert ~~Division (Civil Action No~~L. CVMannard ~~03-1698);~~and Steve Russo, etas ~~al.~~lead ~~v. Acclaim Entertainment~~plaintiffs, ~~Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki~~ and ~~Gerard~~also ~~Agoglia~~approved ~~filed~~lead inplaintiffs’ ~~the~~selection ~~U.S. District Court for the Eastern District~~ of ~~New York, Brooklyn Division (Civil Action No~~counsel. CVPlaintiffs ~~03-1700);~~served ~~Vicino,~~a etConsolidated ~~al.~~Amended v.Complaint ~~Acclaim Entertainment, Inc., Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in~~ (the ~~U.S.~~“Consolidated ~~District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1672~~Complaint”); ~~Sypes,~~on or etabout ~~al.~~September ~~v. Acclaim Entertainment~~1, ~~Inc~~2003., ~~Gregory~~The ~~Fischbach,~~defendants ~~Edmond Sanctis, James Scoroposki and Gerard Agoglia filed~~ in the ~~U.S.~~consolidated ~~District~~action ~~Court~~are ~~for~~ the ~~Eastern District of New York~~Company, ~~Central Islip Division (Civil Action No. CV 03-1685); Berman, et al. v. Acclaim Entertainment, Inc.,~~ Gregory Fischbach, Edmond Sanctis, James ~~Scoroposki and Gerard Agoglia filed in the U.S. District Court for the Eastern District of New York, Central Islip Division (Civil Action No. CV 03-1924); Burk, et~~

2425

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

alScoroposki and Gerard F. vAgoglia. ~~Acclaim~~The ~~Entertainment,~~Consolidated ~~Inc.,~~Complaint ~~Gregory~~alleges ~~Fischbach~~a class period from October 14, ~~Edmond~~1999 ~~Sanctis~~through January 13, ~~James~~2003. ~~Scoroposki~~The ~~and~~Consolidated Complaint ~~Gerard~~alleges ~~Agoglia~~that ~~filed~~the Company engaged in a variety of wrongful practices which rendered statements made by the UCompany and its financial statements to be false and misleading.S. ~~District~~Among ~~Court~~other ~~for~~purported wrongful practices, the Consolidated Complaint ~~Eastern~~alleges ~~District~~that ofAcclaim ~~New~~engaged ~~York~~in “channel stuffing,” ~~Brooklyn~~a ~~Division~~practice ~~(Civil~~by ~~Action~~which ~~No.~~Acclaim CVallegedly ~~03-2030)~~delivered excess inventory to its distributors to meet or exceed analysts’ earnings expectations and inflate its sales results; ~~Brake,~~entered etinto “conditional ~~al.~~sales v.agreements” whereby Acclaim’s ~~Entertainment,~~customers ~~Inc.,~~allegedly ~~Rodney~~were ~~Cousens~~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 ~~Gerard~~that ~~Agoglia~~Acclaim ~~filed~~falsified insales reports and manipulated the Utiming and recognition of price concessions and discounts granted to its retail customers.S. ~~District~~The ~~Court~~Consolidated ~~for~~Complaint further alleges that Acclaim engaged in improper accounting practices, including the ~~Eastern~~improper ~~District~~recognition of ~~New~~sales ~~York~~revenue; manipulation of reserves associated with concessions, ~~Central~~chargebacks and/or sales discounts granted to customers; and the improper reporting of software development ~~Islip~~costs. ~~Division~~The Consolidated Complaint alleges that as a result of these practices defendants violated § 10(~~Civil~~b) ~~Action~~of ~~No.~~the CVSecurities 03Exchange Act of 1934 and SEC Rule 10b-~~2175~~5, and that the individual defendants violated § 20(a); ~~Manard,~~of ~~et.~~the ~~al.~~1934 vAct. ~~Acclaim~~The Consolidated ~~Entertainment,~~Complaint ~~Inc~~seeks compensatory damages in an unspecified amount., ~~Gregory~~Pursuant ~~Fischbach,~~to ~~Edmond~~an ~~Sanctis~~agreement with plaintiffs, ~~James~~defendants’ ~~Scoroposki~~time ~~and~~to ~~Gerard~~answer, ~~Agoglia~~move ~~filed~~or inotherwise respond to the UConsolidated Complaint has been extended to December 3, 2003.S. ~~District~~A preliminary ~~Court~~conference ~~for~~before the ~~Eastern~~Court ~~District~~is ofscheduled ~~New~~for ~~York~~December 5, ~~Central~~ ~~Islip~~2003. ~~Division~~We ~~(Civil~~are ~~Action~~defending ~~No.~~this CVaction ~~03-2355)~~vigorously.

In ~~Purvis,~~ ~~Baron,~~1999 ~~Traube,~~we ~~Hildal,~~received ~~Russo,~~a ~~Vicino,~~demand ~~Sypes,~~for ~~Berman~~indemnification ~~and~~from ~~Burk,~~the ~~plaintiffs~~defendant ~~allege~~Lazer-Tron ~~that~~Corporation ~~during~~in ~~the~~a ~~purported~~matter ~~class~~entitled ~~period~~J. ~~between~~Richard ~~January~~Oltmann ~~11,~~v. ~~2002~~Steve ~~and September 19~~Simon, ~~2002~~No. ~~we reported~~98 ~~positive~~C1759 ~~earnings~~and ~~statements~~Steve ~~and~~Simon ~~gave~~v. ~~favorable~~J. ~~earnings~~Richard ~~guidance~~Oltmann, ~~but~~J ~~failed~~Richard toOltmann ~~disclose~~Enterprises, ~~material~~Inc., ~~adverse~~d/b/a ~~facts~~Haunted ~~regarding~~Trails ~~our~~Amusement ~~business~~Parks, ~~operations~~ and ~~management~~RLT Acquisitions, ~~thereby~~Inc., ~~causing~~d/b/a ~~plaintiffs~~Lazer-Tron, ~~and~~No. ~~other~~A ~~members~~98CA of426, ~~the~~consolidated ~~class~~as toU.S. ~~purchase~~District ~~our~~Court ~~securities at~~Northern ~~artificially~~District ~~inflated~~of ~~prices~~Illinois Case No. ~~Plaintiffs~~99 ~~claim~~C ~~violations~~1055. ~~under~~The §§Lazer-Tron ~~10(b)~~action ~~and~~involved ~~20(a)~~the ofassertion ~~the~~by ~~Securities~~plaintiff ~~Exchange~~Simon ~~Act~~that ofdefendants ~~1934~~Oltmann, ~~and~~Haunted ~~SEC~~Trails ~~Rule~~and ~~10b~~Lazer-5.Tron Inmisappropriated ~~DMS,~~plaintiff’s ~~Nach,~~trade ~~Hicks,~~secrets. ~~and~~Plaintiff ~~Brake,~~alleges ~~plaintiffs~~claims ~~assert~~for ~~that~~Lanham ~~during~~Act ~~the~~violations, unfair ~~class~~competition, ~~period~~misappropriation ~~between~~of ~~January~~trade 22secrets, ~~2002~~conspiracy, and ~~September~~fraud ~~19,~~against ~~2002~~all ~~we committed certain alleged accounting improprieties~~defendants, ~~thereby~~and ~~causing~~seeks ~~plaintiffs~~damages ~~and~~in ~~other~~unspecified ~~members~~amounts, ofincluding ~~the~~treble ~~class~~damages tofor ~~purchase~~Lanham ~~our~~Act ~~securities~~claims, atand ~~artificially~~an ~~inflated prices~~accounting. ~~Plaintiffs claim~~Pursuant ~~violations~~to ~~under~~an §§asset ~~10(b)~~purchase ~~and~~agreement ~~20(a)~~made as of ~~the~~March ~~Securities~~5, ~~Exchange Act of 1934~~1997, ~~and~~we ~~SEC~~sold ~~Rule 10b~~Lazer-5.Tron ~~All~~to ~~the~~RLT ~~complaints~~Acquisitions, ~~seek unspecified damages~~Inc. InUnder ~~Manard, plaintiffs assert that during~~ the ~~class~~asset ~~period~~purchase ~~between October 24~~agreement, ~~2001 and September 19, 2002~~ we ~~reported~~assumed ~~positive earnings statements~~ and ~~gave~~excluded ~~favorable~~specific ~~earnings guidance~~liabilities, ~~but~~and ~~failed~~agreed to ~~disclose~~indemnify ~~material~~RLT ~~adverse~~for ~~facts~~certain ~~regarding our business~~losses, ~~operations~~as ~~and~~specified ~~management,~~in ~~thereby causing plaintiffs and other members of~~ the ~~class~~asset to purchase ~~our securities at artificially inflated prices~~agreement. ~~Plaintiffs~~In ~~claim~~an August ~~violations~~1, ~~under~~2000 §§letter, ~~10(b)~~counsel ~~and~~for ~~20(a)~~Lazer-Tron ofin the ~~Securities~~Lazer-Tron ~~Exchange~~action ~~Act~~asserted ofthat ~~1934,~~our ~~and~~indemnification ~~SEC~~obligations ~~Rule~~in ~~10b-5. On July 3, 2003,~~ the ~~Court~~asset ~~issued~~purchase anagreement ~~order~~applied ~~consolidating all~~to 14the ~~class~~Lazer-Tron ~~actions~~action, ~~appointing~~and ~~Penn~~demanded ~~Capital~~that ~~Management,~~we ~~Robert~~indemnify L.Lazer-Tron ~~Manard~~for ~~and~~any ~~Steve~~losses ~~Russo~~which asmay be ~~lead~~incurred ~~plaintiffs,~~in ~~and~~ the ~~law~~Lazer-Tron ~~firms~~action. ofIn ~~Cauley~~an ~~Geller~~August ~~Bowman~~22, ~~Coates~~2000 ~~& Rudman~~response, ~~LLP,~~we ~~Schiffrin~~asserted &that ~~Barroway,~~any ~~LLP~~losses ~~and~~which ~~Wolf~~may ~~Haldenstein~~result ~~Adler~~from ~~Freeman~~the ~~& Herz~~Lazer-Tron ~~LLP~~action asare ~~lead~~not ~~counsel.~~assumed Anliabilities ~~initial~~under ~~conference before~~ the ~~Court~~asset ~~has~~purchase ~~been~~agreement ~~scheduled~~ for ~~October~~which ~~20,~~we ~~2003.~~must ~~Plaintiffs~~indemnify ~~will~~Lazer-Tron. ~~serve~~Upon review aof ~~consolidated~~applicable ~~complaint~~court ~~by August 18~~dockets, ~~2003~~the ~~and~~ defendants ~~will~~in ~~move,~~this ~~answer~~action orwere ~~otherwise~~granted ~~reply~~summary tojudgment ~~that~~dismissing ~~consolidated complaint~~the byplaintiff’s ~~October~~claims; 2,therefore ~~2003.~~we Wehave ~~intend~~no toindemnification ~~defend~~obligations ~~this~~under ~~action~~the ~~vigorously~~asset purchase agreement.

WeAn ~~received~~action ~~a demand for indemnification from the defendant Lazer-Tron Corporation in a matter~~ entitled J.David ~~Richard~~Mirra ~~Oltmann~~ v. ~~Steve~~Acclaim ~~Simon~~Entertainment, ~~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~~CV-~~Tron,~~03-575 ~~No.~~was filed Ain ~~98CA~~the ~~426,~~United ~~consolidated~~States ~~as U.S.~~ District Court ~~Northern~~for the Eastern District of ~~Illinois~~New ~~Case~~York ~~No.~~on 99February C5, ~~1055~~2003. ~~The~~We ~~Lazer-Tron~~have ~~action~~since ~~involves~~amicably ~~the~~resolved ~~assertion by~~our ~~plaintiff~~differences ~~Simon~~with ~~that~~Mr. ~~defendants~~Mirra ~~Oltmann,~~surrounding ~~Haunted~~this ~~Trails~~matter. ~~and~~Mr. ~~Lazer-Tron misappropriated plaintiff~~Mirra’s ~~trade~~lawsuit ~~secrets.~~against ~~Plaintiff~~us ~~alleges~~was ~~claims~~settled ~~for~~with ~~Lanham Act violations, unfair competition, misappropriation of trade secrets, conspiracy, and~~no ~~fraud~~monetary ~~against~~or ~~all~~other ~~defendants, and seeks~~ damages inbeing ~~unspecified~~paid ~~amounts,~~by ~~including~~either ~~treble damages for Lanham Act claims~~party, and ~~an accounting~~Mr. ~~Pursuant~~Mirra towill ~~an asset purchase agreement made as of March 5~~continue, ~~1997~~uninterrupted, ~~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~~contract 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~~us tountil the ~~Lazer-Tron~~year ~~action~~2011. ~~No other action with respect to this matter has been taken to date.~~

AnWe ~~action~~are ~~entitled~~also ~~David~~party ~~Mirra~~to v.various ~~Acclaim~~litigations ~~Entertainment,~~arising ~~Inc., was filed~~ in the ~~United~~ordinary ~~States~~course ~~District~~of ~~Court~~our ~~for~~business, the ~~Eastern~~resolution ~~District~~ of ~~New~~which, ~~York~~we ~~on February 5~~believe, ~~2003.~~will ~~The plaintiff alleged that the defendants did~~ not have ~~authorization to utilize Mirra’s name and likeness in connection with~~ a ~~bicycle video~~material ~~game~~adverse ~~intended~~effect ~~for~~on ~~mature~~our ~~audiences.~~liquidity ~~Specifically,~~or ~~Mirra~~results ~~alleges that we engaged in (1) violations~~ of ~~§ 1051 et seq~~operations. 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

2526

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

(Unaudited)

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) an accountingB. ~~Mirra~~Indemnification 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. We served our initial disclosures on the plaintiff on June 28, 2003.

~~Various~~Under ~~claims~~the ~~and~~terms ~~actions~~of substantially all of our software revenue sharing agreements with customers that, among other things, rent our software to consumers, we have ~~been~~agreed ~~asserted~~to orindemnify ~~threatened~~our ~~against~~customers usfor inall ~~the~~costs ~~ordinary~~and ~~course~~damages ofarising ~~business.~~from ~~Management~~claims ~~expects~~against such customers based on, among other things, allegations that the ~~outcome~~Company’s software infringes the intellectual property rights of ~~these~~a ~~asserted~~third orparty. ~~threatened~~Such ~~claims~~indemnification orprovisions ~~actions~~are ~~would~~accounted ~~not~~for ~~have~~in aaccordance ~~materially~~with ~~adverse~~SFAS ~~effect~~No. ~~on our~~5. ~~consolidated~~Through ~~financial~~September ~~position~~28, ~~results~~2003, ofthere ~~operations,~~have ~~and~~not ~~cash~~been ~~flows,~~any ~~taken~~claims asunder asuch ~~whole~~indemnification provisions.

2019. SUBSEQUENT ~~EVENT~~EVENTS

On ~~January~~November 2410, 2003, we received a ~~letter~~term sheet from ~~The~~our ~~Nasdaq~~primary ~~Stock Market~~lender, ~~Inc.~~which ~~stating~~provides ~~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~~recasting ~~bid price requirements for continued listing as set forth in Marketplace Rule 4310(c)(4),~~ and ~~we had until July 23~~modification, ~~2003~~ in ~~which~~its ~~to regain compliance. On July 25~~entirety, ~~2003,~~of weour ~~received~~existing ~~notice~~domestic ~~from~~credit ~~Nasdaq~~agreement ~~that in accordance~~ with ~~Marketplace~~our ~~Rule~~primary ~~4310(c)(8)(D)~~lender. weThe ~~were~~term ~~granted~~sheet aprovides ~~180~~for ~~day~~initial ~~extension~~borrowings of ~~time,~~up orto ~~until January 20~~$30,000 ~~2004~~under ~~with~~a ~~which~~revolving tocredit ~~regain~~and ~~compliance~~factoring ~~with~~loan ~~the~~facility ~~minimum~~utilizing ~~bid~~an ~~requirement.~~asset Ifbased atborrowing ~~any~~formula ~~time prior to January 20, 2004 the closing bid price of~~and ~~our~~included ~~common~~therein ~~stock~~ is ~~$1.00 or more for~~ a ~~minimum~~provision ofthat 10provides ~~consecutive~~for ~~trading days~~$5,000 ~~then we will again be~~ in ~~compliance~~supplemental ~~with~~overformula ~~such~~borrowing ~~rule~~availability. The ~~letter~~domestic ~~also~~loan ~~states~~facility ~~that~~will ifcontinue ~~compliance~~to ~~cannot~~ be ~~demonstrated~~secured by ~~January~~our ~~20,~~eligible ~~2004~~accounts receivable, ~~Nasdaq~~inventory ~~will~~and ~~determine~~other ~~whether we~~assets, ~~meet~~as ~~the~~defined. ~~initial listing standards for~~ The ~~Nasdaq~~term of ~~SmallCap~~the ~~Market,~~domestic ~~and~~loan iffacility weis dofor ~~meet~~three ~~that~~years ~~criteria~~and weis ~~will~~renewable beannually ~~granted~~thereafter. anWe ~~additional~~and 90GMAC ~~day~~are ~~grace~~working ~~period~~together ~~in which~~ to ~~demonstrate~~finalize ~~compliance.~~the ~~If,~~definitive ~~after~~agreements ~~January~~which ~~20,~~will ~~2004~~embody ~~compliance~~the ~~cannot~~terms ~~be demonstrated~~ and weprovisions doof ~~not meet~~ the ~~initial~~term ~~listing standards then our securities would be subject to delisting~~sheet. ~~At that time, we may appeal such determination; however, there can be no assurances that such an appeal would be successful.~~

26On November 12, 2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaq’s opinion, the structure of our September/October 2003 private offering of the Notes (please see note 13A) was not in compliance with NASD Marketplace Rule 4350(i)(1)(d). The Note offering was structured in a manner we believe complied with Nasdaq’s published rules. Based upon our continuing discussions with Nasdaq and the holders of the Notes, while there can be no assurance, we believe we will be successful in resolving this matter; however, the ultimate resolution of this matter is not determinable at this time and, if the terms of the securities are modified, it could have a material impact on the financial statements of the Company. In the event that we and Nasdaq cannot resolve this matter, then our securities would be subject to delisting. If a delisting proceeding is commenced, we have the right to appeal such determination; however, there can be no assurance that such an appeal would be successful.

