UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED ~~DECEMBER~~SEPTEMBER 3130, ~~2002~~2003 OR


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

FOR THE TRANSITION PERIOD FROM ~~____________~~___________ TO ___________ ~~_______________~~ .

COMMISSION FILE NUMBER: 000-32989

BAM! ENTERTAINMENT, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


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

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

(~~ADDRESS~~408) 298-7500 (REGISTRANT’S OFTELEPHONE ~~PRINCIPAL~~NUMBER, ~~EXECUTIVE~~INCLUDING ~~OFFICES)~~AREA ~~(ZIP~~ CODE)

(408) 298-7500

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

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

~~THE~~ Indicate ~~NUMBER~~by OFcheck ~~SHARES~~mark OFwhether ~~COMMON~~the ~~STOCK~~registrant ~~OUTSTANDING~~(1) is ASan OFaccelerated ~~FEBRUARY~~filer (as ~~13,~~defined ~~2003:~~in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] ~~14,668,676~~

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

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS.
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
RISK FACTORS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
	ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS — Not Applicable
	ITEM 3. DEFAULTS UPON SENIOR NOTES
	ITEM 3. DEFAULTS UPON SENIOR NOTES — Not Applicable
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS — None
	ITEM 5. OTHER INFORMATION
	ITEM 5. OTHER INFORMATION — Not Applicable
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 10.3
Exhibit 10.1
Exhibit 10.4
Exhibit 10.1(a)
Exhibit 10.5
Exhibit 10.2
Exhibit 10.6
Exhibit 10.2(a)
Exhibit 99.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

			December 31,			June 30,
			September 30,			June 30,
			2002			2002
			2003			2003
ASSETS
Current assets:
	Cash and cash equivalents		$	~~2,358~~617		$	41,~~726~~068
	Short-term investments			—			8,185
	Accounts receivable, net of allowance of $2,392 as of September 30, 2003 and $2,722 as of June 30, 2003			557			539
	Accounts receivable, net of allowance of $7,599 as of December 31, 2002 and $3,720 as of June 30, 2002			15,558			10,183
	Inventories			734			961
	Inventories			3,069			3,945
	Prepaid royalties			993			1,067
	Prepaid royalties, capitalized software costs and licensed assets, net			7,494			12,858
	Prepaid expenses and other			2,535			1,036
	Prepaid expenses and other			1,788			2,539
		Total current assets		5,436			4,671
		Total current assets		30,267			42,436
Capitalized software and licensed assets, net				4,852			4,138
Prepaid royalties, capitalized software and licensed assets, net of current portion				2,321			5,467
Property and equipment, net				502			597
Property and equipment, net				903			987
Long-term receivable, net of allowance of $1,627 as of September 30, 2003 and $1,627 as of June 30, 2003				—			—
Long-term receivable, net of allowance of $1,627 as of December 31, 2002 and $1,080 as of June 30, 2002				—			547
Other assets				104			54
Other assets				30			30
Total assets			$	10,894		$	9,460
Total assets			$	33,521		$	49,467
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable – trade		$	7,266		$	4,755
	Accounts payable — trade		$	3,726		$	3,199
	Short-term borrowings			31,~~417~~745			~~1,359~~—
	Royalties payable			~~1,450~~624			~~528~~1,242
	Accrued compensation and related benefits			1,049			972
	Loan from director			250			—
	Accrued software costs			1,384			1,488
	Obligations under capital leases — short-term portion			27			27
	Accrued expenses – other			1,443			1,509
	Accrued compensation and related benefits			652			785
		Total current liabilities		16,009			10,611
	Accrued software costs			368			128
	Accrued expenses — other			1,327			793
		Total current liabilities		8,719			6,174
Obligations under capital leases — long-term portion				19			26
Funds held in escrow for a future stockholder investment				503			—
Stockholders’ equity:
	Common stock $0.001 par value; shares authorized; 100,000,000; shares issued and outstanding: 14,668,676 and 14,582,756 as of December 31, 2002 and June 30, 2002, respectively			15			15
	Common stock $0.001 par value; shares authorized; 100,000,000; shares issued and outstanding: 14,814,040 and 14,678,290 as of September 30, 2003 and June 30, 2003, respectively			15			15
	Additional paid-in capital			63,~~104~~049			62,~~988~~986
	Deferred stock compensation			(~~495~~125	)		(~~789~~245	)
	Accumulated deficit			(4561,~~468~~476	)		(2359,~~618~~811	)
	Accumulated other comprehensive income			~~356~~190			~~260~~315
		Total stockholders’ equity		171,~~512~~653			383,~~856~~260
Total liabilities and stockholders’ equity			$	3310,~~521~~894		$	499,~~467~~460

See notes to condensed consolidated financial statements

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

					Three months endedDecember 31,						Six months endedDecember 31,
					Three months ended
					2002			2001			2002			2001
					September 30,
Net revenues					$	22,005		$	18,914		$	30,745		$	29,741
					2003			2002
Costs and expenses:
Net revenues					$	1,363		$	8,740
	Cost of revenues
Costs and expenses:
			Cost of goods sold			14,315			10,591			18,752			16,746
	Cost of revenues
			Royalties, software costs, and license costs			9,430			3,127			13,626			4,675
			Cost of goods sold			633			4,437
			Project abandonment costs			2,384			—			4,311			—
			Royalties, software costs, and license costs			681			4,196
			Total cost of revenues			26,129			13,718			36,689			21,421
			Project abandonment costs			105			1,927
	Research and development (exclusive of amortization of deferred stock compensation)					755			492			2,048			941
			Total cost of revenues			1,419			10,560
	Sales and marketing (exclusive of amortization of deferred stock compensation)					4,152			4,950			7,012			6,325
	Research and development (exclusive of amortization of deferred stock compensation)					538			1,293
	General and administrative (exclusive of amortization of deferred stock compensation)					2,352			1,960			4,392			2,689
	Sales and marketing (exclusive of amortization of deferred stock compensation)					182			2,860
	Amortization of deferred stock compensation*					133			361			294			713
	General and administrative (exclusive of amortization of deferred stock compensation)					1,260			2,040
	Restructuring costs					1,753			—			1,753			—
	Amortization of deferred stock compensation*					73			161
				Total costs and expenses		35,274			21,481			52,188			32,089
	Litigation settlement					(650	)		—
Loss from operations						(13,269	)		(2,567	)		(21,443	)		(2,348	)
	Restructuring costs					176			—
		Interest income				79			91			143			96
				Total costs and expenses		2,998			16,914
		Interest expense				(258	)		(1,307	)		(526	)		(2,019	)
Loss from operations						(1,635	)		(8,174	)
		Other income (expense)				19			8			(24	)		7
		Interest income				1			64
Net loss					$	(13,429	)	$	(3,775	)	$	(21,850	)	$	(4,264	)
		Interest expense				(28	)		(268	)
Net loss per share:
		Other expense				(3	)		(43	)
	Basic and diluted				$	(0.92	)	$	(0.52	)	$	(1.49	)	$	(0.96	)
Net loss					$	(1,665	)	$	(8,421	)
Shares used in computation:
Net loss per share:
	Basic and diluted				$	~~14,669~~(0.11	)	$	~~7,310~~(0.58	)		~~14,632~~			~~4,427~~
*Amortization of deferred stock compensation:
Shares used in computation:
	Research and development				$	11		$	56		$	24		$	114
	Basic and diluted					14,723			14,595
	Sales and marketing					7			24			16			49
*Amortization of deferred stock compensation:
	General and administrative					115			281			254			550
	Research and development				$	1		$	13
					$	133		$	361		$	294		$	713
	Sales and marketing					1			9
	General and administrative					71			139
Total amortization of deferred stock compensation					$	73		$	161