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

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

This Quarterly Report on Form 10-Q, including Item 2 of Part I (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and Item 3 of Part I (“Quantitative and Qualitative Disclosures About Market Risk”), contains forward-looking statements about circumstances that have not yet occurred. All statements, trend analysis and other information contained below relating to markets, our products and trends in revenue, as well as other statements including words such as “anticipate”, “believe” or “expect” and statements in the future tense are forward-looking statements. These forward-looking statements are subject to business and economic risks, and actual events or actual future results could differ materially from those set forth in the forward-looking statements due to such risks and uncertainties. We will not necessarily update this information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to, those discussed under the heading “Factors Affecting Future Performance.”

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

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

Overview

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~~28 our inception, we have developed products for each generation of major gaming platforms, including IBM(R) Windows-based personal computers and compatibles, 16-bit Sega™ Genesis™ video game system, 16-bit

~~Super~~our ~~Nintendo Entertainment System®~~business, ~~32-bit~~we ~~Nintendo~~distribute ~~Game~~software ~~Boy®,~~products ~~Game~~which ~~Boy®~~have ~~Advance~~been ~~and~~developed ~~Game~~by ~~Boy®~~third ~~Color,~~parties. ~~32-bit~~A ~~Sony~~less ~~PlayStation®,~~significant ~~64-bit~~aspect ~~Nintendo® 64,~~of ~~Sega~~our ~~Dreamcast,~~business ~~128-bit~~is ~~Sony~~the ~~PlayStation®~~development 2,and ~~128-bit~~publication ~~Microsoft~~of ~~Xbox™,~~strategy ~~and~~guides ~~128-bit~~relating ~~Nintendo™~~to ~~GameCube.~~our Wesoftware ~~also~~products ~~initially~~and ~~developed~~the ~~software~~issuance ~~for~~of ~~the 8-bit~~certain ~~Nintendo~~“special ~~Entertainment~~edition” ~~System~~comic ~~and~~magazines ~~the~~to ~~8-bit~~support ~~Sega~~some ~~Master~~of ~~System~~our brands.

~~Substantially~~Since ~~all~~our ofinception, ~~our~~we ~~revenue~~have isdeveloped ~~derived~~products ~~from~~for ~~one~~each ~~industry~~generation ~~segment,~~of ~~the~~major ~~development,~~gaming ~~publication~~platforms, ~~marketing~~including IBM(R) Windows-based personal computers and ~~distribution~~compatibles, of16-bit ~~interactive~~Sega™ ~~entertainment~~Genesis™ ~~software.~~video ~~For~~game system, ~~information~~16-bit ~~regarding~~Super ~~our~~Nintendo ~~foreign~~Entertainment ~~and~~System®, ~~domestic~~32-bit ~~operations~~Nintendo Game Boy®, ~~see~~Game ~~Note~~Boy® Advance 18and ~~(Segment~~Game ~~Information)~~Boy® ofColor, ~~the~~32-bit ~~notes~~Sony toPlayStation®, ~~the~~64-bit ~~consolidated~~Nintendo® ~~financial~~64, ~~statements~~Sega inDreamcast, ~~Part~~128-bit ISony PlayStation® 2, ~~Item~~128-bit 1Microsoft ofXbox™, ~~this~~and ~~quarterly~~128-bit ~~report~~Nintendo™ onGameCube. ~~Form~~We 10also initially developed software for the 8-Qbit Nintendo Entertainment System and the 8-bit Sega Master System.

Substantially all of our revenue is derived from one industry segment, the development, publication, marketing and distribution of interactive entertainment software. For information regarding our foreign and domestic operations, see Note 17 (Segment Information) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

Critical Accounting Policies

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

Revenue Recognition

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

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

~~Allowances~~29 ~~for Price Concessions and Returns~~

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

~~historical~~Allowances ~~price~~for ~~concessions~~Price ~~and~~Concessions ~~returns, current sell-through of product~~ and ~~retailer~~Returns ~~inventory, current economic trends, changes in consumer demand and acceptance of our products in the marketplace, among other factors.~~

AsWe ~~the~~are ~~consumer~~not ~~market~~contractually ~~acceptance~~obligated ofto aaccept ~~software title decreases~~returns, ~~resulting~~except infor ~~lower~~defective product. ~~unit retail sell-through~~However, ~~the~~we ~~potential~~grant ~~for~~ price concessions ~~and~~to ~~returns~~our ~~for~~customers ~~those~~who ~~titles~~primarily ~~increases.~~are Inmajor ~~the~~retailers ~~fourth~~that ~~quarter~~control ofmarket ~~fiscal~~access ~~2002,~~to ~~we released~~ the ~~software~~ ~~titles~~consumer ~~Turok:~~when ~~Evolution~~those ~~and~~concessions ~~Aggressive~~are ~~Inline,~~necessary ~~which~~to wemaintain ~~anticipated~~our ~~would~~relationships bewith ~~significant~~the ~~revenue~~retailers ~~drivers~~ and ~~valuable~~access ~~additions~~ to ~~our~~their retail ~~product~~channel ~~catalog~~customers. ~~The~~If ~~market~~the ~~reception~~consumers’ todemand ~~these~~for ~~titles,~~a asspecific ~~evidenced~~title byfalls ~~the~~below ~~retail sell-through~~expectations ~~rates~~or tosignificantly ~~consumers~~declines inbelow ~~the~~previous ~~first~~rates ~~quarter~~ of ~~fiscal~~sell-through, ~~2003~~then, ~~and~~we ~~beyond,~~may ~~fell~~provide ~~substantially~~a ~~below~~price ~~our~~concession ~~revenue~~or ~~expectations.~~credit Asto aspur ~~result~~further ofsales by the retailer ~~poor~~to ~~retail~~maintain ~~sell-through,~~the ~~significant~~customer ~~quantities~~relationship. ofWe ~~these~~record ~~products~~revenue ~~remained~~net inof ~~the~~an ~~retail~~allowance ~~channel. Accordingly,~~for weestimated ~~provided~~price ~~our~~concessions ~~retail~~and ~~customers~~returns. ~~with~~We ~~price~~must ~~concessions~~make ~~for~~significant ~~these~~estimates ~~products~~and ~~more~~judgments ~~rapidly~~when ~~after~~determining the ~~initial~~appropriate ~~release~~allowance ~~date~~for ~~than~~price ~~was~~concessions ~~our~~and returns ~~historical~~in ~~practice~~any ~~and,~~accounting inperiod. ~~the~~In ~~fourth~~order ~~quarter~~to ofderive ~~fiscal~~and ~~2002,~~evaluate ~~recorded~~those aestimates, ~~$17.9~~we ~~million~~analyze ~~provision~~historical ~~for~~ price concessions and returns, oncurrent ~~these~~sell-through ~~products~~of ~~that~~product ~~exceeded historical allowance rates~~ and ~~that~~retailer weinventory, ~~believed~~current ~~would~~economic ~~have~~trends, ~~resulted~~changes in ~~additional~~consumer ~~sell-through~~demand toand acceptance of our ~~retailers’~~products ~~customers~~in ~~through~~ the ~~holiday~~marketplace, ~~season~~among other factors.

~~During~~As ~~fiscal~~the ~~2003,~~consumer ~~while~~market ~~the~~acceptance ~~price~~of ~~concessions~~a wesoftware ~~previously~~title ~~offered~~decreases, ~~our retail~~resulting ~~customers~~in ~~did~~lower ~~increase~~unit ~~the~~ retail sell-through ~~rate~~, the ~~rate~~potential offor ~~reduction~~price ofconcessions ~~retail~~and ~~channel~~returns ~~inventory~~for ~~did~~those ~~not~~titles ~~attain~~increases. In the ~~level~~fourth wequarter ~~had~~of ~~originally~~fiscal ~~estimated. Consequently~~2002, we ~~experienced~~released ~~significantly~~the software ~~more~~titles ~~returns~~Turok: ofEvolution ~~these~~and ~~two~~Aggressive ~~products~~Inline, ~~from our~~which ~~retail customers than~~ we ~~originally~~anticipated ~~had~~would ~~estimated.~~be ~~Additionally,~~significant ~~the~~revenue ~~market~~drivers ~~for~~and ~~GameCube~~valuable ~~products~~additions ~~softened~~to ~~after~~our ~~the~~product ~~2002~~catalog. ~~holiday~~The ~~season,~~market ~~which~~reception ~~required us~~ to ~~provide~~these ~~price~~titles, ~~concessions~~as onevidenced ~~certain~~by ofthe ~~our~~retail sell-through ~~products~~rates ~~for those platforms~~ to ~~lower prices~~consumers ~~than~~in wethe ~~originally~~first ~~estimated~~quarter atof ~~this~~fiscal ~~stage~~2003 inand ~~the~~beyond, ~~platform~~fell ~~cycle.~~substantially ~~Finally,~~below ~~the~~our ~~actual~~revenue ~~sell-through~~expectations. ~~rates~~As ofa ~~Legends~~result of ~~Wrestling~~the ~~and~~lower ~~BMX were less~~ than ~~the~~anticipated ~~projected~~ retail sell-through, ~~rates~~significant wequantities ~~had~~of ~~used~~these inproducts ~~our~~remained ~~previous~~in ~~estimates~~the ofretail ~~allowances~~channel. Accordingly, ~~which~~we ~~were~~provided ~~based~~our onretail ~~historical~~customers ~~experience~~with ~~and~~price ~~actual~~concessions ~~sell-through rates~~ for ~~those~~these products ~~through~~more ~~August~~rapidly ~~31,~~after ~~2002.~~the Asinitial arelease ~~result~~date ofthan ~~these~~was ~~unanticipated~~our ~~events~~historical practice and, wein ~~provided~~the ~~our~~fourth ~~retail~~quarter ~~customers~~of ~~additional~~fiscal ~~price~~2002, ~~concessions. The~~recorded ~~resulting~~a $1417.4 9 million ~~increase to the~~ provision for price concessions and returns ~~negatively~~on ~~impacted~~these ~~net~~products ~~revenues,~~that ~~gross~~exceeded ~~profit~~historical allowance rates and ~~net~~that ~~income~~we ~~for~~believed ~~fiscal~~would ~~2003.~~have Noresulted ~~further~~in ~~significant~~additional ~~adjustments~~sell-through ~~were~~to ~~made~~our ~~during~~retailers’ ~~the~~customers ~~three~~through ~~months~~the ~~ended~~calendar ~~June 29,~~2002 ~~2003~~holiday season.

During fiscal 2003, while the price concessions we previously offered our retail customers did increase the retail sell-through rate, the rate of reduction of retail channel inventory did not attain the level we had originally estimated. Consequently, we experienced significantly more returns of these two products from our retail customers than we originally had estimated. Additionally, the market for GameCube products softened after the 2002 holiday season, which required us to provide price concessions on certain of our products for that platform to lower prices than we originally estimated at that stage in the platform cycle. Finally, the actual sell-through rates of Legends of Wrestling and BMX were less than the projected retail sell-through rates we had used in our previous estimates of allowances, which were based on historical experience and actual sell-through rates for those products through August 31, 2002. As a result of these unanticipated events, we provided our retail customers additional price concessions. The resulting $14.4 million increase to the provision for price concessions and returns negatively impacted net revenues, gross profit and net income for fiscal 2003. No further significant adjustments were made to allowances during the three and six months ended September 28, 2003.

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

Prepaid Royalties

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

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.

2931

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 three and six months ended ~~June~~September 2928, 2003 and ~~June~~August 231, 2002 and the related changes in operating results between those periods. You should read the tables below together with the consolidated financial statements and the related notes to the consolidated financial statements, which are included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

							Changes
	Three Months Ended						1Q'04Versus3Q'02
	June 29,2003			June 2,2002			$			%
Net revenue	$	33,070		$	62,863		$	(29,793	)	-47.4	%
Cost of revenue		19,905			26,691			(6,786	)	-25.4	%
Gross profit		13,165			36,172			(23,007	)	-63.6	%
Operating expenses
Marketing and selling		6,725			13,068			(6,343	)	-48.5	%
General and administrative (excluding stock-based compensation of $1,170)		8,541			10,413			(1,872	)	-18.0	%
Research and development		11,325			9,367			1,958		20.9	%
Stock-based compensation		1,170			—			1,170		0.0	%
Total operating expenses		27,761			32,848			(5,087	)	-15.5	%
(Loss) earnings from operations		(14,596	)		3,324			(17,920	)	-539.1	%
Other income (expense)
Interest expense, net		(1,046	)		(974	)		(72	)	7.4	%
Non-cash financing expense		(1,960	)		(193	)		(1,767	)	915.5	%
Other (expense) income		(447	)		403			(850	)	-210.9	%
Total other expense		(3,453	)		(764	)		(2,689	)	352.0	%
(Loss) earnings before income taxes		(18,049	)		2,560			(20,609	)	-805.0	%
Income tax provision		—			25			(25	)	-100.0	%
Net (loss) earnings	$	(18,049	)	$	2,535		$	(20,584	)	-812.0	%

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

							Changes
	Three Months Ended						2Q’04 Versus 4Q’02
	September 28, 2003			August 31, 2002			$			%
Net revenue	$	41,345		$	54,055		$	(12,710	)	-23.5	%
Cost of revenue		20,472			33,222			(12,750	)	-38.4	%

Gross profit		20,873			20,833			40		0.2	%

Operating expenses
Marketing and selling		6,094			18,557			(12,463	)	-67.2	%
General and administrative(1)		8,875			11,480			(2,605	)	-22.7	%
Research and development		7,390			15,928			(8,538	)	-53.6	%
Stock-based compensation		80			—			80		NA
Restructuring		205			—			205		NA

Total operating expenses		22,644			45,965			(23,321	)	-50.7	%

Loss from operations		(1,771	)		(25,132	)		23,361		-93.0	%

Other income (expense)
Interest expense, net		(989	)		(1,169	)		180		-15.4	%
Non-cash financing expense		(1,828	)		(193	)		(1,635	)	847.2	%
Other income (expense)		583			(1,512	)		2,095		-138.6	%

Total other expense		(2,234	)		(2,874	)		640		-22.3	%

Loss before income taxes		(4,005	)		(28,006	)		24,001		-85.7	%
Income tax provision		—			224			(224	)	-100.0	%

Net loss	$	(4,005	)	$	(28,230	)	$	24,225		-85.8	%

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

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

							Changes
	Six Months Ended						Fiscal 2004 Versus Fiscal 2002
	September 28, 2003			August 31, 2002			$			%
Net revenue	$	74,415		$	116,918		$	(42,503	)	-36.4	%
Cost of revenue		40,377			59,913			(19,536	)	-32.6	%

Gross profit		34,038			57,005			(22,967	)	-40.3	%

Operating expenses
Marketing and selling		12,819			31,625			(18,806	)	-59.5	%
General and administrative(1)		17,416			21,893			(4,477	)	-20.4	%
Research and development		18,715			25,295			(6,580	)	-26.0	%
Stock-based compensation		1,250			—			1,250		NA
Restructuring charges		205			—			205		NA

Total operating expenses		50,405			78,813			(28,408	)	-36.0	%

Loss from operations		(16,367	)		(21,808	)		5,441		-24.9	%

Other income (expense)
Interest expense, net		(2,035	)		(2,143	)		108		-5.0	%
Non-cash financing expense		(3,788	)		(386	)		(3,402	)	881.3	%
Other income (expense)		136			(1,109	)		1,245		-112.3	%

Total other expense		(5,687	)		(3,638	)		(2,049	)	56.3	%

Loss before income taxes		(22,054	)		(25,446	)		3,392		-13.3	%
Income tax provision		—			249			(249	)	-100.0	%

Net loss	$	(22,054	)	$	(25,695	)	$	3,641		-14.2	%

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

Net Revenue

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

3033

Summarized below is information about our gross revenue by game console for the three ~~months~~and ~~ended~~six ~~June~~months 29ended September 28, 2003 and ~~June~~August 231, 2002. Please note that the numbers in the schedule below do not include the effect of provisions for price concessions and returns because we do not track them by game console. Accordingly, the numbers presented may vary materially from those that we would disclose were we able to present the information net of provisions for price concessions and returns.

	Three Months Ended					Six Months Ended
	June 29,2003		June 2,2002
	September 28,2003			August 31,2002		September 28,2003		August 31,2002
Cartridge-based software:
Nintendo Game Boy	3%	%	9%	6	%	3	%	7	%
Subtotal for cartridge-based software	3%	%	9%	6	%	3	%	7	%
Disc-based software:
Sony PlayStation 2: 128-bit	~~43%~~61	%	~~38%~~	51	%	52	%	45	%
Sony PlayStation 1: 32-bit	5%3	%	3%	2	%	4	%	2	%
Microsoft Xbox: 128-bit	~~31%~~22	%	~~18%~~	21	%	26	%	20	%
Nintendo GameCube: 128-bit	~~15%~~9	%	~~30%~~	19	%	12	%	24	%
Subtotal for disc-based software	~~94%~~95	%	~~89%~~	93	%	94	%	91	%
PC software	3%2	%	2%	1	%	3	%	2	%
Total	100%	%	~~100%~~	100	%	100	%	100	%
Gross Revenue by Studio:
Gross revenue by studio:
Internal	~~29%~~49	%	~~37%~~	72	%	40	%	58	%
External	~~71%~~51	%	~~63%~~	28	%	60	%	42	%
Total	100%	%	~~100%~~	100	%	100	%	100	%
Gross Revenue by Segment:
Gross revenue by segment:
Domestic	~~41%~~55	%	~~70%~~	69	%	49	%	69	%
International	~~59%~~45	%	~~30%~~	31	%	51	%	31	%
Total	100%	%	~~100%~~	100	%	100	%	100	%
New Titles Released	10		11
New titles released	17			9		27		20

Summarized below is information about our software franchises, all released on multiple platforms, that represented 5% or more of gross revenue for the three and six months ended ~~June~~September 2928, 2003 and ~~June~~August 231, 2002:

	Three Months Ended					Six Months Ended
Software Franchise	~~June~~September 2928,2003		~~June 2,2002~~	August 31,2002		September 28,2003		August 31,2002
Burnout	32%		18%
NBA Jam	16	%		—		9	%	—
Vexx	15%		—
Burnout	14	%		3	%	23	%	10	%
ATV	8%		1%
Summer Heat	11	%		—		6	%	—
Speed Kings	8%		—
A TV	9	%		2	%	8	%	2	%
All Star Baseball	5%		10%
Extreme G	6	%		—		3	%	2	%
Legends of Wrestling	2%		15%
Turok	6	%		66	%	4	%	38	%
Crazy Taxi	2%		7%
All Star Baseball	4	%		3	%	4	%	6	%
BMX	1%		8%
Speed Kings	3	%		—		5	%	—
Vexx	1	%		—		7	%	—
Legends of Wrestling	1	%		1	%	2	%	7	%
Aggressive Inline	1	%		12	%	1	%	11	%

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~~For~~Three ~~the~~Months ~~three~~Ended ~~months~~September ~~ended June 29~~28, 2003, ~~net~~Compared ~~revenue~~to ofThree ~~$33.1~~Months ~~million~~Ended ~~decreased~~August ~~by $29.8 million, or 47%, from $62.9 million for the three months ended June 2, 2002. The decrease was caused by a $~~31~~.7 million decrease in gross revenue~~, ~~partially offset by a $1.9 million decrease in the net provision for price concessions and returns primarily due~~2002 ~~to the decrease in gross revenue.~~

~~The~~For ~~$31.7~~the ~~million~~three ~~decrease in~~months ~~gross~~ended ~~revenue~~September ~~was~~28, ~~primarily~~2003, ~~attributable~~net revenue ~~to the release~~ of ~~fewer~~$41.3 ~~titles,~~million adecreased ~~lower~~by ~~number~~$12.7 ofmillion, ~~units~~or ~~sold~~24%, ~~and~~from ~~lower~~$54.1 ~~average~~million ~~selling~~for ~~prices per unit sold as compared with~~ the ~~prior~~three ~~year.~~months ~~Catalog~~ended ~~title~~August ~~sales~~31, ~~which~~2002. ~~generally~~The ~~sell~~decrease atwas ~~lower~~caused ~~price~~by ~~points than~~a ~~newly~~$52.3 ~~released~~million ~~titles,~~decrease ~~represented~~in agross ~~greater percentage of~~ revenue, atpartially ~~lower~~offset ~~average~~by ~~selling~~a ~~prices per unit sold~~$39.6 ~~Catalog~~million ~~titles~~decrease ~~comprised~~in ~~approximately~~the ~~62%~~net provision ~~of revenue~~ for ~~the~~price ~~first~~concessions ~~quarter~~and ~~of fiscal 2004 compared to approximately 44% in the prior year~~returns.

~~Sales~~The $52.3 million decrease in gross revenue was primarily attributable to the release of ~~software~~fewer titles, ~~for~~the lower average number of units sold per title, and lower average selling prices per unit sold as compared with the ~~top~~prior ~~three~~year ~~game~~period. Catalog title sales, which ~~systems~~generally ~~accounted~~sell ~~for~~at ~~89%~~lower price points than newly released titles, represented a greater percentage of ~~gross~~revenue at lower average selling prices per unit sold. Catalog titles comprised approximately 70% of revenue for the ~~three~~second ~~months~~quarter ~~ended~~of ~~June~~fiscal ~~29, 2003~~ 2004 compared to 86approximately 24% ~~for~~in the ~~three~~comparable ~~months~~period ~~ended~~of ~~June~~the 2,prior ~~2002~~year. WeThe ~~achieved~~$39.6 million decrease in the ~~greatest~~net ~~level~~provision offor ~~sales~~price concession and returns resulted from ~~software~~the ~~titles~~reduction ~~released~~in ~~for~~gross ~~PlayStation~~revenues, 2higher ~~which~~retail tosell-through ~~date~~rates ~~has~~for our products during fiscal 2004 as well as the ~~highest~~increase ~~installed~~in ~~base~~the provision of $13.6 million recorded in the ~~three~~fourth ~~game~~quarter ~~systems~~of fiscal 2002 for Turok: Evolution and Aggressive Inline based on the lower than historical retail sell-through rates for those products and a higher than historical allowance provision rate.

Sales of software titles for the top three game systems accounted for 92% of gross revenue for the three months ended September 28, 2003 compared to 91% for the three months ended August 31, 2002. We achieved the greatest level of sales from software titles released for PlayStation 2 which to date has the highest installed base of the three game systems.

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

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

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

Sales of software titles for the top three game systems accounted for 90% of gross revenue for the six months ended September 28, 2003 compared to 89% for the six months ended August 31, 2002. We achieved the greatest level of sales from software titles released for PlayStation 2 which to date has the highest installed base of the three game systems.

Gross Profit

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

•

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

•

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.

~~For~~Three ~~the three months~~Months ~~ended~~Ended ~~June~~September 2928, 2003, ~~gross~~Compared ~~profit~~to ofThree ~~$13.2~~Months ~~million~~Ended ~~(40%~~August ~~of net revenue) decreased by $23.0 million from $36.2 million (58% of net revenue) for the three months ended June 2~~31, 2002. ~~The decreased gross profit was primarily due to a:~~

•For the three months ended September 28, 2003, gross profit of $2120.09 million ~~decrease~~(51% of net revenue) was the same as gross profit for the three months ended August 31, 2002 (39% of net revenue). The increased gross profit percentage was primarily due to lower average costs per unit and a ~~lower~~decrease ~~number~~in the amortization of ~~units~~capitalized ~~sold~~software ~~and~~development ~~lower~~costs, partially offset by diminished average net selling prices per unit sold (please see “Net Revenue”),.

•For ~~$3.1~~the ~~million~~three ~~increase~~months inended September 28, 2003, amortization of capitalized software development costs ~~due~~amounted ~~primarily~~ to ~~the~~$2.6 ~~releases~~million ofas ~~Vexx,~~compared ~~All~~to ~~Star~~$3.5 ~~Baseball~~million ~~2004~~for ~~and~~the ~~Burnout~~three 2,months ~~partially~~ended ~~offset~~August by31, a2002.

•Six ~~$1.0~~Months ~~million~~Ended ~~increase~~September in28, ~~gross~~2003 ~~profit~~Compared ~~associated~~to ~~with~~Six ~~slightly~~Months ~~lower~~Ended ~~per~~August ~~unit~~31, ~~costs~~2002 ~~of software sold.~~

For the ~~three~~six months ended ~~June~~September 2928, 2003, ~~amortization~~gross profit of ~~capitalized~~$34.0 ~~software~~million (46% ~~development~~of ~~costs~~net ~~amounted~~revenue) todecreased by $423.50 million ~~as compared~~from to $157.40 million (49% of net revenue) for the ~~three~~six months ended ~~June~~August 231, 2002. ~~Capitalized~~The ~~software~~decreased ~~development~~gross ~~costs,~~profit ~~net,~~was ~~amounted~~primarily tocaused ~~$2.9~~by ~~million~~a as: ~~of June 29, 2003 and $6.9 million as of March 31, 2003.~~

~~Gross~~• ~~profit~~$ in29.6 ~~fiscal~~million ~~2004~~decrease ~~will~~due ~~depend~~to ina ~~large~~lower ~~part~~number onof ~~our~~units ~~ability~~sold ~~to identify, develop~~ and ~~timely~~lower ~~publish,~~average inselling ~~accordance~~prices ~~with~~per ~~our~~unit ~~product~~sold ~~release~~(please ~~schedule,~~see ~~software that sells through at projected levels at retail. See~~ “~~Factors~~Net ~~Affecting~~Revenue”), ~~Future Performance: Our Ability to Meet Cash Requirements~~ and ~~Maintain Necessary Liquidity Rests in~~

32• $2.2 million increase in amortization of capitalized software development costs due primarily to the releases of Vexx, All Star Baseball 2004 and Burnout 2, partially offset by a

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

~~Part~~For on the ~~Cooperation~~six months ended September 28, 2003, amortization of ~~Our~~capitalized ~~Primary~~software ~~Lender~~development ~~and~~costs ~~Vendors,~~amounted ~~and~~to ~~Our~~$7.1 ~~Ability~~million as compared to ~~Achieve~~$4.9 ~~Our~~million ~~Projected~~for ~~Revenue~~the ~~Levels~~six ~~and~~months ~~Reduced~~ended ~~Operating~~August ~~Expenses~~31, 2002 due to the higher capitalized costs associated with the titles released in fiscal 2004.”

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

Gross profit in fiscal 2004 will depend in large part on our ability to identify, develop and timely publish, in accordance with our product release schedule, software that sells through at projected levels at retail. See “Factors Affecting Future Performance: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of Our Primary Lender and Vendors, Our Ability to Achieve Our Projected Revenue Levels and Reduced Operating Expenses and Our Ability to Raise Additional Financing from Outside Investors.”

Operating Expenses

For the three months ended ~~June~~September 2928, 2003, operating expenses of $2722.86 million (8455% of net revenue) decreased by $523.13 million, or 1651%, from $3246.80 million (5285% of net revenue) for the three months ended ~~June~~August 231, 2002. For the six months ended September 28, 2003, operating expenses of $50.4 million (68% of net revenue) decreased by $28.4 million, or 36%, from $78.8 million (67% of net revenue) for the six months ended August 31, 2002.

Marketing and Selling

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

For the three months ended ~~June~~September 2928, 2003, marketing and selling expenses of $6.71 million (2015% of net revenue) decreased by $612.35 million, or 4967%, from $1318.16 million (2134% of net revenue) for the three months ended ~~June~~August 231, 2002. ~~The~~For ~~decrease~~the six months ended September 28, 2003, marketing and selling expenses of $412.48 million (17% of net revenue) decreased by $18.8 million, or 60%, from $31.6 million (27% of net revenue) for the six months ended August 31, 2002. The decreases in the three and six month periods relative to the comparative prior year periods resulted primarily from lower variable marketing expenditures on lower revenues and management’s decision to curtail marketing and advertising expenditures in order to improve short-term liquidity (please see discussion under “Liquidity and Capital Resources”), ~~and~~as awell ~~$0.7~~as ~~million~~lower ~~decrease in~~ sales commissions related to the ~~decrease~~decreases in net revenue.

General and Administrative

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

For the three months ended ~~June~~September 2928, 2003, general and administrative expenses of $8.59 million (2622% of net revenue) decreased by $12.96 million, or 1823%, from $1011.45 million (1721% of net revenue) for the three months ended ~~June~~August 231, 2002. The decrease resulted primarily from ~~savings~~a decrease in ~~employee~~occupancy ~~related~~costs ~~expenses~~ of $1.31 million, depreciation of $0.78 million, technology costs of $0.6 million and ~~occupancy~~distribution costs of $0.5 million partially offset by higher insurance and legal expenses of $0.74 million. The 9% increase in general and administrative expenses as a percentage of net revenue resulted from decreased net revenue in the three months ended June 29, 2003 as compared to the three months ended June 2, 2002.

~~Administrative~~For ~~employee~~the ~~headcount~~six ~~was~~months ~~relatively~~ended September ~~unchanged~~28, at2003, ~~approximately~~general ~~165~~and asadministrative expenses of ~~June~~$17.4 ~~29,~~million ~~2003~~(23% asof ~~compared~~net torevenue) ~~160~~decreased asby ~~of March~~$4.5 31million, ~~2003,~~or ~~however~~20%, ~~was~~from ~~significantly~~$21.9 ~~reduced~~million ~~from~~(19% of net revenue) for the ~~June~~six 2months ended August 31, 2002. ~~headcount~~The ofdecrease ~~229.~~resulted ~~Please~~primarily ~~see~~from ~~“Restructuring,”~~a decrease ~~and~~in ~~“Liquidity~~employee ~~and~~related ~~Capital~~costs ~~Resources”~~of as$1.7 ~~well~~million, asoccupancy ~~Note~~costs 12of ~~(Accrued~~$1.6 ~~Restructuring~~million, ~~Charges)~~depreciation of ~~the notes~~$1.5 tomillion, ~~the~~technology ~~consolidated~~costs ~~financial~~of ~~statements~~$0.5 inmillion ~~Part~~and I,distribution ~~Item~~costs 1 of ~~this~~$0.6 ~~quarterly~~million ~~report~~partially onoffset ~~Form~~by ~~10-Q~~higher insurance and legal expenses of $1.3 million.

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

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

Research and Development

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

~~For~~• ~~the three months ended June 29, 2003, research and development expenses of~~ $114.37 million ~~(34% of net revenue) increased by $2.0 million, or 21%,~~ from ~~$9.4~~lower ~~million~~employee ~~(15%~~related ofand ~~net~~overhead ~~revenue)~~costs ~~for~~associated ~~the~~with ~~three~~internal ~~months~~development ~~ended June 2~~studios, ~~2002.~~principally ~~Fewer~~resulting ~~titles~~from ~~under development in fiscal year 2004 met~~ the ~~test~~closure of ~~technological~~our ~~feasibility,~~Salt asLake ~~compared~~City ~~to the prior year, thereby increasing~~ software development ~~expenses~~studio byat ~~$6.3~~the ~~million.~~end ~~Partially~~of ~~offsetting~~calendar ~~these~~2002 ~~additional costs are savings of:~~ and

•37 ~~$2.0 million from lower employee related costs associated with internal development studios, and~~

• $2.0 million from lower external development costs.

•

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

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

•

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

•

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

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

Stock-based Compensation

Stock-based compensation of $10.21 million for the three months ended ~~June~~September 2928, 2003 represents the increase in market value, asbetween the end of ~~June~~the first quarter of fiscal 2004, June 29, 2003 ($1,170 based on a market value per share of $0.78) and the end of the second quarter of fiscal 2004, September 28, 2003 ($1,250 based on a market value per share of $0.83) of the 1.5 million shares of our common stock ~~that~~which ~~the~~our Compensation Committee ~~has~~had approved, and the Board of Directors ~~has~~had ratified, tofor beissuance ~~issued~~ to Rodney Cousens, for his appointment as CEO. As the issuance of the shares is subject to stockholder approval, the associated expense will fluctuate with the ~~trading~~market ~~price~~value of our common stock until the issuance is approved. Stock-based compensation associated with the proposed share issuance amounted to $1.3 million for the six months ended September 28, 2003.