See notes to condensed consolidated financial statements

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

					Six months ended
						Three months ended
					December 31,
						September 30,
					2002				2001
						2003				2002
Cash flows from operating activities:
Net loss					$	~~(21,850~~$	)(1,665	)	$	~~(4,264~~$	)(8,421	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization					~~18,372~~	862			~~3,692~~	6,101
	Provision for bad debts, sales returns, price protection and cooperative advertising					~~9,936~~	254			~~4,825~~	2,662
	Consulting services performed in exchange for stock options					12	—			62	6
	Other					~~(52~~	)—			~~(15~~	)38
	Changes in operating assets and liabilities:
		~~Accounts receivable~~	Accounts receivable			~~(14,388~~	)(277	)		~~(16,104~~	)1,463
		~~Inventories~~	Inventories			~~964~~	240			~~(3,476~~	)(689	)
		~~Prepaid expenses and other~~	Prepaid expenses and other			~~761~~	(1,495	)		~~(541~~	)982
		Prepaid royalties, capitalized software costs and licensed assets				(9,098	)			(5,631	)
			Prepaid royalties				(7	)			(98	)
		Accounts payable – trade				2,237				1,967
			Capitalized software costs and licensed assets				(1,404	)			(6,087	)
		Royalties payable				883				(39	)
			Other assets — long-term royalties				—				(1	)
		Accrued compensation and related benefits				77				101
			Accounts payable — trade				479				1,819
		Accrued software costs				(140	)			1,278
			Royalties payable				(622	)			52
		Accrued expenses – other				(95	)			1,890
			Accrued compensation and related benefits				(133	)			40
			Net cash used in operating activities			(12,381	)			(16,255	)
			Accrued software costs				240				(794	)
Cash flows from investing activities:
			Accrued expenses — other				527				675
	Purchase of property and equipment					(309	)			(467	)
				Net cash used in operating activities			(3,001	)			(2,252	)
	Sale of short-term investments					8,185				—
Cash flows from investing activities:
	Purchase of short-term investments					—				(6,125	)
	Purchase of property and equipment						(4	)			(236	)
	Decrease in other assets					—				1,730
	Proceeds from sale of short-term investments						—				1,351
			~~Net cash provided by (used in) investing activities:~~	Net cash provided by (used in) investing activities:		~~7,876~~	(4	)		~~(4,862~~	)1,115
Cash flows from financing activities:
	Advances under short-term borrowings					~~8,628~~	1,745			~~17,524~~	1,262
	Repayments of short-term borrowings					(6,570	)			(15,481	)
	Loan from director						250				—
	Net proceeds from issuance of stock in initial public offering					—				39,158
	Repayments of short-term borrowings						—				(2,621	)
	Net proceeds from exercise of warrants					—				529
	Payments under capital leases						(7	)			—
	Net proceeds from exercise of stock options					—				5
	Funds held in escrow for a future stockholder investment						503				—
	Net proceeds from issuance of stock under employee stock purchase plan					27				—
	Prepaid share issuance expenses						(50	)			—
			Net cash provided by financing activities			2,085				41,735
	Net proceeds from exercise of stock options						110				—
Net increase (decrease) in cash and cash equivalents						(2,420	)			20,618
	Net proceeds from issuance of stock under employee stock purchase plan						—				27
Net effect on cash and cash equivalents from change in exchange rates						52				—
				Net cash provided by (used in) financing activities			2,551				(1,332	)
Cash and cash equivalents, beginning of period						4,726				2,170
Net decrease in cash and cash equivalents							(454	)			(2,469	)
Cash and cash equivalents, end of period					$	2,358			$	22,788
Net effect on cash and cash equivalents from change in exchange rates							3				(46	)
Cash and cash equivalents, beginning of period							1,068				4,726
Cash and cash equivalents, end of period						$	617			$	2,211
Supplementary disclosure of cash flow information:
		Cash paid for interest				$	28			$	268

See notes to condensed consolidated financial statements

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

1. BASIS OF PRESENTATION

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

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

The results of operations for the three ~~and six~~ months ended ~~December~~September 3130, ~~2002~~ 2003 are not necessarily indicative of the results to be expected for the entire ~~fiscal~~ fiscal year, which ends on June 30, ~~2003~~2004.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, ~~2002~~2003, together with management’s discussion and analysis of financial condition and results of operations, contained in Bam’s ~~2002~~2003 Annual Report and Form 10-K.

Going Concern and Liquidity Uncertainties - These condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in these condensed consolidated financial statements, during the ~~six~~three months ended ~~December~~September 3130, ~~2002~~2003, ~~the~~Bam ~~Company~~ used cash in operating activities of $123.40 million and incurred a net loss of $211.97 million. As of ~~December~~September 3130, ~~2002~~2003, ~~the~~Bam ~~Company~~ had cash and cash equivalents of $~~2.4 million~~617,000 and its accumulated deficit was $4561.5 million. These factors, among others, raise substantial doubt about ~~the Company~~Bam’s ability to continue as a going concern for a reasonable period of time. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should ~~the Company~~Bam be unable to continue as a going concern.

During the ~~quarter~~year ended ~~December~~ June 3130, ~~2002~~2003, ~~the~~Bam ~~Company~~ undertook measures to reduce ~~spending~~ spending and restructured its operations. In February 2003 Bam retained, ~~the~~through ~~Company~~July ~~retained~~31, 2003, the investment banking firm of Gerard Klauer Mattison & Co., Inc. to assist it in reviewing a range of potential strategic ~~alternatives,~~ ~~including mergers, acquisitions and securing additional financing. The Company may need to consummate one or a combination of the potential strategic~~ alternatives~~, or otherwise obtain capital via the sale or license of certain of its assets, in order to satisfy its future liquidity requirements~~. ~~Current market conditions present~~No ~~uncertainty~~transactions asarose tofrom ~~the~~this ~~Company’s~~assistance ~~ability to effectuate any such merger~~ or ~~acquisition~~were orconsummated ~~secure~~during ~~additional~~this ~~financing, as well as its ability to reach profitability~~period. ~~There can be no assurances that the Company~~ ~~will be able to effectuate any such merger or acquisition or secure~~ additional financing, or obtain favorable terms on such financing if it is available, or as to the Company’s ability to achieve positive cash flow from operations. Continued negative cash flows create uncertainty about the Company’s ability to implement its operating plan and the Company may have to further reduce the scope of its planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy the Company’s liquidity requirements, the Company will not have sufficient resources to continue operations for the next 12 months.

2In October 2003, Bam completed the sale of 1,850,000 shares of its common stock and warrants to purchase another 1,665,000 shares of its common stock, resulting in gross proceeds (assuming no exercise of the warrants) of $1.8 million, ~~INCOME~~in ~~TAXES~~a private offering to institutional and accredited investors. The warrants have a five-year term and are exercisable at $1.87 per share. The placement agents were issued warrants (“placement agent warrants”) to purchase 277,500 shares of Bam’s common stock in connection with placement agent fees under the same terms as the warrants issued to the investors, except that the placement agent warrants are subject to a 180 day lock-up provision. Bam also granted the investors additional investment rights to purchase an additional 1,111,625 shares of its common stock and warrants to purchase another 1,000,462 shares of its common stock. The shares of common stock underlying the additional investment rights are purchasable at $0.96 per share and the warrants underlying the additional investment rights have a five-year term and are exercisable at the greater of (i) $1.87 and (ii) the lesser of (x) the closing bid price of Bam’s common stock on the Nasdaq Stock Market on the business day immediately preceding the exercise date of the additional investment right, and (y) the average of the closing bid price of our common stock on the Nasdaq Stock Market for the five business days immediately preceding the exercise date of the additional investment right. The additional investment rights are exercisable until 45 business days after the effectiveness of a registration statement covering the shares and warrants sold.

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

3Bam needs to raise additional funds. ~~NET~~These ~~LOSS~~funds ~~PER~~may ~~SHARE~~come from either one or a combination of additional financings, exercise of outstanding warrants and additional investment rights, mergers or acquisitions, or otherwise obtain capital via sale or license of certain of its assets, in order to satisfy its future liquidity requirements. Current market conditions present uncertainty as to Bam’s ability to secure additional financing or effectuate any merger or acquisition, as well as Bam’s ability to reach profitability. There can be no assurances that Bam will be able to secure additional financing or effectuate any such merger or acquisition, or obtain favorable terms on such financing if it is available, or as to Bam’s ability to achieve positive cash flow from operations. Continued negative cash flows create significant uncertainty about Bam’s ability to implement its operating plan and Bam may have to further reduce the scope of its planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy Bam’s liquidity requirements, Bam will not have sufficient resources to continue operations for the next six months.

~~Basic~~As ~~net~~of ~~loss~~September 30, ~~per~~2003, ~~share~~Bam ishad ~~computed~~$4.9 million ~~using~~of ~~the~~capitalized ~~weighted~~development ~~average number of~~costs ~~common~~and ~~stock~~licensed ~~shares~~assets, ~~outstanding~~and ~~during~~$993,000 ~~the~~of ~~period~~prepaid royalties. ~~Diluted~~Should ~~net~~Bam ~~loss~~not ~~per~~be ~~share~~able isto ~~computed~~effectuate ~~using~~either ~~the~~a ~~weighted~~merger ~~average~~or ~~number~~acquisition ofor ~~common~~to ~~stock~~secure ~~shares~~sufficient ~~and common~~additional ~~stock~~financing, ~~share~~part ~~equivalents~~or ~~outstanding~~all ~~during the period. Potential common shares consist~~ of ~~warrants~~development ~~and~~projects ~~stock~~in ~~options,~~progress ~~using~~might ~~the~~have ~~treasury~~to ~~stock method.~~be ~~Potential~~abandoned ~~common~~and ~~shares~~the ~~are~~related ~~excluded~~costs ~~from~~would ~~the~~have ~~computation,~~to ifbe ~~their~~written ~~effect is antidilutive~~off.

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

			Three months ended						Six months ended
			December 31,						December 31,
			2002			2001			2002			2001
Net loss			$	(13,429	)	$	(3,775	)	$	(21,850	)	$	(4,264	)
Calculation of basic loss per share:
		Weighted average number of common stock shares outstanding – basic and diluted		14,669			7,310			14,632			4,427
	Net loss per share – basic and diluted		$	(0.92	)	$	(0.52	)	$	(1.49	)	$	(0.96	)

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

4The following table illustrates the effect on net loss and net loss per share if Bam had applied the fair value recognition provisions of SFAS No. 123 ~~COMPREHENSIVE~~to stock-based ~~LOSS~~employee compensation. For purposes of SFAS No. 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period (in thousands):

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


		Three months ended
		September 30,

		2003			2002

Net loss attributable to common stockholders		$	(1,665	)	$	(8,421	)
Add: Stock-based employee compensation expense included in net loss			73			161
Less: Stock-based employee compensation expense under the fair value method for stock option awards			(223	)		(480	)
Less: Stock-based employee compensation expense under the fair value method for purchases of stock under the employee stock purchase plan			—			(24	)

Pro forma net loss		$	(1,815	)	$	(8,764	)

	Basic and diluted net loss per share — as reported	$	(0.11	)	$	(0.58	)

	Basic and diluted net loss per share — pro forma	$	(0.12	)	$	(0.60	)

The components of comprehensive loss for the three and six months ended December 31, 2002 and 2001 were as follows (in thousands):

	Three months ended						Six months ended
	December 31,						December 31,
	2002			2001			2002			2001
Net loss	$	(13,429	)	$	(3,775	)	$	(21,850	)	$	(4,264	)
Change in accumulated translation adjustment		141			(70	)		148			(15	)
Change in unrealized gain on available-for-sale marketable securities		(90	)		—			(52	)		—
Comprehensive loss	$	(13,378	)	$	(3,845	)	$	(21,754	)	$	(4,279	)

5. SHORT-TERM INVESTMENTS

Bam classifies all of its short-term investments as available-for-sale securities, as the sale of such securities may be required prior to maturity to implement management strategies. Bam had no short-term investments at December 31,

~~2002~~2. ~~Short-term~~RESTRUCTURING ~~investments are reported at fair market value with the related~~COSTS ~~unrealized holding gains and losses reported as a component of accumulated~~ ~~other comprehensive income.~~

6Bam accounts for restructuring costs in accordance with SFAS No. 146, Accounting ~~INVENTORIES~~for Costs Associated with Exit or Disposal Activities. For restructuring actions initiated prior to January 1, 2003 Bam accounts for restructuring costs in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring).