Restructuring

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

In December 2002 and January 2003, we restructured our operations in order to lower our operating expenses and improve our operating cash flows. Under the plan, we closed our software development studio located in Salt Lake City, Utah, and reduced global administrative headcount. The studio closing was designed to achieve financial efficiencies through consolidation of all our domestic internal product development. The closure of the development studio and reduction of our global administrative headcount reduced our overall headcount by approximately 100 employees and resulted in initial restructuring charges of $4,824 during fiscal 2003. The restructuring charges included accruals for employee termination costs, the write-off of certain fixed assets and leasehold improvements and the accrual of the development studio lease commitment, which is net of estimated sub-lease rental income. An adjustment to our forecast of sub-lease rental income and additional lease costs resulted in an increase to the restructuring charge of $205 during the three months ended September 28, 2003. The development studio lease commitment expires in May 2007 and the employee severance agreements expire over various periods through April 2004. No restructuring charges were incurred for the three and six months ended June 29, 2003 or August 31, 2002, respectively.

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

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

Ending balance as of September 28, 2003	$	1,176		$	1,176

Other Income and Expense

Interest Expense, Net

Interest expense, net, was $1.0 million for ~~both~~ the three months ended ~~June 29~~September 28, 2003 (32% of net revenue) ~~and~~as compared to $1.2 million for the three months ended ~~June~~August 231, 2002 (2% of net revenue).

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

Non-cash Financing Expense

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

For the three months ended ~~June~~September 2928, 2003, non-cash financing expense amounted to $21.8 million (4% of net revenue) as compared to $0.2 million (60.4% of net revenue) for the three months ended August 31, 2002. For the six months ended September 28, 2003, non-cash financing expense amounted to $3.8 million (5% of net revenue) as compared to $0.24 million (0.3% of net revenue) for the ~~three~~six months ended ~~June~~August 231, 2002. The ~~increase~~increases ~~relates~~relate primarily to $1.76 million ~~from~~of costs for the three months ended September 28, 2003 and $3.3 million for the six months ended September 28, 2003 associated with the warrants to purchase 1,000 shares of our common stock at an exercise price of $0.50 per share issued and the 4,000 shares of common stock proposed to be issued to two of Acclaim’s major shareholders, who are also co-chairmen, as consideration for their ~~deposit~~ deposit of $2,000 with our primary lender. The cash deposit was provided as a limited guarantee of our obligations. We will continue to revalue the shares at each quarter-end, pending a stockholder approval of the share issuance. Please see Note ~~13A~~13B (Debt: North American Credit Agreement) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

Other Income (Expense)

For the three months ended ~~June~~September 2928, 2003, other income (expense) amounted to ~~expense~~income of $0.56 million (1.4% of net revenue) as compared to ~~income~~expense of $01.45 million (02.68% of net revenue) for the three months ended ~~June~~August 231, 2002. ~~The~~For ~~change~~the six months ended September 28, 2003, other income (expense) amounted to income of $0.1 million as compared to expense of $1.1 million for the six months ended August 31, 2002. The changes for the three and six month periods relative to the comparable prior year periods relates primarily to net foreign currency transaction gains in the current year versus losses in the prior year associated with the change in the purchase power of the British Pound Sterling versus the Euro.

Income Taxes

Income tax provision ~~(benefit)~~ decreased to zero for the three and six months ended ~~June~~September 2928, 2003 as compared to an expense of $250.2 million for the three and six months ended ~~June 2~~August 31, 2002. Although as of June 29, 2003 we had a significant U.S. tax net operating loss carryforward, we were not able to recognize a benefit during the three months ended June 29, 2003 because of the uncertainty of whether we will be able to utilize ~~the loss carryforward in the future.~~

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

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

Net (Loss) ~~Earnings~~

For the three months ended ~~June~~September 2928, 2003, we reported a net loss of $184.0 million, or $0.1904 per diluted share (based on weighted average diluted shares outstanding of ~~97,056~~109.1 million), as compared to a net ~~earnings~~loss of $228.52 million, or $0.0331 per diluted share (based on weighted average diluted shares outstanding of ~~97,312~~92.5 million) for the three months ended ~~June~~August 231, 2002.

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

Seasonality

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

34Liquidity and Capital Resources (In thousands, except per share data)

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

As of September 28, 2003, the working capital deficit of $67,209 increased by $3,713 from the $63,496 working capital deficit as of March 31, 2003. The increase in the working capital deficit during the six months ended September 28, 2003 resulted primarily from the $22,054 net loss in the period, partially offset by the gross proceeds of $5,500 received from purchases of convertible subordinated notes, repayments of $7,820 for notes receivable and related accrued interest due from our Co-chairmen, and net proceeds of $8,314 from our June 2003 private placement. Please see “Factors Affecting Future Performance: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary Lender and Vendors, and Our Ability to Achieve Our Projected Revenue Levels and Reduce Operating Expenses and Our Ability to Raise Additional Financing From Outside Investors.”

As of March 31, 2003, our independent auditors’ report, as prepared by KPMG LLP and dated May 20, ~~whole.~~2003, ~~Please~~included ~~see~~an ~~“Factors~~explanatory ~~Affecting~~paragraph ~~Future~~relating ~~Performance:~~to ~~Revenue~~the ~~Varies~~substantial ~~Due~~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 ~~Seasonal~~recurring ~~Nature~~use of ~~Video~~cash in operating activities. For the six months ended September 28, 2003, we had a net loss of $22,054 and ~~Computer~~used ~~Game~~$1,133 ~~Software~~of cash in operating activities. As of September 28, 2003, we had a stockholders’ deficit of $55,022, a working capital deficit of $67,209 and ~~Purchases~~cash and cash equivalents of $7,323.” These factors have continued to raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty and, based on management’s plans described below, our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern.

~~Liquidity~~Our short-term liquidity has been supplemented with borrowings under our North American and ~~Capital~~International ~~Resources~~credit facilities with our primary lender. To enhance our short-term liquidity, during fiscal 2003, we implemented targeted expense reductions through a business restructuring. In connection with the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff related expenses and lowered our overall marketing expenditures. Additionally, on March 31, 2003, our primary lender had advanced to us a supplemental discretionary loan of $11,000 through May 31, 2003. In accordance with the terms of the amendment to our credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6,000 of the supplemental discretionary loan and as of September 26, 2003, we repaid the remaining $5,000. During the six months ended September 28, 2003, our Co-chairmen fully repaid a total of $6,947 of their outstanding loans and related accrued interest of $873. Additionally, in June 2003, we completed a private placement of 16,383 shares of our common stock to a limited group of private investors, resulting in net proceeds to us of $8,314. In September and October 2003, we completed the sale of our 10% convertible subordinated notes, resulting in gross proceeds of $11,863 of which $5,500 was received as of September 28, 2003.

AsOur offuture ~~June~~liquidity ~~29,~~will ~~2003,~~significantly ~~cash~~depend ~~and~~in ~~cash~~whole ~~equivalents~~or ~~were~~in part ~~$2,165.~~on ~~During~~our ~~the~~ability ~~three months~~to ~~ended~~(1) ~~June~~timely ~~29,~~develop ~~2003, cash~~ and ~~cash~~market ~~equivalents~~new ~~decreased~~software byproducts ~~$2,330~~that ~~compared~~meet toor aexceed ~~net~~our ~~decrease~~operating ~~of $3~~plans,~~391~~ ~~for~~(2) ~~the~~realize ~~three~~long-term ~~months~~benefits ~~ended~~from ~~June~~our 2implemented expense reductions, ~~2002.~~and ~~Primary~~(3) ~~contributors~~continue to enjoy the ~~decreased~~support ~~use~~ of ~~cash~~our inprimary ~~the~~lender and ~~three~~vendors. ~~months~~If ~~ended~~we ~~June~~do ~~29,~~not ~~2003~~substantially ~~as compared~~achieve toour ~~the~~overall ~~three~~projected ~~months~~revenue ~~ended~~levels ~~June~~as 2,reflected ~~2002 were changes~~ in ~~cash~~our ~~used~~business in operating ~~activities~~plan, ~~and~~continue ~~cash~~to ~~(used~~realize ~~in)~~additional ~~and~~benefits ~~provided~~from bythe ~~financing~~expense ~~activities.~~reductions ~~Operating~~we ~~activities~~have ~~used $3~~implemented,~~595~~ ~~less~~and ~~cash~~timely ~~for~~close on the ~~three~~new domestic ~~months~~loan ~~ended~~facility ~~June~~with 29our primary lender, ~~2003~~we ~~as compared~~will ~~with~~either ~~the~~need ~~three~~to ~~months~~make ~~ended~~further ~~June~~significant 2expense reductions, ~~2002~~including, ~~due~~without ~~primarily~~limitation, tothe ~~lower~~sale ~~capitalized~~of ~~software~~certain ~~development~~assets ~~costs~~or ~~and~~the ~~faster~~consolidation ~~collection~~or closing of ~~accounts~~certain ~~receivable.~~operations, ~~Financing~~additional ~~activities used $4~~staff reductions,~~812~~ ~~more~~and/or ~~cash~~the ~~for~~delay, ~~the~~cancellation ~~three~~or ~~months~~reduction ~~ended~~of ~~June~~certain ~~29,~~product ~~2003~~development ~~as compared~~and tomarketing ~~the~~programs. ~~three~~Additionally, ~~months~~some ~~ended~~of ~~June~~these 2,measures ~~2002,~~may ~~due~~require ~~primarily~~third toparty aconsents ~~$17,339~~or ~~increase~~approvals infrom ~~net~~our ~~short-term~~primary ~~loan~~lender ~~repayments~~and others, ~~partially~~and ~~offset~~there bycan ~~net~~be ~~proceeds~~no assurance ofthose ~~$8,314~~consents ~~from~~or ~~our~~approvals ~~June~~will ~~2003~~be ~~private placement~~obtained.

AsIn ofthe event ~~June~~that ~~29,~~we ~~2003,~~do ~~the~~not ~~working~~achieve ~~capital~~our ~~deficit~~business ofoperating ~~$69~~plan,~~400~~ ~~increased~~continue ~~by $5,904~~to ~~over~~derive ~~the~~significant ~~$63,496~~expense ~~working~~savings ~~capital~~from ~~deficit~~our asimplemented ofexpense ~~March~~reductions ~~31,~~and ~~2003.~~timely ~~The~~close ~~increase~~on in the ~~working~~new ~~capital~~domestic ~~deficit~~loan ~~during~~facility ~~the~~with ~~three~~our ~~months~~primary ~~ended~~lender, ~~June~~we ~~29,~~cannot ~~2003~~assure ~~resulted~~our stockholders ~~primarily~~that ~~from~~our ~~the~~future ~~$18,049~~operating ~~net~~cash ~~loss~~flows inwill ~~the~~be ~~period,~~sufficient ~~partially~~to ~~offset~~meet byour ~~the~~operating ~~$8,314 net~~requirements ~~proceeds~~and ~~from~~debt ~~our~~service ~~June~~requirements. ~~2003~~If ~~private~~any ~~placement~~of ~~and~~the $4preceding events were to occur,~~784~~ ofour ~~prepayments~~operations ofand ~~notes~~liquidity ~~receivable~~would be materially and ~~related~~adversely affected ~~accrued~~and ~~interest~~we ~~due~~could ~~from~~be ~~Acclaim’s~~forced ~~co-chairmen~~to cease operations.

~~Please~~At various ~~see~~times ~~“Factors~~we ~~Affecting~~may ~~Future~~depend ~~Performance:~~on ~~Our~~obtaining ~~Ability~~dividends, toadvances ~~Meet~~and ~~Cash~~transfers ~~Requirements~~of funds from our subsidiaries. State and ~~Maintain~~foreign ~~Necessary Liquidity~~laws ~~Rests~~regulate inthe ~~Part~~payment onof dividends by these subsidiaries, which is also subject to the ~~Cooperation~~terms of our ~~Primary~~North ~~Lender~~American credit ~~and~~agreement. ~~Vendors~~A significant portion of our assets, operations, trade payables and ~~Our~~indebtedness ~~Ability~~is located among our foreign subsidiaries. The creditors of the subsidiaries would generally recover from these assets on the obligations owed to ~~Achieve~~them by ~~Our~~the ~~Projected~~subsidiaries ~~Revenue~~before ~~Levels~~any recovery by our creditors and ~~Reduce~~before ~~Operating~~any ~~Expenses~~assets are distributed to our stockholders.”

As41 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 three months ended June 29, 2003, we had a net loss of $18,049 and used $188 of cash in operating activities. As of June 29, 2003, we had a stockholders’ deficit of $53,614, a working capital deficit of $69,400 and cash and cash equivalents of $2,165. These factors have continued to raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty and, based on management’s plans described below, our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern.

Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with our primary lender. To enhance our short-term liquidity, during fiscal 2003, we implemented targeted expense reductions through a business restructuring. In connection with the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff related expenses and lowered our overall marketing expenditures. Additionally, on March 31, 2003, our primary lender advanced to us a supplemental discretionary loan of up to $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. The remaining $5,000 of the supplemental discretionary loan will continue to be available to us through September 29, 2003. In June 2003, two of our executive officers prepaid a total of $3,956 of their outstanding loans that are due to us on August 31, 2003 and $828 of related accrued interest. 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. Furthermore, to meet our liquidity needs, we have included a proposal in our forthcoming 2003 Proxy Statement seeking the authorization from our stockholders to issue securities in connection with our continuing efforts to raise additional financing from outside investors.

~~Our~~Private ~~future~~Placements liquidity will significantly depend in whole or in part on our ability to (1) obtain additional supplemental financing from outside investors, (2) timely develop and market new software products that meet or exceed our operating plans, and (3) realize long-term benefits from our implemented expense reductions, as well as (4) continue to enjoy the support of our primary lender and vendors. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, nor continue to realize additional benefits from the expense reductions we have implemented, and we are unable to obtain additional supplemental discretionary financing from our primary lender to fund operations, or obtain additional supplemental financing from outside investors, we will either need to make further significant expense reductions, including, without limitation, the sale of certain assets or the consolidation or closing of certain operations, staff reductions, and/or the delay, cancellation or reduction of certain product development and marketing programs. Additionally, some of these measures may require third party consents or approvals from our primary lender and others, and there can be no assurance that such consents or approvals can be obtained.

InDuring ~~the~~September ~~event~~and ~~that~~October 2003, we doraised ~~not~~gross ~~meet~~proceeds orof ~~exceed~~$11,863 ~~our~~in ~~operating~~connection ~~business~~with ~~plan~~the ~~and continue~~sale, to ~~derive~~a ~~significant~~limited ~~expense~~group ~~savings~~of private ~~from~~investors, of our ~~implemented~~10% ~~expense~~convertible ~~reductions~~subordinated notes (the “Notes”), ~~obtain~~due ~~additional~~in ~~financing~~2010. ~~from~~The ~~outside~~Notes ~~investors~~are ~~or,~~initially ifconvertible ~~our~~into ~~primary~~16,385 ~~lender~~shares ~~does~~of ~~not~~our ~~consent~~common stock, based upon ~~our~~a ~~existing~~conversion ~~collateral,~~price toof ~~provide~~$0.724 usper ~~supplemental~~share. The conversion price is ~~financing~~based ~~during~~upon the ~~second~~10 ~~half~~day trailing average closing price of ~~fiscal~~our ~~2004~~common stock ending on September 23, 2003. In the event we ~~cannot~~obtain ~~assure~~the authorization from our stockholders, ~~that~~the ~~our~~conversion ~~future~~price ~~operating~~for ~~cash~~the ~~flows~~Notes will be ~~sufficient~~adjusted to ~~meet~~$0.57 ~~our~~per ~~operating requirements~~share, ~~our~~a ~~debt~~21% discount ~~service~~from ~~requirements,~~the or$0.724 toconversion ~~repay~~price. ~~our~~Accordingly, ~~indebtedness~~the atNotes ~~maturity, including~~would ~~without~~then ~~limitation~~be convertible into 20,812 ~~repayment~~shares of ~~the~~our ~~remaining~~common ~~outstanding~~stock. ~~balance~~Interest ofon the ~~supplemental~~Notes ~~discretionary~~is ~~loan.~~due Ifsemi-annually ~~any~~on each April 15 and October 15, commencing April 15, 2004. The purchasers of the ~~preceding~~Notes ~~events~~have ~~were~~also received warrants to ~~occur~~purchase approximately 4,096 shares of our ~~operations~~common ~~and~~stock, ~~liquidity~~at ~~could~~an beexercise ~~materially~~price ~~and~~of ~~adversely~~$0.724 ~~affected~~per share,we ~~may~~which ~~be forced~~exercise price will also adjust to ~~seek~~$0.57 ~~legal~~if ~~relief~~stockholder ~~from~~approval ~~our~~is ~~debts~~obtained. orIf we ~~may~~do not receive stockholder approval, then additional warrants will be ~~forced~~issued to ~~cease~~the ~~operations~~purchasers of the Notes, to purchase an additional 4,096 shares at the market price of our common stock at the time of issuance.