~~Inventories~~In November 2002, ~~which~~Bam ~~consist~~initiated ~~primarily~~a restructuring of ~~finished~~its ~~goods~~operations, ~~are~~and accounted ~~stated~~for atin accordance with EITF 94-3. As part of the ~~lower~~restructuring, Bam reduced its headcount across all departments, by a total of ~~cost~~30 ~~(based~~employees, ~~upon~~and certain members of the ~~first-in~~Company’s management also agreed to a reduction of salary for the period December 2002 through June 2003. As compensation for the reduction, ~~first-out~~those ~~method)~~members orof ~~market~~management ~~value~~taking the salary reduction were granted stock options in the Company. Bam also transferred, under UK law, an additional ~~estimates~~12 product development employees to VIS Entertainment plc upon the ~~net~~sale ~~realizable~~of ~~value~~its London based studio in January 2003, and granted VIS a sublease to its London premises through June 2007. VIS had an option to terminate the tenancy of ~~slow~~the sublease ~~moving~~upon ~~inventories~~the onlater of November 30, 2003 and the determination of a porting ~~product-by-product~~contract ~~basis~~between Bam and ~~charges~~VIS. ~~any~~In ~~excess~~October of2003, ~~cost~~VIS ~~over~~notified ~~net~~Bam ~~realizable~~that they were ~~value~~terminating tothe ~~cost~~sublease effective November 30, 2003. Bam is considering negotiating an early termination of ~~revenues~~the lease with its landlord.

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

On January 22, 2002 Kmart, a customer of Bam, filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. On January 22, 2002 Bam had an accounts receivable balance from Kmart of $1.7 million. Bam is an unsecured creditor, and as such is at risk of not recovering in full its accounts receivable balance. Accordingly, in the third quarter of fiscal 2002 Bam recorded an allowance of $1.1 million against the receivable. As Kmart has stated that at earliest it will complete its reorganization in 2003, Bam classified the receivable, net of allowance, as a long-term asset.

Three months ended

September 30, 2003

Restructuring costs

expensed in the

Restructuring costs

unpaid as of June

three months ended

paid as of

unpaid as of

30, 2003

September 30, 2003

Nature of restructuring costs:

Lease termination costs

—

176

—

176

InBam anticipates that the ~~quarter~~costs ~~ended~~of ~~September 30,~~an ~~2002~~early ~~Bam~~termination ~~reevaluated~~of ~~and~~its ~~increased~~lease ~~the~~of its ~~allowance~~former toLondon ~~cover~~premises ~~the~~will ~~full~~be ~~accounts~~paid ~~receivable~~in ~~balance~~fiscal 2004.

~~Subsequent to January 22, 2002 Kmart arranged debtor-in-possession financing and Bam has sold product to Kmart under this arrangement~~3. ~~Bam~~INCOME ~~also purchased~~TAXES ~~credit insurance for sales made to Kmart in the two months ended November 30,~~ ~~2002 at a cost of $900,000. Credit insurance costs are included in General and administrative expense.~~

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

84. ~~SHORT-TERM~~NET ~~BORROWINGS~~LOSS PER SHARE

InBasic ~~February~~net ~~2002,~~loss ~~Bam~~per ~~entered~~share ~~into~~is acomputed ~~two~~using ~~year factoring agreement (~~the ~~“Agreement”)~~ ~~with~~weighted aaverage ~~finance~~number ~~company,~~of common ~~whereby~~stock ~~Bam~~shares ~~assigns~~outstanding ~~its~~during ~~North American receivables to~~ the ~~finance company~~period. ~~The~~Diluted ~~finance~~net ~~company~~loss per share is ~~responsible~~computed ~~for collecting~~using ~~customer~~the ~~receivables,~~weighted ~~and~~average ~~upon~~number ~~collection,~~of ~~remits~~common ~~the~~stock ~~funds~~shares toand ~~Bam,~~common ~~less~~stock ashare ~~service~~equivalents ~~fee.~~outstanding ~~Under~~during the ~~Agreement,~~period. ~~Bam~~Potential ~~may~~common ~~obtain advances, subject to~~shares ~~the~~consist ~~finance~~of ~~company’s~~warrants ~~discretion~~ and ~~Bam’s~~stock ~~compliance with certain liquidity covenants~~options, inusing the ~~form~~treasury ofstock ~~cash~~method. Potential orcommon asshares ~~collateral~~are ~~for~~excluded ~~letters~~from ofthe ~~credits~~computation, upif totheir ~~a maximum~~effect ~~of 75% of outstanding domestic receivables at any point in time. As of~~is ~~December 31~~antidilutive, ~~2002,~~as ~~Bam~~was nothe ~~longer~~case ~~met~~for the ~~liquidity~~three ~~covenants~~months ~~under~~ended ~~the Agreement~~September 30, ~~and~~2003 ~~accordingly may not be able to obtain further advances under the~~and ~~Agreement~~2002, respectively.

Under the terms of the Agreement, Bam pays a service fee on all receivables assigned, with a minimum annual fee of $150,000, and interest at prime plus 1% on all cash sums advanced. All fees are included in interest expense. Bam bears the collection risk on its accounts receivable that are assigned, unless the finance company approves the receivable at the time of assignment, in which case the finance company bears the risk.

The finance company has a security interest in Bam’s accounts receivable, inventory, fixed assets and intangible assets. As of December 31, 2002, Bam had advances of $3.4 million outstanding under the Agreement.

In February 2000, prior to entering into the Agreement, Bam had entered into a master purchase order assignment agreement with a different finance company, whereby Bam assigned purchase orders entered into with its customers to the finance company and requested the finance company purchase finished goods to fulfill such customer purchase orders. The master purchase order assignment agreement, and a factoring agreement entered into in August 2001 with an affiliate of the finance company, terminated in February 2002, and all outstanding amounts funded were fully repaid.

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

As more fully described in Note 12, in September 2002 Bam issued 68,738 shares of common stock pursuant to a license agreement with a production company. Bam capitalized the cost of this issuance at the fair market value of the common stock, equal to $70,000, and is amortizing this amount to royalties, software costs, license costs and project abandonment over the life of the products after release. Bam previously issued 68,738 shares of common stock pursuant to this license agreement in April 2001. During the three and six months ended December 31, 2002 and 2001, $44,000, $0, $70,000 and $0, respectively, was amortized to royalties, software costs, license costs and project abandonment.