InSubject ~~order~~ to ~~meet~~the consent of the holders of any senior indebtedness and our common ~~debt~~stock ~~service~~price ~~obligations,~~closing at ~~various~~an ~~times~~average weof ~~may~~200% ~~depend~~of onthe ~~obtaining~~Notes’ ~~dividends~~conversion price during a specified period, ~~advances~~as ~~and~~defined ~~transfers~~in ofthe ~~funds~~agreement, ~~from~~we may, at our ~~subsidiaries.~~option, ~~State~~redeem ~~and~~the ~~foreign~~Notes ~~laws~~in ~~regulate~~whole ~~the~~but ~~payment~~not ofin ~~dividends~~part byon any date on or after April 5, 2005, at a ~~these~~redemption ~~subsidiaries~~price, ~~which~~payable isin ~~also~~cash, ~~subject~~equal to the ~~terms~~outstanding principal amount of ~~our~~the ~~North~~Notes ~~American~~plus ~~credit~~accrued and unpaid interest thereon to the applicable redemption date if the requirements as documented in the agreement are satisfied. AIn ~~significant~~addition, subject ~~portion~~to the consent of ~~our~~the ~~assets,~~holders ~~operations~~of any senior indebtedness, ~~trade~~the ~~payables~~purchasers ~~and~~of ~~indebtedness~~the isNotes ~~located~~have ~~among~~a ~~our~~put ~~foreign~~option ~~subsidiaries.~~to ~~The~~require ~~creditors~~us ofto repurchase the ~~subsidiaries~~ ~~would~~notes ~~generally~~at ~~recover~~a ~~from~~redemption ~~these~~amount ~~assets~~equal onto the ~~obligations~~greater ~~owed~~of tothe ~~them~~principal byamount of the ~~subsidiaries~~Notes ~~before~~plus ~~any~~accrued interest ~~recovery~~thereon, byor ~~our~~the ~~creditors~~market ~~and~~value ~~before~~of ~~any~~the ~~assets~~underlying ~~are~~stock, ~~distributed~~if towe ~~our~~experience ~~stockholders~~a change in control.

In ~~June~~the ~~2003,~~event ~~we raised net proceeds of $8,314 in a private placement of 16,383 shares of~~ our common stock atprice ~~prices~~closes ~~ranging~~at ~~from~~200% ~~$0.50~~of tothe ~~$0.60~~Notes’ ~~per~~conversion ~~share.~~price Wein ~~have~~effect ~~filed~~at ~~a registration statement with~~ the ~~SEC~~time ~~covering~~for ~~the~~10 ~~resale~~consecutive bytrading ~~the~~days, ~~investors~~we ofhave ~~all~~ the right ~~common~~to ~~stock~~require ~~issued in~~ the ~~offering.~~holders ~~We are obligated to pay each investor an amount equal to 1%~~ of the ~~purchase~~warrants ~~price~~to ~~paid~~exercise ~~for~~ the ~~shares~~warrants ~~purchased~~in byfull, ~~investors~~within ~~each~~10 ~~30-day~~business ~~period~~days ~~that~~following ~~passes~~notification ~~from~~to ~~August 3, 2003 without~~ the ~~registration~~warrant ~~statement~~holders ~~being declared effective. As~~ of ~~August 13, 2003,~~ the ~~SEC~~forced ~~had not yet declared our registration statement effective~~exercise.

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

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

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

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

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

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

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

On January 24, 2003 we received a letter from The Nasdaq Stock Market, Inc. stating that, because our common stock had not closed at or above the minimum $1.00 per share bid price requirement for 30 consecutive trading days, we had not met the minimum bid price requirements for continued listing as set forth in Marketplace Rule 4310(c)(4), and we had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in accordance with Marketplace Rule 4310(c)(8)(D) we were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the minimum bid requirement. If at any time prior to January 20, 2004 the closing bid price of our common stock is $1.00 or more for a minimum of 10 consecutive trading days, then we will again be in compliance with such rule. The letter also states that if compliance cannot be demonstrated by January 20, 2004, Nasdaq will determine whether we meet the initial listing standards for The Nasdaq SmallCap Market, and if we do meet that criteria we will be granted an additional 90 day grace period in which to demonstrate compliance. If, after January 20, 2004 compliance cannot be demonstrated and we do not meet the initial listing standards then our securities would be subject to delisting. At that time, we may appeal such determination; however, there can be no assurances that such an appeal would be successful.

~~Our~~43 long-term liquidity will be significantly dependent on our ability to (1) timely develop and market new software products that achieve widespread market acceptance for use with the hardware platforms that dominate the market, (2) realize long-term benefits from our implemented expense reductions, as well as (3) continue to enjoy the support of our primary lender and vendors. Please see Note 13 (Debt) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

~~Please~~On ~~see~~November ~~discussion~~12, ~~regarding~~2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaq’s opinion, the structure of our ~~North~~September/October ~~American~~2003 ~~credit~~private ~~agreement~~offering ~~below~~of asthe ~~well~~Notes as(please see note 13A) was not in ~~Note~~compliance 13with NASD Marketplace Rule 4350(~~Debt~~i)(1)(d). ofThe Note offering was structured in a manner we believe complied with Nasdaq’s published rules. Based upon our continuing discussions with Nasdaq and the ~~notes~~holders toof the ~~consolidated~~Notes, ~~financial~~while ~~statements~~there incan ~~Part~~be Ino assurance, ~~Item~~we 1believe ofwe ~~this~~will ~~quarterly~~be ~~report~~successful onin ~~Form~~resolving ~~10-Q.~~this ~~Please~~matter; ~~also~~however, ~~see~~the ~~“Factors~~ultimate ~~Affecting~~resolution ~~Future~~of ~~Performance:~~this matter ~~Our~~is ~~Ability~~not todeterminable ~~Meet~~at ~~Cash~~this ~~Requirements~~time and, ~~Maintain~~if ~~Necessary~~the ~~Liquidity~~terms ~~Rests in~~of ~~Part~~the securities are modified, it could have a material impact on the ~~Cooperation~~financial statements of ~~our~~the ~~Primary~~Company. ~~Lender~~In the event that we and ~~Vendors~~Nasdaq cannot resolve this matter, ~~and~~then ~~Our~~our ~~Ability~~securities would be subject to ~~Achieve~~delisting. ~~Our~~If ~~Projected~~a ~~Revenue~~delisting ~~Levels~~proceeding ~~and~~is ~~Reduce~~commenced, ~~Operating~~we ~~Expenses~~have the right to appeal such determination; however, there can be no assurance that such an appeal would be successful.”

Please see discussion regarding our North American credit agreement below as well as in Note 13 (Debt) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q. Please also see “Factors Affecting Future Performance: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary Lender and Vendors, and Our Ability to Achieve Our Projected Revenue Levels and Reduce Operating Expenses and Our Ability to Raise Additional Financing from Outside Investors.”

Credit Agreements

We established a relationship with our primary lender in 1989 when we entered into our North American credit agreement. The North American credit agreement expires on August 31, 2004. This agreement automatically renews for additional one-year periods, unless our primary lender or we terminate the agreement with 90 days’ prior notice. We and our primary lender are also parties to a factoring agreement that expires on August 31, 2004. The factoring agreement also provides for automatic renewals for additional one-year periods, unless terminated by either party upon 90 days’ prior notice.

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

Pursuant to the terms of the North American credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other financial covenants. As of ~~June~~September 2928, 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 consolidated financial statements~~ ~~in Part I, Item 1 of this quarterly report on Form 10-Q.~~

~~Before~~44 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 June 29, 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 (5.94% as of June 29, 2003).

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

Before our primary lender purchases our U.S. accounts receivable and remits payment to us for the purchase price, it may, in its discretion, provide us cash advances under our North American credit agreement (please see discussion below) taking into account the assigned receivables due from our customers which it expects to purchase, among other factors. As of September 28, 2003, our primary lender was advancing us 60% of the eligible receivables due from our retail customers. The factoring charge of 0.25% of assigned accounts receivable, with invoice payment terms of up to 60 days and an additional 0.125% for each additional 30 days or portion thereof, is recorded in interest expense. Additionally, our factor, utilizing an asset based borrowing formula, advances us cash equal to 50% of our inventory that is not in excess of 60 days old.

North American Credit Agreement

Advances to us under the North American credit agreement bear interest at 1.50% per annum above our primary lender’s prime rate (5.50% as of September 28, 2003).

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

On March 31, 2003, our North American credit agreement was amended towhich ~~allow~~allowed ~~for~~us to borrow supplemental discretionary loans of ~~up to~~ $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. ~~The~~and ~~remaining~~as ~~$5,000~~ of ~~the~~September ~~supplemental~~26, ~~discretionary~~2003 ~~loan~~we ~~will~~repaid ~~continue~~the toremaining ~~be available to us through September 29~~$5, ~~2003~~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 ~~will return~~ the cash deposit to the Affiliates ~~within~~on ~~five~~September ~~days~~26, ~~following~~2003 ~~our~~concurrently ~~timely~~with our repayment of the supplemental discretionary ~~loans which are due to be fully repaid on September 30, 2003~~loan. As consideration to the Affiliates for making the deposit, and based upon the advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit Committee approved and the Board of Directors authorized the issuance to each Affiliate of 2,000 shares of our common stock with ana then aggregate market value of $1,560 ($3,332 as of September 28, 2003) and a warrant to purchase 500 shares of our common stock at an exercise price of $0.50 per share with an aggregate fair value of $305. We have also 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 1716 (Related Party Transactions) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

In June 2003, Nasdaq advised us that their then unpublished internal interpretation of NASD Marketplace Rule 4350(i)(1)(a) requires us to obtain stockholder ratification of the issuance of the shares to the Affiliates. Therefore, the issuance of the 4,000 common shares are subject to stockholder approval, as included in our forthcoming 2003 Proxy Statement, and variable accounting is being applied to the issuance. Nasdaq has subsequently published a proposed amendment to Marketplace Rule 4350(i)(1)(a) which addresses this issue. Since the common shares are now forfeitable, as of June 29, 2003, we reclassified the $1,560 aggregate market value of the shares at issuance from stockholders’ equity to accrued stock-based expenses ~~and recorded an increase of $1,560 to the $3,120 market value of such shares as of June 29, 2003~~. We ~~will~~are ~~continue~~required to revalue the common shares at each quarter-end, until the market value is fixed if and when the stockholders approve the share issuance. Accordingly, during the six month period ended September 28, 2003 we increased accrued stock-based expenses by $1,772 to the market value of the common shares of $3,332 as of September 28, 2003.

We ~~are~~have ~~expensing~~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, February 2003, and the date they are required to be fully repaid in September~~ ~~2003. During the three months ended June 29, 2003, we expensed $1,702 which is included in non-cash financing expense.~~

On45 May 30, 2003 our Board of Directors awarded 1,500 shares of common stock to an executive officer for his promotion to CEO. The issuance of these shares are also subject to shareholder approval and therefore variable accounting is being applied to the issuance. The fair market value of the common shares at June 29, 2003 of $1,170 was recorded as stock-based compensation in the three months ended June 29, 2003 and included in accrued stock-based expenses in the balance sheet at June 29, 2003.

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

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

38If we do not substantially achieve the overall projected revenue levels, and realize any additional benefits from the expense reductions we plan to implement over the next twelve months as reflected in our business operating plan, or obtain sufficient additional financing to fund operations, our cash and projected cash flow from operations in fiscal 2004 would be insufficient to meet our operating and debt requirements. We cannot guarantee that we would be able to restructure or refinance our debt on satisfactory terms, if at all, or obtain permission to do so under the terms of our existing indebtedness as some of these measures may require third party consents or approvals from our primary lender. Our failure to meet those obligations could result in defaults being declared by our primary lender, and our primary lender seeking its remedies, including immediate repayment of the debt and/or foreclosure on collateral, which could force us to become insolvent or cease operations.

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

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

International Credit Facility and Factoring Agreements

We, through Acclaim Entertainment, Ltd., our U.K. subsidiary, and GMAC Commercial Credit Limited, our U.K. bank and an Affiliate of our primary lender, are parties to a seven-year term secured credit facility we entered into in March 2000, related to our purchase of a building in the U. K. Our borrowings under that international facility, which may not exceed $6,200 (£3,800), bear interest at LIBOR plus 2.00% (5.67% as of September 28, 2003). Our U.K. bank has secured all obligations under this facility with substantially all of our subsidiaries’ assets including the building. We and several of our foreign subsidiaries have guaranteed the obligations of Acclaim Entertainment, Ltd. under this facility and the related agreements. As of September 28, 2003, the building with which the credit facility was secured was being held for sale and, accordingly, the building was classified as a current asset with a net carrying value of $5,628 (£3,448), which was equal to its fair value as determined by an independent appraisal in fiscal 2003, and the associated mortgage payable under the international facility of $4,678 (£2,867) was classified as a separate component of current liabilities. Please see Note 6 (Building Held for Sale and Mortgage Payable) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

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

There were no advances outstanding within the standard borrowing formula under the North American credit agreement as of June 29, 2003. As of March 31, 2003, advances outstanding under the North American credit agreement within the standard borrowing formula amounted to $4,154. The supplemental discretionary loan outstanding amounted to $4,212 as of June 29, 2003 and $11,000 as of March 31, 2003.

International Credit Facility and Factoring Agreement

We, through Acclaim Entertainment, Ltd., our U.K. subsidiary, and GMAC Commercial Credit Limited, our U.K. bank and an Affiliate of our primary lender, are parties to a seven-year term secured credit facility we entered into in March 2000, related to our purchase of a building in the U. K. Our borrowings under that international facility, which may not exceed $6,337 (£3,800), bear interest at LIBOR plus 2.00%. Our U.K. bank has secured all obligations under this facility with substantially all of our subsidiaries’ assets including the building. We and several of our foreign subsidiaries have guaranteed the obligations of Acclaim Entertainment, Ltd. under this facility and the related agreements. As of June 29, 2003, the building with which the credit facility was secured was being held for sale and, accordingly, the building was classified as a current asset with a net carrying value of $5,754, which was equal to its fair value as determined by an independent appraisal in fiscal 2003, and the associated mortgage payable under the international facility of $4,945 (£2,966) was classified as a separate component of current liabilities. Please see Note 6 (Building Held for Sale and Mortgage Payable) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

Several of our international subsidiaries are parties to international receivable factoring facilities with our U.K. bank. Under the facilities, our international subsidiaries assign the majority of their accounts receivable to the U.K. bank, on a full recourse basis. Under the facilities, upon receipt by the U.K. bank of confirmation that our subsidiary has delivered product to our customers and remitted the appropriate documentation to the U.K. bank, the U.K. bank remits payments to our subsidiary, net of discounts and administrative charges.

Under the international receivable facilities, we can obtain financing of up to the lesser of approximately $18.0 million or 60% of the aggregate amount of eligible receivables from our international operations. The amounts we borrow under the international facility bear interest at 2.00% per annum above LIBOR (45.1607% as of September ~~June 29~~28, 2003). This international facility has a term of three years, which automatically renews for additional one-year periods thereafter unless either our U.K. bank (GMAC) or we terminate it upon 90 days’ prior notice. Our U.K. bank has secured the international facility with the accounts receivable and assets of our international subsidiaries that participate in the facility. We had an outstanding balance under the international facility of $1,~~535~~608 as of ~~June~~September 2928, 2003.

Commitments

We generally purchase our inventory of Nintendo software by opening letters of credit when placing the purchase order. As of ~~June~~September 2928, 2003, we had $~~100~~ 1,032 outstanding under letters of credit. Approximately $27600 as of ~~June~~September 2928, 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 ~~June 29~~September 28, 2003, we did not have any significant operating or capital expenditure commitments.

39As of September 28, 2003, our future contractual cash obligations were as follows:

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

Total contractual cash obligations	$	32,512	$	22,248	$	4,203	$	561	$	5,500

As of June 29, 2003, our future contractual cash obligations were as follows:

	Payments Due Within
Contractual Obligations	Total		1 year		2-3years		4-5years
Debt	$	15,783	$	15,783	$	—	$	—
Mortgage payable		4,945		4,945		—		—
Capital lease obligations		1,348		682		639		27
Operating leases		8,067		3,151		4,258		658
Total contractual cash obligations	$	30,143	$	24,561	$	4,897	$	685

New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” The objective of ~~Interpretation~~FIN ~~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 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~~47 No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. For us, it will be implemented in our second quarter of fiscal 2004 by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of that period. Restatement is not permitted. The adoption of this Statement is not expected to have a material impact on our financial statements.