			Three months ended
			September 30,

			2003			2002

Net loss			$	(1,665	)	$	(8,421	)

Calculation of loss per share, basic and diluted:
		Weighted average number of common stock shares outstanding — basic and diluted		14,723			14,595

	Net loss per share — basic and diluted		$	(0.11	)	$	(0.58	)

~~10.~~The ~~WARRANTS~~following table summarizes common stock equivalents that are not included in the denominator used in the diluted net loss per share calculation because to do so would be antidilutive for the periods indicated:

There were outstanding warrants to purchase a total of 858,450 and 853,450 shares of common stock as of December 31, 2002 and June 30, 2002, respectively.


		Three months ended
		September 30,

		2003		2002

Options to purchase common stock			385		169
Warrants to purchase common stock			12		197

	Total common stock equivalents		397		366

In connection with an agreement entered into with a production company during January 2002, Bam obtained the exclusive right of first refusal, for a period of five years, to develop products based on certain properties owned by the production company and to distribute them worldwide. In connection with the agreement, Bam is required to issue to the production company warrants to purchase up to 50,000 shares of common stock, in pre-determined multiples of either 5~~,000 or 10,000 shares, upon the occurrence of certain pre-determined events~~. ~~Warrants~~COMPREHENSIVE ~~are issued at the average closing price of Bam’s stock for~~LOSS ~~the five days immediately prior to the date of issue, have a five year term~~ from date of issue, and are fully vested and are immediately exercisable upon issuance. Bam issued warrants to purchase 5,000 shares of common stock in July 2002 under this agreement. The fair value of the warrant was estimated to be $7,000 at the grant date, using the Black-Scholes option pricing model with the following assumptions: expected term equal to five years; risk-free interest rate of 4.7%; volatility of 88%; and no dividends during the expected term. The fair values of the warrants were capitalized to prepaid royalties, capitalized software costs and licensed assets and will be amortized over the life of the products (generally between three and six months) to which they relate when these products are released. Through December 31, 2002, Bam has issued warrants to the production company to purchase a total of 25,000 shares of common stock.

11SFAS No. 130, ~~BUSINESS~~Reporting ~~SEGMENT~~Comprehensive ~~AND~~Income, ~~GEOGRAPHIC~~requires ~~INFORMATION~~that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual statement that is displayed with the same prominence as other annual financial statements. SFAS No. 130 also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. Comprehensive loss, as defined, includes all changes in equity during a period from nonowner sources.

AsThe ~~defined~~components byof ~~the~~comprehensive ~~requirements~~loss offor ~~SFAS~~the ~~No. 131,~~three ~~Disclosures~~months ~~About~~ended ~~Segments of~~September 30, an2003 ~~Enterprise~~ and ~~Related~~2002 ~~Information,~~were ~~the~~as ~~Company~~follows ~~operates~~ (in ~~one reportable segment~~thousands): ~~the development and publishing of interactive entertainment products.~~

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


	Three months ended
	September 30,

	2003			2002

Net loss	$	(1,665	)	$	(8,421	)
Change in accumulated translation adjustment		(125	)		7
Change in unrealized gain on available-for-sale marketable securities		—			38

Comprehensive loss	$	(1,790	)	$	(8,376	)

		Three months ended						Six months ended
		December 31,						December 31,
		2002			2001			2002			2001
Net revenues from unaffiliated customers:
	North America	$	14,773		$	15,676		$	22,062		$	26,380
	Europe		7,073			1,841			8,492			1,849
	Other		159			1,397			191			1,512
Consolidated		$	22,005		$	18,914		$	30,745		$	29,741
Income (loss) from operations:
	North America	$	(7,459	)	$	(2,886	)	$	(13,083	)	$	(1,787	)
	Europe		(5,810	)		319			(8,360	)		(561	)
Consolidated		$	(13,269	)	$	(2,567	)	$	(21,443	)	$	(2,348	)

6. INVENTORIES

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

	December 31,			June 30,
	2002			2002
Identifiable assets:
North America	$	45,365		$	53,313
Europe		11,940			15,648
Intercompany items and eliminations		(23,784	)		(19,494	)
Total	$	33,521		$	49,467
Long-Lived assets:
North America	$	2,812		$	3,668
Europe		442			3,363
Total	$	3,254		$	7,031

7. RECEIVABLES

~~12.~~Trade ~~CONTINGENCIES~~accounts receivable

~~Under~~Accounts ~~an agreement entered into between Bam and a production company~~receivable, ~~Bam~~net ~~has a first look right to review screenplays acquired by the production company and to develop products based on films produced from those screenplays. For each film (up to a total~~ of ~~10 films) that Bam selects~~allowances, ~~68,738~~is ~~fully~~comprised ~~vested and non-forfeitable shares~~ of ~~common stock will be issued to~~ the ~~production company~~ following the theatrical release of each film for which Bam has developed a product, up to a maximum of 687,375 shares of common stock. As of December 31, 2002 Bam has elected to produce software products for three films pursuant to this agreement. One of these films had its theatrical release during the year ended June 30, 2001 and another had its theatrical release during the six months ended December 31, 2002. Accordingly, Bam has issued 137,476 shares of common stock to the production company to date, of which 68,738 shares were issued during the six months ended December 31, 2002. Bam is not required to issue stock on the remaining film until such time as the film is released, which is anticipated to be (in ~~the summer of calendar year 2004.~~ thousands):

In connection with an agreement entered into with a separate production company during January 2002, under which Bam may produce software products based on certain properties owned by the production company, Bam is required to issue to the production company warrants to purchase up to 50,000 shares of common stock, in pre-determined multiples of either 5,000 or 10,000 shares, upon the occurrence of certain pre-determined events. As of December 31, 2002, warrants to issue 25,000 shares of common stock have been issued under this agreement. The issuance of warrants on the remaining 25,000 shares of common stock is contingent upon certain future events occurring.


			September 30,			June 30,
			2003			2003

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

Accounts receivable, net			$	557		$	539

~~In connection with a licensing and publishing agreement entered into with a publishing company in May 2002, Bam granted to the production company a warrant, with a ten year~~ Long-term ~~from the date of issue, to purchase up to 200,000~~receivable ~~shares of Bam’s common stock at an exercise price of $2.60, of which 15,000~~ shares became immediately exercisable upon the signing of the agreement, and the remaining 185,000 shares only become exercisable in multiples of 4,625 shares upon each election by Bam to produce a title based on any films, made for television movies, or television series produced from screenplays to be produced by the publishing company, up to a maximum ten titles, and multiples of 13,875 shares upon the theatrical release or television air-date of each film for which Bam has developed a title. Upon expiration of the agreement, any unexercised warrants will cease to be exercisable.