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

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

Related Party Transactions

Fees for services

We pay sales commissions to a firm which is owned and controlled by one of our co-chairmen. That firm earns these sales commissions based on the amount of our software sales that firm generates. Commissions earned by that firm amounted to $19(32) for the three months ended ~~June~~September 2928, 2003, ~~and~~ $~~139~~100 for the three months ended ~~June~~August 231, 2002, $(13) for the six months ended September 28, 2003 and $239 for the six months ended August 31, 2002. We owed that firm $~~488~~366 as of ~~June~~September 2928, 2003 and $498 as of March 31, 2003.

During previous fiscal years we received legal services from two separate law firms of which two members of our Board of Directors are partners, respectively. WeFor the one firm which continues to represent us, we incurred fees of $227 for the three months ended ~~June~~September 2928, 2003, of$181 for the three months ended August 31, 2002, $~~292~~447 tofor the ~~one~~six months ended September 28, 2003 and $347 for the six months ended August 31, 2002. For the firm ~~which~~that ~~continues~~no tolonger ~~represent~~represents us, ~~and~~we ~~had~~ incurred fees of $595 ~~to both~~for ~~law~~the ~~firms~~three months ended August 31, 2002 and $10 for the ~~three~~six months ended ~~June~~August 231, 2002. We ~~owe~~owed the firm that ~~one~~continues ~~firm~~to represent us legal fees of $~~283~~263 as of ~~June~~September 2928, 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 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. 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 ~~three~~six months ended ~~June~~September 2928, 2003, we expensed $92 119 of the unamortized principal balance. The unamortized principal balance under the loan, included in other receivables, was $7548 as of ~~June~~September 2928, 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 ~~are~~were 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~~provided ~~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~~bore interest at our primary lender’s prime rate plus 1.50% per annum. ~~During~~As ~~the~~of ~~three~~September ~~months ended June 29~~26, 2003, the two executive officers ~~repaid~~had ~~$361~~fully ofrepaid the principal balance and ~~$364 of the~~ related accrued interest ~~then outstanding~~ under the notes. ~~The~~As ~~total~~of March 31, 2003, the principal balance outstanding under the notes was $~~2,991 as of June 29, 2003 and $~~3,352, classified as ofa ~~March~~contra-equity ~~31,~~balance ~~2003.~~in ~~Other~~additional ~~receivables~~paid-in-capital, ~~included~~and accrued interest receivable on the notes ofamounted ~~$10~~to ~~as of June 29, 2003 and~~ $324 ~~as of March 31~~, ~~2003. The notes receivable are~~ ~~classified~~included ~~as a contra-equity balance~~ in ~~additional~~other ~~paid-in capital~~receivables.

In48 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 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 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. Other receivables included accrued interest receivable on the notes of $426 as of March 31, 2003. The notes were classified as a contra-equity balance in additional paid-in capital as of March 31, 2003.

~~personal~~In ~~residence~~July or2001, ~~August~~we ~~24,~~issued ~~2004.~~a ~~Based~~total onof ~~the~~1,500 ~~officer’s~~shares ~~employment~~of ~~agreement,~~our wecommon ~~were~~stock to ~~forgive~~two ~~the~~of ~~loan~~our atexecutive aofficers ~~rate~~when they exercised their warrants with an exercise price of $252.42 ~~for~~per ~~each~~share. ~~year~~For the ~~officer~~ ~~remained~~shares ~~employed~~issued, ~~with~~we usreceived upcash toof a$30 ~~maximum~~for oftheir ~~$100.~~par ~~Accordingly,~~value inand ~~fiscal~~two ~~2001,~~promissory wenotes ~~expensed~~totaling $253,595 ~~and~~for ~~reduced~~the unpaid portion of the ~~officer’s~~exercise ~~outstanding~~price ~~loan~~of ~~balance~~the warrants. InThe principal ~~May~~amount ~~2002,~~and ~~relating~~accrued tointerest awere ~~separation~~due ~~agreement~~and ~~with~~payable ~~the~~on ~~officer~~August 31, we2003 ~~forgave~~ and ~~expensed~~ ~~another~~bore ~~$75~~interest at our primary lender’s prime rate plus 1.50%. In ~~May~~June 2003, the ~~former~~two ~~officer~~executive officers repaid in full the ~~balance~~principal amount of the notes of $~~100~~3,595 and all related accrued interest of $464 then outstanding under the ~~loan~~notes. As of March 31, 2003, the principal balance outstanding under the ~~loan~~notes was $3,595, ~~included~~classified as a contra-equity balance in ~~other~~additional ~~assets~~paid-in-capital, ~~was~~and accrued interest receivable on the notes amounted to $~~100~~426, included in other receivables.

In August ~~1998~~2000, relating to an officer’s employment agreement, we loaned one of our officers $~~500~~200 under a promissory note. WeThe ~~reduced~~note bears no interest and must be repaid on the ~~note~~earlier ~~balance~~to byoccur ~~$50~~of inthe sale of the officer’s personal residence or August ~~1999~~24, ~~relating~~2004. toBased on the officer’s employment agreement, ~~and~~we bywere to forgive the loan at a rate of $~~200~~25 infor ~~January~~each ~~2000~~year ~~relating~~the officer remained employed with us up to a maximum of $100. Accordingly, in fiscal 2001, we expensed $25 and reduced the ~~employee~~officer’s ~~termination~~outstanding loan balance. ~~The~~In ~~note~~May ~~bears~~2002, ~~no interest~~relating ~~and~~to ~~must~~a beseparation ~~repaid~~agreement onwith the ~~earlier~~officer, towe ~~occur~~forgave ofand ~~the~~expensed ~~sale~~another or$75. ~~transfer~~In ofMay 2003, the former officer’s ~~personal~~repaid ~~residence~~the orbalance ~~August~~of ~~11,~~$100 outstanding ~~2003~~under the loan. As of ~~June 29, 2003 and~~ March 31, 2003, the balance outstanding under the loan, included in other ~~receivables~~ assets, was $~~250~~100.

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

Warrants

42Consideration for Collateral

Two of our major shareholders, who are also executive officers, otherwise referred to as the Affiliates, pledged an aggregate cash deposit of $2,000 with our primary lender in order to provide a limited guarantee of our obligations. Our primary lender returned the cash deposit to the Affiliates on September 26, 2003 concurrently with our repayment of the supplemental discretionary loan. As consideration to the Affiliates for making the deposit, and based upon the advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit Committee approved and the Board of Directors authorized the issuance to each Affiliate of 2,000 shares of our common stock with a then aggregate market value of $1,560 ($3,332 as of September 28, 2003) and a warrant to purchase 500 shares of our common stock at an exercise price of $0.50 per share with an aggregate fair value of $305. Please see note 16 (Related Party Transactions) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.

FACTORS AFFECTING FUTURE PERFORMANCE

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

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

Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with our primary lender. To enhance our short-term liquidity, during fiscal 2003, we implemented targeted expense reductions through a business restructuring. In connection with the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff related expenses and lowered our overall marketing expenditures. Additionally, on March 31, 2003, our primary lender advanced to us a supplemental discretionary loan of ~~up to~~ $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. ~~The~~and ~~remaining~~as ~~$5.0~~of ~~million~~September of26, ~~the~~2003 ~~supplemental~~we ~~discretionary~~repaid ~~loan~~the ~~will~~remaining ~~continue~~$5.0 tomillion. beDuring ~~available~~the tosix usmonths ~~through~~ended September 2928, 2003~~. In June 2003~~, ~~two~~ of our ~~executive~~Co-Chairmen ~~officers~~fully ~~prepaid~~repaid a total of $46.09 million of their outstanding loans ~~that~~and ~~are~~related ~~due~~accrued tointerest usof ~~on August 31, 2003 and~~ $0.9 million ~~of related accrued interest~~. Additionally, in June 2003, we completed a private placement of 16,383,000 shares of our common stock to a limited group of private investors, resulting in net proceeds to us of $8.3 million. ~~Furthermore,~~In toSeptember ~~meet~~and ~~our~~October ~~liquidity needs~~2003, we ~~have~~completed ~~included~~the asale ~~proposal~~of inconvertible ~~our~~subordinated ~~forthcoming~~notes ~~2003~~resulting ~~Proxy~~in ~~Statement~~gross ~~seeking~~proceeds ~~the authorization~~of ~~from~~$11.9 ~~our~~million ~~stockholders~~of towhich ~~issue~~$5.5 ~~securities~~million inwas ~~connection~~received ~~with~~as ~~our~~of ~~continuing~~September ~~efforts~~28, ~~to raise additional financing from outside investors~~2003.

Our future liquidity will significantly depend in whole or in part on our ability to (1) ~~obtain additional supplemental financing from outside investors, (2)~~ timely develop and market new software products that meet or exceed our operating plans, ~~and~~ (32) realize long-term benefits from our implemented expense reductions, asand ~~well as~~ (43) continue to enjoy the support of our primary lender and vendors. If we do not substantially achieve our overall projected revenue levels as reflected in our business operating plan, ~~nor~~ continue to realize additional benefits from the expense reductions we have implemented, and wetimely ~~are~~close ~~unable~~on tothe ~~obtain~~new ~~additional~~domestic loan ~~supplemental~~facility ~~discretionary~~with ~~financing from~~ our primary lender ~~to fund operations~~, ~~or obtain additional supplemental financing from outside investors,~~ 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 ~~that such~~ consents or approvals ~~can~~will be obtained.

In the event that we do not ~~meet~~achieve ~~or exceed~~ our ~~operating~~ business operating plan, ~~and~~ continue to derive significant expense savings from our implemented expense reductions, ~~obtain~~and ~~additional~~timely ~~financing~~close ~~from~~on ~~outside~~the ~~investors~~new ~~or,~~domestic ifloan facility with 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 our ~~stockholders~~ stockholders that our future operating cash flows will be sufficient to meet our operating requirements, ~~our~~and debt service requirements ~~or to repay our indebtedness at maturity, including without limitation, repayment of the remaining outstanding balance of the supplemental discretionary loan~~. If any of the preceding events were to occur, our operations and liquidity ~~could~~would be materially and adversely affected, weand ~~may be forced to seek legal relief from our debts or~~ we could ~~may~~ be forced to cease operations. See “If Cash Flows from Operations Are Not Sufficient to Meet Our Operational Needs, We May Be Forced To Sell Assets, Refinance Debt, Raise Additional Financing from Outside Investors or Further Downsize or Cease Our Operations”, and “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability.”

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

4350

As of September 28, 2003, we received waivers from GMAC with respect to those financial covenants contained in the credit agreement for which we were ~~liquidated~~not orin ~~reorganized,~~compliance. ~~after~~If ~~payment~~waivers tofrom ~~our~~GMAC ~~creditors~~are necessary in the future, ~~there~~we ~~would~~cannot ~~likely~~be assured that we will be ~~insufficient~~able ~~assets~~to ~~remaining~~obtain ~~for~~waivers of any ~~distribution~~future tocovenant ~~our stockholders.~~violations, as we have in the past.

As of June 29, 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 ~~three~~six months ended ~~June~~September 2928, 2003 we had a net loss of $1822.01 million and used $01.21 million of cash in operating activities. As of ~~June~~September 2928, 2003, we had a stockholders’ deficit of $5355.60 million, a working capital deficit of $6967.42 million and $27.23 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, ~~these~~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 ~~quarter~~half of fiscal 2004. Our operating plan for the remainder of fiscal 2004 focuses on (1) maintaining our lower rate of fixed and variable expenses worldwide, (2) continuing to ~~limit~~ limit and eliminate non-essential expenses and (3) maintaining our reduced employee related expenses. Although we believe the actions we are taking should return our operations to profitability, we cannot assure our stockholders and investors that we will achieve the fiscal 2004 net revenues necessary to achieve sufficient liquidity and avoid further expense reduction actions such as selling assets or consolidating operations, further reducing staff, refinancing debt and/or otherwise further restructuring or ceasing our operations. See “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability”.

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

If we violate the financial or other covenants contained in our credit agreement with GMAC, we will be in default under the credit agreement. If a default occurs under the credit agreement and is not timely cured by us or waived by GMAC, GMAC could seek remedies against us, including: (1) penalty rates of interest; (2) immediate repayment of our outstanding debt; and/or (3) the foreclosure on any assets securing our debt. Pursuant to the terms of the credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other requirements. As of ~~June~~September 2928, 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~~ necessary in the future, we cannot be assured that we will be able to obtain waivers of any future covenant violations, as we have in the past. If Acclaim is liquidated or reorganized, after payment to the creditors, there are likely to be insufficient assets remaining for any distribution to our stockholders.

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

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

On51 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

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

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

Revenue and Liquidity are Dependent on Timely Introduction of New Titles

The timely shipment of a new title depends on various factors, including the development process, debugging, approval by hardware licensors and approval by third-party licensors. It is likely that some of our titles will not be released in accordance with our operating plans. Because net revenue associated with the initial shipments of a new product generally constitute a high percentage of the total net revenue associated with the life of a product, a significant delay in the introduction of one or more new titles would negatively affect or limit sales and would have a negative impact on our financial condition, liquidity and results of operations. We cannot assure stockholders that our new titles will be released in a timely fashion in accordance with our fiscal 2004 business plan.

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

We52 ~~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 quarter of fiscal 2004, 68% of our gross revenue was derived from five software products. In fiscal 2003, 55% of our gross revenue was derived from five software products. We expect that a limited number of popular brands will continue to produce a disproportionately large amount of our revenue. Due to this dependence on a limited number of brands, the failure of one or more products based on these brands to achieve anticipated results may significantly harm our business and financial results. For example, during the fourth quarter of fiscal 2002, our failure to achieve our projected revenue from two titles, Turok: Evolution and Aggressive Inline, due to lower than anticipated consumer acceptance of the products, resulted in a net loss for the fourth quarter and fiscal year 2002 and continued to contribute to losses during fiscal 2003.

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

A significant portion of our revenue is derived from products based on a relatively small number of franchises each year. In addition, many of these products have substantial production or acquisition costs and marketing budgets. In the first half of fiscal 2004, 49% of our gross revenue was derived from five software products. In fiscal 2003, 55% of our gross revenue was derived from five software products. We expect that a limited number of popular brands will continue to produce a disproportionately large amount of our revenue. Due to this dependence on a limited number of brands, the failure of one or more products based on these brands to achieve anticipated results may significantly harm our business and financial results. For example, during the fourth quarter of fiscal 2002, our failure to achieve our projected revenue from two titles, Turok: Evolution and Aggressive Inline, due to lower than anticipated consumer acceptance of the products, resulted in a net loss for the fourth quarter and fiscal year 2002 and continued to contribute to losses during fiscal 2003.

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

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

When new platforms are announced or introduced into the market, consumers typically reduce their purchases of software products for the current platforms, in anticipation of new platforms becoming available. During these periods, sales of our software products can be expected to slow down or even decline until the new platforms have been introduced and have achieved wide consumer acceptance. Each of the three current principal hardware producers launched a new platform in ~~recent~~2000 ~~years~~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 ~~re-deployed~~redeployed its resources to develop software for multiple consoles. More recently, the entry of Microsoft in November 2001 into the video game console market with the Xbox has benefited us and other video game publishers by expanding the total size of the market for video games. The effects of this type of entry or exit can be significant and difficult to anticipate.

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

Our Future Success Depends On Our Ability To Release Popular Products

The life of any one software product is relatively short, in many cases less than one year. It is therefore important for us to be able to continue to develop new products that are favorably received by consumers. If we are unable to do this, our business and financial results may be negatively affected. We focus our development and publishing activities principally on products that are, or have the potential to become, franchise brand properties. Many of these products are based on intellectual property and other character or story rights acquired ~~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~~53 ~~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 three months ended June 29, 2003 (a portion of which were expensed and the remainder of which were capitalized), were higher than the three months ended June 2, 2002 and 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 quarter of fiscal 2004, we focused our development efforts and costs on the development of tools and engines necessary for PlayStation 2, Xbox, GameCube and PC’s. Our fiscal 2003 release schedule was

~~developed~~or ~~around~~licensed ~~PlayStation~~from 2,third ~~GameCube,~~parties. ~~Xbox~~These license and ~~Game~~distribution ~~Boy~~agreements ~~Advance~~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 ~~release~~loss ~~schedule~~of ~~for~~a ~~the~~significant ~~remainder~~number of ~~fiscal~~our ~~2004~~intellectual ~~continues~~property tolicenses ~~support~~or ~~the PlayStation~~of 2,our ~~Xbox~~relationships ~~and~~with ~~Game~~licensors ~~Boy~~would ~~Advance~~have ~~platforms~~a asmaterial ~~well~~adverse aseffect PCon our ability to develop new products and therefore on our business and financial results.

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

Our cash outlays for product development for the six months ended September 28, 2003 (a portion of which were expensed and the remainder of which were capitalized), were lower than the six months ended August 31, 2002 but our product development cash outlays may increase in the future as a result of the higher costs associated with releasing more games across multiple platforms and the complexity of developing games for the 128-bit game consoles, among other reasons. We anticipate that our profitability will continue to be impacted by the levels of research and development expenditures relative to revenue and by fluctuations relating to the timing of development in anticipation of future platforms.