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

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

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

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

Concentration of credit risk

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

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

~~Bam’s~~8. ~~agreement expires upon the later of five years, and the earlier of either the theatrical release or television air~~SHORT-~~date~~TERM ~~of the tenth film or television~~BORROWINGS ~~series on which Bam bases a product, and eight years.~~

AsIn ofSeptember ~~December 31~~2003, ~~2002~~ Bam ~~had~~entered nointo ~~letters~~a ofsix month agreement (the “Agreement”) with a finance company, pursuant to which the finance company extends a line of credit ~~outstanding~~facility to fund domestic inventory purchases to Bam. AtBam ~~June 30,~~may sell the ~~2002,~~inventory purchased under the Agreement and is required to remit customer receipts from those sales directly to the finance company up to the amounts funded by them. Bam ~~had~~retains ~~outstanding~~collections ~~letters~~in excess of ~~credit~~the ~~issued~~amounts funded by the finance company, is responsible for collecting the customer receivables, and bears the risk of $2loss on all uncollectible accounts.~~3 million~~ The finance company has a security interest in Bam’s accounts receivable and inventory.

13Under the terms of the Agreement, the finance company’s aggregate outstanding funding is limited to $3.2 million. ~~NEW~~Bam ~~ACCOUNTING~~is ~~PRONOUNCEMENTS~~required to pay the finance company’s expenses under the contract, a facility fee equal to 5.0% of the funds advanced by the finance company, and interest at prime plus 0.5%. The Agreement terminates on March 31, 2004 and any sums outstanding become repayable on that date. Bam may repay any sums advanced prior to the due date of payment without penalty. As of September 30, 2003, Bam had advances of $1,745,000 outstanding under the Agreement. Prepayments for products not yet received are included in prepaid expenses and as of September 30, 2003 these totaled $1,745,000.

InPrior ~~June~~to ~~2001,~~entering into the ~~FASB~~Agreement, ~~issued~~Bam ~~SFAS~~had ~~No. 141,~~entered ~~Business~~into ~~Combinations,~~a ~~and~~two ~~SFAS~~year ~~No.~~factoring ~~142~~agreement (the “Factoring Agreement”) with a different finance company in February 2002, ~~Goodwill~~pursuant ~~and~~to ~~Other~~which ~~Intangible~~Bam ~~Assets.~~assigned ~~SFAS~~its ~~No. 141~~North ~~requires~~American ~~that~~receivables ~~all~~to ~~business~~the ~~combinations~~finance ~~initiated~~company. ~~after~~The ~~June 30,~~finance ~~2001~~company bewas ~~accounted~~responsible for ~~under the~~collecting ~~purchase~~customer ~~method~~receivables, and ~~addresses~~upon collection, remitted the ~~initial~~funds ~~recognition~~to ~~and~~Bam, ~~measurement~~less ofa ~~goodwill~~service ~~and~~fee. ~~other~~Under ~~intangible~~the ~~assets~~Factoring ~~acquired~~Agreement, inBam acould ~~business~~obtain ~~combination.~~advances, ~~SFAS~~subject ~~No. 142~~to ~~addresses~~ the ~~initial~~finance ~~recognition~~company’s discretion and ~~measurement~~Bam’s ofcompliance ~~intangible~~with ~~assets~~certain liquidity ~~acquired~~covenants, ~~outside~~in ofthe aform ~~business~~of ~~combination~~cash ~~and~~or ~~the~~as ~~accounting~~collateral for ~~goodwill~~letters ~~and~~of credit, up to a ~~other~~maximum ~~intangible~~of ~~assets~~75% ~~subsequent~~of tooutstanding ~~their~~domestic ~~acquisition.~~receivables ~~SFAS~~at Noany point in time. ~~142~~ ~~provides~~Under ~~that~~the ~~intangible~~terms ~~assets~~of ~~with~~the ~~finite~~Factoring ~~useful~~Agreement, ~~lives~~Bam bepaid ~~amortized~~a ~~and~~service ~~that~~fee ~~goodwill and~~on ~~intangible~~all ~~assets~~receivables assigned, with ~~indefinite~~a ~~lives~~minimum ~~not~~annual befee ~~amortized~~of $150,000, ~~but~~interest ~~will~~at ~~instead be~~prime ~~tested~~plus at1% ~~least~~on all ~~annually~~cash ~~for~~sums ~~impairment~~advanced. ~~Bam~~All ~~adopted~~fees ~~SFAS~~were ~~No. 142~~included onin ~~July 1, 2002~~interest expense. Bam ~~did~~bore the ~~not~~collection ~~carry~~risk ~~any~~on ~~goodwill~~the oraccounts ~~other~~receivable ~~intangibles~~that onwere ~~its~~assigned, ~~balance~~unless ~~sheet~~the asfinance ofcompany ~~June 30,~~approved ~~2002,~~the ~~and~~receivable ~~therefore~~at the ~~adoption~~time of ~~SFAS~~assignment, Noin which case the finance company bore the risk. ~~142~~ ~~did~~The ~~not~~finance ~~have~~company had a security ~~material~~interest ~~effect~~in onBam’s ~~its~~accounts ~~consolidated~~receivable, ~~financial~~inventory, ~~statements~~fixed assets and intangible assets.

InAs ~~June~~of ~~2001~~June 30, ~~the~~2003 ~~FASB~~Bam ~~issued~~did ~~SFAS~~not ~~No. 143,~~meet ~~Accounting~~the ~~for~~Factoring ~~Asset~~Agreement’s ~~Retirement~~liquidity ~~Obligations.~~covenants ~~SFAS No. 143 addresses financial accounting~~ and ~~reporting~~had ~~for obligations~~no ~~associated~~sums ~~with~~advanced under the ~~retirement~~Factoring ofAgreement. ~~tangible~~The ~~long-lived assets and~~Factoring ~~the~~Agreement ~~associated~~was ~~asset~~mutually ~~retirement~~terminated ~~costs.~~in ~~This~~September ~~statement~~2003, isand ~~effective~~all ~~for fiscal~~liabilities ~~years~~settled. ~~beginning~~Upon ~~after~~the ~~June 15,~~termination ~~2002,~~of ~~however~~the ~~earlier~~Factoring ~~application~~Agreement, isthe ~~permitted.~~minimum annual ~~Bam~~fee ~~adopted~~for ~~SFAS~~the ~~No. 143~~second onyear ~~July 1, 2002. The adoption~~ of ~~this~~the ~~statement~~Factoring ~~did not~~Agreement ~~have~~was awaived, ~~material~~and ~~effect on~~ Bam’s ~~financial~~paid ~~position~~a termination orpayment ~~operating~~of ~~results~~$25,000.