During the first half of fiscal 2004, we focused our development efforts and costs on the development of tools and engines necessary for PlayStation 2, Xbox, GameCube and PC’s. Our fiscal 2003 release schedule was developed around PlayStation 2, GameCube, Xbox and Game Boy Advance. The release schedule for the remainder of fiscal 2004 continues to support the PlayStation 2, Xbox and Game Boy Advance platforms as well as PC.

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

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

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

As noted above, when the consumer market acceptance of a software title decreases, resulting in lower retail sell-through, the potential for price concessions and returns for those titles increases. In the fourth quarter of fiscal 2002, we released the software titles Turok: Evolution and Aggressive Inline, which we anticipated would be significant revenue drivers and valuable additions to our product catalog. The market reception to these titles, as evidenced by the retail sell-through rates to consumers in the first quarter of fiscal 2003 and beyond, fell substantially below our revenue expectations. As a result of the poor retail sell-through, significant quantities of these products remained in the retail channel. Accordingly, we provided our retail customers with price concessions for these products more rapidly after the initial release date than was our historical practice and, in the fourth quarter of fiscal 2002, recorded a $17.9 million provision for price concessions and returns on these products that exceeded historical allowance rates and that we believed would have resulted in additional sell-through to our retailers’ customers through the 2002 holiday season.

~~During~~54 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 those platforms to lower prices than we originally estimated at this 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.

OurTable allowances for price concession and returns were $33.9 million as of June 29, 2003 and $ 46.3 million as of March 31, 2003. Please see Note 1D (Business and Significant Accounting Policies: Net Revenue) of the notes to the consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q. Contents

During fiscal 2003, while the price concessions we previously offered our retail customers did increase the retail sell-through rate, the rate of reduction of retail channel inventory did not attain the level we had originally estimated. Consequently, we experienced significantly more returns of these two products from our retail customers than we originally had estimated. Additionally, the market for GameCube products softened after the 2002 holiday season, which required us to provide price concessions on certain of our products for that platform to lower prices than we originally estimated at that stage in the platform cycle. Finally the actual sell-through rates of Legends of Wrestling and BMX were less than the projected retail sell-through rates we had used in our previous estimates of allowances, which were based on historical experience and actual sell-through rates for those products through August 31, 2002. As a result of these unanticipated events, we provided our retail customers additional price concessions. The resulting $14.4 million increase to the provision for price concessions and returns negatively impacted net revenues, gross profit and net income for fiscal 2003.

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

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

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

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

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

In addition, when we develop software titles for the PlayStation 2 system, the products are manufactured exclusively by Sony . Since each of the hardware companies is also a publisher of games for its own hardware system, they may give priority to their own products or those of our competitors in the event of insufficient manufacturing capacity. We could be materially harmed by unanticipated delays in the manufacturing and delivery of products.

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

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

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

We Depend On Skilled Personnel

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

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

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

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

•

availability of significant financial resources;

•

the quality of titles;

•

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

•

publisher’s access to retail shelf space;

•

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

•

the price of each title; and

• hethe 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.

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

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

Our Software May Be Subject To Governmental Restrictions Or Rating Systems

Legislation is periodically introduced at the local, state and federal levels in the United States and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. In addition, many foreign countries have laws that permit governmental entities to censor the content and advertising of interactive entertainment software. We believe that mandatory government-run rating systems eventually may be adopted in many countries that are significant markets or potential markets for our products. We may be required to modify our products or alter our marketing strategies to comply with new regulations, which could delay the release of our products in those countries. 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 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 ~~July~~November 3110, 2003, we had 113,~~084~~234,491 shares of common stock issued and outstanding, (including 4,000,000 shares of our common stock issued in equal amounts to our co-chairman, which shares are being held by us pending the outcome of our Annual Meeting of Stockholders and which our co-chairman have no current right to vote, pledge, sell or otherwise hypothecate), of which 3217,~~898~~278,~~661~~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 ~~July~~November 3110, 2003, 5774,~~277~~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 ~~July~~ 31November 10, 2003, a total of 511,~~264~~333,~~778~~739 shares of common stock are issuable upon the exercise of warrants to purchase our common stock.

We have also registered on Form S-8 a total of 24,236,000 shares of common stock (issuable upon the exercise of options) under our 1988 Stock Option Plan and our 1998 Stock Incentive Plan, and a total of 2,448,425 shares of common stock under our 1995 Restricted Stock Plan. As of ~~June~~September 2928, 2003, options to purchase a total of 13,~~870~~551,~~883~~634 shares of common stock were outstanding under the 1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which 84,~~966~~507,~~431~~737 were exercisable.

In58 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.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

We had a cumulative foreign currency translation loss of $12,~~969~~363 as of September ~~June 29~~28, 2003 and $1,795 as of March 31, 2003, which is included in accumulated other comprehensive loss in our statements of stockholders’ equity (deficit). ~~For~~We recorded net foreign currency transaction gains of $662 for the three months ended ~~June~~September 2928, 2003, welosses ~~recorded~~of ~~net~~$587 ~~foreign~~for ~~currency~~the ~~transaction~~three months ended August 31, 2002, gains of $~~2,569~~128 ~~and~~for ~~net~~the ~~foreign~~six ~~currency~~months ~~transaction~~ ended September 28, 2003 and losses of $3213 for the six months ended August 31,~~102~~ 2002.

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

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

Item 4. Controls and Procedures.

As of the end of the period covered by this report, under the supervision and with the participation of the Company’s management, the Chief Executive Officer and Chief Financial Officer of the Company, have evaluated the disclosure controls and procedures of the Company as defined in Exchange Act Rule 13(a)-15(e) and have determined that such controls and procedures are adequate and effective.

5259

PART II

Item 1. Legal Proceedings.

AsEarlier ofthis ~~June 29~~year, ~~2003,~~ fourteen class action complaints, ~~containing~~asserting ~~similar~~violations ~~allegations,~~of federal ~~have~~securities ~~been~~laws were filed against usthe Company and certain of ~~our~~its officers and/or directors. ~~Each~~By ~~complaint~~order ~~asserts~~dated ~~violations~~July of3, ~~federal~~2003, ~~securities~~the ~~laws.~~Court ~~The~~consolidated ~~actions~~all ~~are~~fourteen ~~entitled~~actions asinto ~~follows:~~one ~~Purvis,~~action etentitled ~~al.~~In v.re Acclaim Entertainment, Inc., ~~Gregory Fischbach~~Securities Litigation, ~~Edmond~~Master ~~Sanctis,~~File ~~James Scoroposki and Gerard Agoglia filed in the U~~No.S. ~~District Court for the Eastern District of New York~~2, ~~Central Islip Division (Civil Action No. CV~~ 03-CV-1270); ~~DMS, et al~~(E. vD.N.Y.) ~~Acclaim Entertainment,~~(JS) ~~Inc.~~(ETB), ~~Rodney~~and ~~Cousens~~appointed ~~and~~class ~~Gerard~~members ~~Agoglia~~Penn ~~filed~~Capital inManagement, ~~the~~Robert UL.S. ~~District~~Mannard ~~Court~~and ~~for~~Steve ~~the~~Russo ~~Eastern~~as ~~District~~lead ~~of New York~~plaintiffs, ~~Brooklyn~~and ~~Division~~also ~~(Civil~~approved ~~Action~~lead ~~No.~~plaintiffs’ CVselection ~~03-1322);~~of ~~Nach, et al~~counsel. ~~v. Acclaim Entertainment, Inc., Rodney Cousens and~~Plaintiffs ~~Gerard~~served ~~Agoglia~~a ~~filed~~Consolidated inAmended Complaint (the ~~U.S.~~“Consolidated ~~District~~Complaint”) ~~Court~~on ~~for~~or ~~the~~about ~~Eastern~~September ~~District of New York~~1, ~~Central Islip Division (Civil Action No~~2003. CVThe ~~03-1363);~~defendants ~~Baron,~~in etthe ~~al.~~consolidated v.action ~~Acclaim~~are ~~Entertainment,~~the ~~Inc.~~Company, Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard ~~Agoglia~~F. ~~filed in the U~~Agoglia.S. ~~District~~The Consolidated ~~Court~~Complaint ~~for~~alleges ~~the~~a ~~Eastern~~class ~~District~~period offrom ~~New~~October ~~York~~14, ~~Central~~1999 ~~Islip~~through ~~Division~~January ~~(Civil Action No. CV 03-1541); Traube~~13, ~~et al~~2003. v.The ~~Acclaim~~Consolidated ~~Entertainment,~~Complaint ~~Inc.,~~alleges ~~Gregory~~that ~~Fischbach,~~the ~~Edmond~~Company ~~Sanctis,~~engaged ~~James~~in ~~Scoroposki~~a ~~and Gerard~~variety ~~Agoglia~~of ~~filed~~wrongful inpractices ~~the~~which ~~U.S.~~rendered ~~District~~statements ~~Court~~made ~~for~~by the ~~Eastern~~Company ~~District~~and ofits financial ~~New~~statements ~~York,~~to ~~Central~~be ~~Islip~~false ~~Division~~and ~~(Civil~~misleading. ~~Action~~Among ~~No.~~other CVpurported ~~03-1487);~~wrongful ~~Hildal~~practices, etthe ~~al.~~Consolidated v.Complaint ~~Acclaim~~alleges ~~Entertainment,~~that ~~Inc.,~~Acclaim ~~Gregory~~engaged ~~Fischbach,~~in ~~Edmond~~“channel ~~Sanctis~~stuffing,” ~~James~~a ~~Scoroposki~~practice ~~and Gerard~~by ~~Agoglia~~which ~~filed~~Acclaim inallegedly ~~the~~delivered ~~U.S.~~excess ~~District~~inventory ~~Court~~to its ~~for~~distributors ~~the~~to ~~Eastern~~meet ~~District~~or ofexceed ~~New~~analysts’ ~~York,~~earnings ~~Central~~expectations ~~Islip~~and ~~Division~~inflate ~~(Civil~~its ~~Action~~sales ~~No.~~results; CVentered ~~03-1640);~~into ~~Hicks,~~“conditional etsales ~~al.~~agreements” v.whereby Acclaim’s ~~Entertainment,~~customers ~~Rodney~~allegedly ~~Cousens~~were ~~and~~induced ~~Gerard~~to ~~Agoglia~~accept ~~filed~~delivery inof ~~the U.S.~~Acclaim ~~District~~products ~~Court~~prior ~~for~~to ~~the~~a ~~Eastern~~quarter-end ~~District~~reporting ofperiod ~~New~~on ~~York,~~the ~~Brooklyn~~condition ~~Division~~that ~~(Civil Action No. CV 03-1698); Russo, et al. v.~~ Acclaim ~~Entertainment,~~would ~~Inc.,~~accept ~~Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard Agoglia filed in~~ the ~~U.S. District~~return ~~Court for the Eastern District~~ of ~~New~~any ~~York,~~unsold ~~Brooklyn~~product ~~Division~~after ~~(Civil~~the ~~Action No. CV 03~~quarter-~~1700); Vicino~~end, etand ~~al.~~that v. Acclaim ~~Entertainment,~~falsified ~~Inc.,~~sales ~~Gregory~~reports ~~Fischbach, Edmond Sanctis, James Scoroposki~~ and ~~Gerard~~manipulated ~~Agoglia filed in~~ the ~~U.S. District~~timing ~~Court~~and ~~for~~recognition ~~the Eastern District~~ of ~~New~~price concessions ~~York,~~and ~~Central~~discounts ~~Islip~~granted ~~Division~~to ~~(Civil~~its ~~Action~~retail Nocustomers. CVThe ~~03-1672);~~Consolidated ~~Sypes,~~Complaint etfurther ~~al.~~alleges v.that Acclaim ~~Entertainment,~~engaged ~~Inc.,~~in ~~Gregory~~improper ~~Fischbach,~~accounting ~~Edmond Sanctis~~practices, ~~James~~including ~~Scoroposki and Gerard Agoglia filed in~~ the ~~U.S. District~~improper ~~Court~~recognition ~~for the Eastern District~~ of ~~New~~sales ~~York, Central Islip Division (Civil Action No. CV 03-1685)~~revenue; ~~Berman,~~manipulation etof ~~al.~~reserves v.associated with ~~Acclaim Entertainment~~concessions, ~~Inc.,~~chargebacks ~~Gregory~~and/or ~~Fischbach,~~sales ~~Edmond~~discounts ~~Sanctis,~~granted ~~James~~to ~~Scoroposki~~customers; and ~~Gerard Agoglia filed in~~ the ~~U.S. District~~improper ~~Court~~reporting ~~for the Eastern District~~ of ~~New~~software ~~York,~~development ~~Central Islip Division (Civil Action No~~costs. CVThe ~~03-1924);~~Consolidated ~~Burk,~~Complaint etalleges ~~al.~~that v.as ~~Acclaim~~a ~~Entertainment,~~result ~~Inc.,~~of ~~Gregory~~these ~~Fischbach,~~practices ~~Edmond~~defendants ~~Sanctis,~~violated ~~James~~§ ~~Scoroposki~~10(b) ~~and~~of ~~Gerard Agoglia filed in~~ the ~~U.S.~~ ~~District~~Securities ~~Court~~Exchange ~~for~~Act ~~the~~of ~~Eastern~~1934 ~~District~~and ofSEC ~~New~~Rule ~~York~~10b-5, ~~Brooklyn~~and ~~Division~~that ~~(Civil~~the ~~Action~~individual ~~No.~~defendants CVviolated ~~03-2030~~§ 20(a); ~~Brake,~~of etthe ~~al.~~1934 vAct. ~~Acclaim~~The ~~Entertainment,~~Consolidated ~~Inc.,~~Complaint ~~Rodney~~seeks ~~Cousens~~compensatory ~~and~~damages ~~Gerard Agoglia filed~~ in ~~the~~an Uunspecified amount.S. ~~District~~Pursuant ~~Court~~to ~~for~~an ~~the~~agreement ~~Eastern~~with ~~District of~~plaintiffs, ~~New~~defendants’ ~~York~~time to answer, ~~Central~~move ~~Islip~~or ~~Division~~otherwise ~~(Civil~~respond ~~Action~~to ~~No.~~the CVConsolidated ~~03-2175);~~Complaint ~~Manard,~~has ~~et.~~been ~~al.~~extended v.to ~~Acclaim~~December ~~Entertainment~~3, ~~Inc~~2003., ~~Gregory~~A ~~Fischbach,~~preliminary ~~Edmond~~conference ~~Sanctis,~~before ~~James Scoroposki and Gerard Agoglia filed in~~ the ~~U.S.~~Court ~~District~~is ~~Court~~scheduled for ~~the~~December ~~Eastern District of New York~~5, ~~Central~~2003. ~~Islip~~We ~~Division~~are ~~(Civil~~defending ~~Action~~this ~~No.~~action ~~CV 03-2355)~~vigorously.

In ~~Purvis,~~1999 ~~Baron,~~we ~~Traube,~~received ~~Hildal,~~a ~~Russo,~~demand ~~Vicino,~~for ~~Sypes,~~indemnification ~~Berman~~from ~~and Burk, plaintiffs allege that during~~ the ~~purported class period between January 11, 2002 and September 19, 2002~~ wedefendant ~~reported~~Lazer-Tron ~~positive~~Corporation ~~earnings~~in ~~statements~~a ~~and~~matter ~~gave~~entitled ~~favorable~~J. ~~earnings~~Richard ~~guidance,~~Oltmann ~~but~~v. ~~failed~~Steve ~~to disclose material adverse facts regarding our business~~Simon, ~~operations~~No. ~~and~~98 ~~management,~~C1759 ~~thereby causing plaintiffs~~ and ~~other~~Steve ~~members~~Simon ofv. ~~the~~J. ~~class~~Richard toOltmann, ~~purchase~~J ~~our securities~~Richard atOltmann ~~artificially~~Enterprises, ~~inflated prices~~Inc., ~~Plaintiffs claim violations under §§ 10(~~d/b~~) and 20(~~/a) ofHaunted ~~the~~Trails ~~Securities~~Amusement ~~Exchange~~Parks, ~~Act of 1934~~ and ~~SEC~~RLT ~~Rule~~Acquisitions, ~~10b-5~~Inc. ~~In DMS~~, ~~Nach, Hicks, and Brake, plaintiffs assert that~~d/b/a ~~during the class period between January 22~~Lazer-Tron, ~~2002~~No. ~~and~~A ~~September~~98CA 19426, ~~2002~~consolidated weas ~~committed~~U.S. ~~certain~~District ~~alleged~~Court ~~accounting~~Northern ~~improprieties,~~District ~~thereby causing plaintiffs and other members~~ of ~~the~~Illinois ~~class~~Case toNo. ~~purchase~~99 ~~our~~C ~~securities at artificially inflated prices~~1055. ~~Plaintiffs~~ ~~claim~~The ~~violations~~Lazer-Tron ~~under~~action §§involved ~~10(b)~~the ~~and~~assertion ~~20(a)~~by ofplaintiff ~~the~~Simon ~~Securities~~that ~~Exchange~~defendants ~~Act~~Oltmann, ofHaunted ~~1934,~~Trails and ~~SEC Rule 10b~~Lazer-5.Tron ~~All~~misappropriated plaintiff’s ~~the~~trade ~~complaints seek unspecified damages~~secrets. InPlaintiff ~~Manard,~~alleges ~~plaintiffs~~claims ~~assert~~for ~~that~~Lanham ~~during~~Act ~~the~~violations, ~~class~~unfair ~~period between October 24~~competition, ~~2001~~misappropriation ~~and~~of ~~September~~trade 19secrets, ~~2002~~conspiracy, ~~we reported positive earnings statements~~ and ~~gave~~fraud ~~favorable~~against ~~earnings~~all ~~guidance~~defendants, ~~but~~and ~~failed~~seeks todamages ~~disclose~~in ~~material~~unspecified ~~adverse~~amounts, ~~facts~~including ~~regarding~~treble damages ~~our~~for ~~business,~~Lanham ~~operations~~Act ~~and management~~claims, ~~thereby causing plaintiffs~~ and ~~other members~~an ofaccounting. ~~the~~Pursuant ~~class~~ to ~~purchase~~an ~~our~~asset ~~securities~~purchase atagreement ~~artificially~~made ~~inflated~~as ~~prices. Plaintiffs claim violations under §§ 10(b) and 20(a)~~ of ~~the~~March ~~Securities~~5, ~~Exchange Act of 1934~~1997, ~~and~~we ~~SEC~~sold ~~Rule 10b~~Lazer-5.Tron Onto ~~July~~RLT 3Acquisitions, ~~2003,~~Inc. Under the ~~Court~~asset ~~issued~~purchase ~~an order consolidating all 14 class actions~~agreement, ~~appointing~~we ~~Penn~~assumed ~~Capital Management, Robert L Manard~~ and ~~Steve~~excluded ~~Russo~~specific ~~as lead plaintiffs~~liabilities, and agreed ~~the~~to ~~law~~indemnify ~~firms~~RLT offor ~~Cauley~~certain ~~Geller Bowman Coates & Rudman~~losses, ~~LLP,~~as ~~Schiffrin~~specified &in ~~Barroway,~~the ~~LLP~~asset ~~and~~purchase ~~Wolf~~agreement. ~~Haldenstein~~In ~~Adler Freeman~~an &August ~~Herz~~1, ~~LLP~~2000 asletter, ~~lead~~ counsel. Anfor ~~initial~~Lazer-Tron ~~conference~~in ~~before~~ the ~~Court~~Lazer-Tron ~~has~~action ~~been~~asserted ~~scheduled~~that ~~for~~our ~~October~~indemnification ~~20,~~obligations ~~2003.~~in ~~Plaintiffs~~the ~~will~~asset ~~serve~~purchase aagreement applied ~~consolidated~~to ~~complaint~~the byLazer-Tron ~~August 18~~action, ~~2003~~ and ~~defendants~~demanded ~~will move, answer or otherwise reply to~~ that ~~consolidated~~ ~~complaint~~we byindemnify ~~October~~Lazer-Tron 2,for ~~2003.~~any Welosses ~~intend~~which tomay ~~defend~~be ~~this~~incurred ~~action~~in ~~vigorously.~~the

5360

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

An ~~action~~ action entitled David Mirra v. Acclaim Entertainment, Inc., CV-03-575 was filed in the United States District Court for the Eastern District of New York on February 5, 2003. ~~The~~We ~~plaintiff alleged that the defendants did not~~ have ~~authorization to~~since ~~utilize~~amicably ~~Mirra’s~~resolved ~~name~~our ~~and~~differences ~~likeness in connection~~ with ~~a bicycle video game intended for mature audiences~~Mr. ~~Specifically,~~ Mirra ~~alleges~~surrounding ~~that we engaged in (1) violations of § 1051 et seq~~this matter. 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) an accountingMr. Mirra’s ~~claims~~lawsuit ~~that~~against heus ~~has~~was ~~been~~settled ~~harmed~~with byno ~~$1.0~~monetary ~~million~~or ~~per~~other ~~Counts 1-5 and 7-11, for a total of $10.0 million in actual~~ damages~~. Mirra~~ isbeing ~~also~~paid ~~claiming~~by ~~that~~either ~~our~~party, ~~actions were willful~~ and ~~is demanding an additional $20~~Mr.0 ~~million~~Mirra inwill ~~punitive~~continue, ~~damages~~uninterrupted, ~~plus costs and attorneys’ fees. We believe we have meritorious defenses~~ to ~~these~~be ~~allegations~~under ~~and~~contract wewith ~~intend~~us tountil ~~defend this action vigorously. We served our initial disclosures on~~ the ~~plaintiff~~year ~~on June 28, 2003~~2011.

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

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

(a) Exhibits:

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

Exhibit No.		Description
3.1		Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, filed on April 21, 1989, as amended (Commission File No. 33-28274))
3.2		Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, filed on April 21, 1989, as amended (Commission File No. 33-28274))
3.3		Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4(d) to the Company’s Registration Statement on Form S-8, filed on May 19, 1995 (Commission File No. 33-59483))
3.4		Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 3, 2002)
3.5		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K, filed on June 12, 2000)
4.1		Specimen form of the Company’s common stock certificate (incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the year ended August 31, 1989, as amended)
4.2		Rights Agreement dated as of June 5, 2000, between the Company and American Securities Transfer & Trust, Inc. (incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K, filed on June 12, 2000)
4.3		Form of Registration Rights Agreement between the Company and certain purchasers of the Company’s securities, dated June, 2003 (incorporated by reference to Exhibit 4.3 to the Company’s Form S-3, filed on July 21, 2003)
4.4		Form of Investment Agreement between the Company and certain purchasers of the Company’s securities, dated June, 2003 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-3, filed on July 21, 2003)

5461

Exhibit No.		Description
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))
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)
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)
†4.6		Form of Registration Rights Agreement between the Company and certain purchasers of the Company’s securities, dated October, 2003
3.5		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K, filed on June 12, 2000)
†4.7		Form of Warrant between the Company and certain purchasers of the Company’s securities, dated October, 2003
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)
†4.8		Form of 10% Convertible Subordinated Note Purchase Agreement between the Company and certain purchasers of the Company’s securities, dated October, 2003
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)
†4.9		Form of Promissory Note between the Company and certain purchasers of the Company’s securities, dated October, 2003
4.3		Form of Warrant Agreement between the Company and American Securities Transfer & Trust, Inc. as warrant agent, relating to Class D Warrants (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3, filed on August 23, 1999 (Commission File No. 333-72503))
4.4		Form of Warrant Certificate relating to Class D Warrants (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3, filed on August 23, 1999 (Commission File No. 333-72503))
+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
+10.6		Employment Agreement dated as of June 15, 2003 between the Company and Gerard F. Agoglia.
+10.7		Amendment No. 3, dated August 1, 2000, to the Employment Agreement between the Company and Gregory E. Fischbach, dated as of September 1, 1994 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended December 2, 2000)
+10.8		Amendment No. 3, dated August 1, 2000, to the Employment Agreement between the Company and James Scoroposki, dated as of September 1, 1994 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended December 2, 2000)
10.9		Revolving Credit and Security Agreement dated as of January 1, 1993 between the Company, Acclaim Distribution Inc., LJN Toys, Ltd., Acclaim Entertainment Canada, Ltd. and Arena Entertainment Inc., as borrowers, and GMAC Commercial Credit LLC as successor by merger to BNY Financial Corporation (“GMAC”), as lender, as amended and restated on February 28, 1995 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1995), as further amended and modified by (i) the Amendment and Waiver dated November 8, 1996, (ii) the Amendment dated November 15, 1998, (iii) the Blocked Account Agreement dated November 14, 1996, (iv) Letter Agreement dated December 13, 1986, and (v) Letter Agreement dated February 24, 1997 (each incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 8-K filed on March 14, 1997)

5562

Exhibit No.		Description
+10.7		Employment Agreement dated as of October 2, 2000 between the Company and John Ma (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended August 31, 2001)
10.10		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)
+10.8		Amendment No. 3, dated August 1, 2000, to the Employment Agreement between the Company and Gregory E. Fischbach, dated as of September 1, 1994 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended December 2, 2000)
10.11		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)
+10.9		Amendment No. 3, dated August 1, 2000, to the Employment Agreement between the Company and James Scoroposki, dated as of September 1, 1994 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended December 2, 2000)
10.12		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)
10.10		Employment Agreement, dated as of December 20, 2001 between the Company and Edmond Sanctis (incorporated by reference to Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q for the period ended December 2, 2001)
10.13		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))
10.11		Revolving Credit and Security Agreement dated as of January 1, 1993 between the Company, Acclaim Distribution Inc., LJN Toys, Ltd., Acclaim Entertainment Canada, Ltd. and Arena Entertainment Inc., as borrowers, and GMAC Commercial Credit LLC as successor by merger to BNY Financial Corporation (“GMAC”), as lender, as amended and restated on February 28, 1995 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1995), as further amended and modified by (i) the Amendment and Waiver dated November 8, 1996, (ii) the Amendment dated November 15, 1998, (iii) the Blocked Account Agreement dated November 14, 1996, (iv) Letter Agreement dated December 13, 1986, and (v) Letter Agreement dated February 24, 1997 (each incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 8-K filed on March 14, 1997)
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))
10.12		Restated and Amended Factoring Agreement dated as of February 28, 1995 between the Company and GMAC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1995), as further amended and modified by the Amendment to Factoring Agreements dated February 24, 1997 between the Company and GMAC (incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 8-K filed on March 14, 1997)
10.15		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))
10.13		Amendment to Revolving Credit and Security Agreement and Restated and Amended Factoring Agreement, dated March 14, 2002 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 3, 2002)
10.16		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))
10.14		Form of Participation Agreement between GMAC and certain junior participants (incorporated by reference to Exhibit 1 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1998)
10.17		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))
10.15		Note and Common Stock Purchase Agreement dated March 30, 2001 between the Company and Triton Capital Management, Ltd. (incorporated by reference to exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))
10.18		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))
10.16		Note and Common Stock Purchase Agreement dated March 31, 2001 between the Company and JMG Convertible Investments, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))
*10.19		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)
10.17		Note and Common Stock Purchase Agreement dated April 10, 2001 between the Company and Alexandra Global Investment Fund I, Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No.
*10.20		Licensed Publisher Agreement dated as of November 14, 2000 by and between the Company and Sony Computer Entertainment (Europe) Limited (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on November 28, 2001)
*10.21		Confidential License Agreement for Game Boy Advance (Western Hemisphere) between Nintendo of America Inc. and the Company, effective July 11, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2001)
*10.22		Xbox Publisher License Agreement dated as of October 10, 2000 between the Company and Microsoft Corporation (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2001)

5663

Exhibit No.		Description
		333-59048))
*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)
10.18		Note Purchase Agreement dated June 14, 2001 between the Company and Alexandra Global Investment Fund, Ltd. (incorporated by reference to Exhibit 10.4 to Amendment No. 2 to the Company’s Registration Statement on Form S-3 filed on August 8, 2001 (Commission File No. 333-59048))
10.24		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))
10.19		Form of Share Purchase Agreement between the Company and certain purchasers relating to the 2001 Private Placement (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 filed on September 26, 2001 (Commission File No. 333-70226))
10.25		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))
10.20		Form of Registration Rights Agreement between the Company and certain purchasers relating to the 2001 Private Placement (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 filed on September 26, 2001 (Commission File No. 333-70226))
10.26		Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated July 2, 2001
*10.21		License Agreement dated as of December 14, 1994 between the Company and Sony Computer Entertainment of America (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed on December 17, 1996)
10.27		Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated July 2, 2001
*10.22		Licensed Publisher Agreement dated as of April 1, 2000 between the Company and Sony Computer Entertainment America (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 14, 2001)
10.28		Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated October 1, 2001
*10.23		Licensed Publisher Agreement dated as of November 14, 2000 by and between the Company and Sony Computer Entertainment (Europe) Limited (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on November 28, 2001)
10.29		Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated October 1, 2001
*10.24		Confidential License Agreement for Nintendo’s N64 Video Game System (Western Hemisphere) between Nintendo of America Inc. and the Company, effective as of February 20, 1997 (incorporated by reference to Exhibit 1 to the Company’s Quarterly Report on Form 10-Q for the period ended February 28, 1998)
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.
*10.25		Confidential License Agreement for Game Boy Advance (Western Hemisphere) between Nintendo of America Inc. and the Company, effective July 11, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2001)
10.31		Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc.
*10.26		Xbox Publisher License Agreement dated as of October 10, 2000 between the Company and Microsoft Corporation (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the period ended August 31, 2001)
10.32		Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc.
*10.27		Confidential License Agreement for Nintendo GameCube by and between the Company and Nintendo of America Inc., dated as of the 15th day of November, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 4, 2001)
10.33		Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc.
10.28		Form of Share Purchase Agreement between the Company and certain purchasers relating to the February 2002 Private Placement (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 filed on March 15, 2002 (Commission File No. 333-84368))
10.34		Promissory Note executed by Simon Hosken in favor of Acclaim Entertainment, Inc., dated October 31, 2002.
10.29		Form of Registration Rights Agreement between the Company and certain purchasers relating to the February 2002 Private Placement (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3 filed on March 15, 2002 (Commission File No. 333-84368))
10.35		Amendment and Modification to Revolving Credit and Security Agreement, dated June 29, 2003
10.30		Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated July
10.36		Amended and Restated Cash Deposit Agreement between Gregory E. Fischbach and GMAC Commercial Finance, LLC, dated June 29, 2003
10.37		Amended and Restated Cash Deposit Agreement between James Scoroposki and GMAC Commercial Finance, LLC, dated June 29, 2003
10.38		Amended and Restated Limited Guaranty by Gregory E. Fischbach in favor of GMAC Commercial Finance, LLC, dated June 29, 2003
10.39		Amended and Restated Limited Guaranty by James Scoroposki in favor of GMAC Commercial Finance, LLC, dated June 29, 2003
10.40		Letter Agreement, dated June 29, 2003, between the Company’s Audit Committee and Gregory E. Fischbach and James Scoroposki
10.41		Form of Warrant Agreement between the Company and Gregory E. Fischbach, dated as of June 29, 2003
10.42		Form of Warrant Agreement between the Company and James Scoroposki, dated as of March 31, 2003

5764

Exhibit No.		Description
		2, 2001
10.31		Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated July 2, 2001
10.32		Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated October 1, 2001
10.33		Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated October 1, 2001
10.34		Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc.
10.35		Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc.
10.36		Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc.
10.37		Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc.
10.38		Promissory Note executed by Simon Hosken in favor of Acclaim Entertainment, Inc., dated October 31, 2002.
10.39		Amendment and Modification to Revolving Credit and Security Agreement, dated June 29, 2003
10.40		Amended and Restated Cash Deposit Agreement between Gregory E. Fischbach and GMAC Commercial Finance, LLC, dated June 29, 2003
10.41		Amended and Restated Cash Deposit Agreement between James Scoroposki and GMAC Commercial Finance, LLC, dated June 29, 2003
10.42		Amended and Restated Limited Guaranty by Gregory E. Fischbach in favor of GMAC Commercial Finance, LLC, dated June 29, 2003
10.43		Amended and Restated Limited Guaranty by James Scoroposki in favor of GMAC Commercial Finance, LLC, dated June 29, 2003
10.44		Letter Agreement, dated June 29, 2003, between the Company’s Audit Committee and Gregory E. Fischbach and James Scoroposki
10.45		Form of Warrant Agreement between the Company and Gregory E. Fischbach, dated as of June 29, 2003
10.46		Form of Warrant Agreement between the Company and James Scoroposki, dated as of March 31,2003
†31		Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
†32		Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit No.		Description
†32		Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

+	Management contract or compensatory plan or arrangement.

†	Filed herewith.

(b) Current Reports on Form 8-K:

Current Report on Form 8-K filed on ~~April~~July 1018, 2003;

Current Report on Form 8-K filed on ~~May~~July 2128, 2003;

Current Report on Form 8-K filed on ~~June~~August 219, 2003; and

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

5965

SIGNATURES

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

ACCLAIM ENTERTAINMENT, INC.

By:		/s/ RODNEY P. COUSENS

		Rodney Cousens President and Chief Executive Officer

~~August~~November 1317, 2003



By:		/s/ GERARD F. AGOGLIA

		Gerard F. Agoglia Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

~~August~~November 1317, 2003

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