InAs ~~August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal~~ of ~~Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No.~~September 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and reporting provisions of APB No. 30, ~~Reporting~~2003 ~~the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business,~~ and ~~Extraordinary,~~ ~~Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in APB No.~~June 30 ~~to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale~~, ~~abandonment,~~2003 ~~or in a distribution to owners) or is classified as held for sale.~~ Bam ~~adopted~~had ~~SFAS~~no Nooutstanding ~~144~~letters ~~on July 1, 2002. The adoption~~ of ~~SFAS No. 144 did~~ ~~not~~credit ~~have~~issued ~~a material effect~~ on ~~Bam’s~~its ~~consolidated financial statements~~behalf.

~~In June 2002, the FASB issued SFAS No~~9. ~~146,~~ ~~Accounting~~LOAN ~~for~~FROM ~~Costs Associated~~DIRECTOR ~~with Exit or Disposal Activities, which addresses accounting for restructuring~~ and similar costs. SFAS No. 146 supercedes previous accounting guidance, principally Emerging Issues Task Force issue No. 94-3 (“EITF 94-3”). Bam is required to adopt SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 also established that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring plans.

In ~~December~~August ~~2002~~2003, ~~the~~Bam ~~FASB~~entered ~~issued~~into ~~SFAS~~an ~~No. 148,~~unsecured ~~Accounting~~Promissory ~~for~~Note ~~Stock-Based Compensation~~with —a ~~Transition~~Director ~~and~~whereby ~~Disclosure. SFAS No. 148 amends SFAS No. 123,~~the ~~Accounting~~Director ~~for~~loaned ~~Stock-Based~~Bam ~~Compensation. Although it does not require use of fair value method of accounting for stock-based employee compensation~~$250, ~~it does provide alternative methods of transition~~000. ItThe ~~also amends the disclosure provisions of SFAS No.123 and APB Opinion No. 28~~loan, ~~Interim~~which ~~Financial~~bears ~~Reporting, to~~interest ~~require~~at ~~disclosure~~6% ~~in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings~~ per ~~share in annual and~~annum, ~~interim financial statements. SFAS No. 148’s amendment of the transition and annual disclosure requirements~~ is ~~effective~~repayable ~~for~~on ~~fiscal~~or ~~years~~before ~~ending after December~~October 1531, ~~2002~~2003. ~~The~~As ~~amendment~~ of ~~disclosure~~November ~~requirements of Opinion No. 28~~13, ~~is effective for interim periods beginning after December 15~~2003, ~~2002. The Company will adopt~~ this ~~standard~~loan ~~for~~had ~~the~~not ~~third~~been ~~quarter of its fiscal year ending June 30, 2003~~repaid. ~~Unless the Company elects to~~

10. COMMON STOCK

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

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

~~adopt the fair value recognition provisions of SFAS No~~11. ~~123,~~ ~~adoption of SFAS~~WARRANTS ~~No. 148 will only require expanded disclosure to include the effect of~~ ~~stock-based compensation in interim reporting.~~

InThere ~~November~~were ~~2002,~~outstanding ~~the~~warrants ~~FASB~~to ~~issued~~purchase ~~FIN~~a ~~No. 45,~~total ~~Guarantor’s~~of ~~Accounting and Disclosure Requirements for Guarantees~~878,450 ~~Including~~shares ~~Indirect Guarantees~~ of ~~Indebtedness~~ ~~of Others. The interpretation elaborates on the existing~~common ~~disclosure~~stock ~~requirements for most guarantees, including loan guarantees such~~ as ~~standby~~ ~~letters~~ of ~~credit. It also clarifies that at the time a company issues a guarantee~~September 30, ~~the~~2003 ~~company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee~~ and ~~must~~ disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations do not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after DecemberJune 3130, ~~2002~~2003. ~~The Company has not~~ ~~completed the analysis of the effect of FIN No. 45 on its consolidated~~ ~~financial statements.~~

14In connection with an agreement entered into with a production company during January 2002, Bam obtained the exclusive right of first refusal, for a period of five years, to develop products based on certain properties owned by the production company and to distribute them worldwide. ~~RESTRUCTURING~~In ~~COSTS~~connection with the agreement, Bam is required to issue to the production company warrants to purchase up to 50,000 shares of common stock, in pre-determined multiples of either 5,000 or 10,000 shares, upon the occurrence of certain pre-determined events, such as exercising a right to develop a product. Warrants are issued at the average closing price of Bam’s stock for the five days immediately prior to the date of issue, have a five year term from date of issue, and are fully vested and are immediately exercisable upon issuance. Through September 30, 2003, Bam has issued warrants to the production company to purchase a total of 35,000 shares of common stock, at an aggregate cost of $97,000, of which $8,000 was amortized to project abandonment in the year ended June, 30, 2003. Bam is amortizing the remaining licensed asset of $89,000 over the life of the software products on which the warrants are exercisable, expected to be between three and six months, commencing upon release of the products, which occurred in September 2003. As of September 30, 2003, Bam had amortized $12,000 of this charge. Bam cannot estimate the aggregate dollar amount of future non-cash charges arising upon the future issuance of warrants as they are based on its share price at future points in time. Each of these future charges will affect the Bam’s gross margins and profitability.

In ~~November~~connection ~~2002,~~with the ~~Company~~issuance ~~initiated~~of warrants pursuant to a ~~restructuring~~first look agreement with another production company, Bam granted a warrant to purchase up to 200,000 shares of ~~its~~Bam’s ~~operations~~common stock, of which 15,000 became immediately exercisable upon the signing of the agreement. The remaining 185,000 will only ~~Company~~become ~~incurred~~exercisable, ~~restructuring~~in ~~costs~~multiples of ~~$1.8 million~~either ~~during~~4,625 or 13,875 shares, upon certain future events occurring relating to the ~~three~~development and ~~six~~release of products. ~~months~~Upon ~~ended~~the ~~December 31~~warrant for 15,000 ~~2002.~~shares Asbecoming ~~part~~exercisable, Bam incurred a non-cash charge of $29,000. Bam fully amortized the ~~restructuring~~licensed asset of $29,000 to royalties, software costs, and license costs during the ~~Company~~year ended June 30, ~~reduced~~2003. ~~its~~Bam ~~headcount~~will ~~across~~incur ~~all~~additional ~~departments~~non-cash charges as the remaining 185,000 shares bybecome aexercisable. ~~total~~Upon release of 27the software products on which the ~~employees.~~warrants ~~The~~are ~~Company~~exercisable, ~~also~~Bam ~~transferred~~will ~~under~~amortize UKthe ~~law~~licensed anasset ~~additional~~over 12the life of ~~product~~the ~~development~~products, ~~employees~~which are expected to ~~VIS Entertainment~~be ~~plc~~between ~~upon~~three ~~the~~and ~~completion~~six ofmonths. Bam cannot estimate the ~~sale~~aggregate dollar amount of ~~its~~these ~~London~~future ~~based~~non-cash ~~studio~~charges inas they ~~January~~are ~~2003.~~based ~~The~~on ~~Company~~its ~~accounted~~share ~~for~~price ~~the~~at ~~restructuring~~future ~~costs~~points in ~~accordance~~time. Each of these future ~~with~~charges ~~EITF~~will ~~94-3~~affect Bam’s gross margins and profitability.

~~Restructuring~~As ~~costs,~~more ~~which~~fully ~~included~~described ~~employee~~in ~~severance~~Note ~~payments~~16, ~~write~~in ~~down costs~~October on2003, ~~property~~Bam ~~and~~completed ~~equipment~~the sale of 1,850,000 ~~project~~shares ~~abandonment~~of ~~costs~~its oncommon ~~development~~stock and warrants to purchase another 1,665,000 ~~projects~~shares ~~cancelled~~of asits common stock, in a ~~direct~~private ~~result~~offering ofto ~~the~~institutional ~~disposal~~and accredited ofinvestors. ~~the~~The ~~London~~placement ~~based~~agents were also issued warrants to ~~studio~~purchase 277,500 ~~and~~shares ~~legal~~of ~~fees~~Bam’s ~~associated~~common stock in connection with placement agent fees under the ~~disposal~~same ofterms as the ~~London~~warrants ~~based~~issued ~~studio~~to the investors, except ~~were~~that asthe ~~follows~~placement ~~(in~~agent ~~thousands):~~warrants are subject to a 180 day lock-up provision.

				Restructuring costs
				expensed in the
				three and six		Restructuring costs		Restructuring costs
		Balance June 30,		months ended		paid as of		unpaid as of
		2002		December 31, 2002		December 31, 2002		December 31, 2002
Nature of restructuring costs:
Employee severance costs		$	—	$	255	$	145	$	110
	Property and equipment writedowns		—		115		115		—
	Project abandonment costs		—		1,302		1,302		—
	Legal fees		—		62		30		32
	Other		—		19		19		—
Total		$	—	$	1,753	$	1,611	$	142

12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

15As defined by the requirements of SFAS No. 131, ~~SUBSEQUENT~~Disclosures ~~EVENTS~~About Segments of an Enterprise and Related Information, Bam operates in one reportable segment: the development and publishing of interactive entertainment products.

In January 2003, the Company completed the sale of the assets and operations of its London based development studio to VIS Entertainment plc (“VIS”), a UK based developer. The assets sold under the agreement were classified as assets held for future sale within Property and Equipment at December 31, 2002 and carried a net book value of $153,000, equal to their fair value. As part of the sale, 12 product development employees were transferred under UK law to VIS, and the Company entered into a porting contract for one project. The Company also entered into a sublease agreement with VIS regarding the Company’s London premises. This sublease is subject to the landlord’s consent, which has yet to be received. VIS has an option to determine the tenancy of the sublease upon the later of November 30, 2003 and the determination of the porting contract.

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


		Three months ended
		September 30,

		2003			2002

Net revenues from unaffiliated customers:
	North America	$	479		$	7,289
	Europe		782			1,419
	Other		102			32

Consolidated		$	1,363		$	8,740

Operating loss:
	North America	$	(1,190	)	$	(5,624	)
	Europe		(445	)		(2,550	)

Consolidated		$	(1,635	)	$	(8,174	)


	September 30,			June 30,
	2003			2003

Identifiable assets:
North America	$	30,026		$	28,937
Europe		5,013			4,186
Intercompany items and eliminations		(24,145	)		(23,663	)

Total	$	10,894		$	9,460

Long-Lived assets:
North America	$	1,915		$	1,486
Europe		3,543			3,303

Total	$	5,458		$	4,789

13. COMMITMENTS

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

14. CONTINGENCIES

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

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

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

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

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

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

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

Legal proceedings

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

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

15. NEW ACCOUNTING PRONOUNCEMENTS

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

16. SUBSEQUENT EVENTS

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

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

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

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

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

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

OVERVIEW

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

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

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

We have offices in both the United States and Europe. International operations outside of North America are conducted through our ~~offices~~office in England, where we perform international sales and marketing activities and manage local third-party developers. ~~Domestically, we sell our products to mass~~ ~~merchandisers such as Toys “R” Us, Target, Kmart, Wal-Mart and Best Buy,~~ specialty chains such as GameStop. and Electronics Boutique, and independent distributors. Internationally, we sell our products through mass merchandisers, distributors and sub-distributors. Our products are manufactured exclusively by third parties.

~~We have experienced recurring net losses from inception (October 7~~Domestically, ~~1999) through~~we ~~December 31,~~sell ~~2002.~~our Weproducts ~~had~~to anmass ~~accumulated~~merchandisers ~~deficit~~such ofas ~~$45.5 million~~Toys as“R” ofUs, ~~December 31~~Target, ~~2002.~~Kmart, ~~These~~Wal-Mart ~~factors,~~and ~~among~~Best ~~others~~Buy, ~~raise~~specialty ~~substantial~~chains ~~doubt~~such ~~about our~~as ~~ability~~GameStop toand Electronics ~~continue~~Boutique, asand aindependent ~~going~~distributors. ~~concern~~Our ~~for~~products aare manufactured ~~reasonable~~exclusively ~~period~~by ofthird ~~time~~parties. ~~The~~ ~~condensed financial statements~~

12In July 2003, we entered into a distribution agreement with Acclaim Entertainment Ltd (“Acclaim”) whereby Acclaim exclusively distribute certain current and forthcoming products of ours in PAL territories. PAL is the television standard for the United Kingdom, continental Europe and Australia. Acclaim will be responsible for the

domanufacture, ~~not~~sale, ~~include~~distribution ~~any~~and marketing ~~adjustments~~of ~~relating to~~ the ~~recoverability~~products and ~~classification~~ ofwill ~~assets~~pay orus based on net receipts from the ~~amounts~~sales made ~~and~~by ~~classification~~them. ofThe ~~recorded~~agreement obligates Acclaim to pay us minimum guarantee ~~liabilities~~advances ~~that~~both ~~might~~before beand ~~necessary~~after ~~should~~product werelease bedates, ~~unable~~but tosuch ~~continue~~payments asare reduced upon late delivery of a ~~going~~product, and fully repayable upon cancellation ~~concern~~of the product.

~~During~~We ~~the~~have ~~quarter~~experienced ~~ended~~recurring ~~December 31,~~net ~~2002,~~losses wefrom ~~undertook~~inception ~~measures~~(October 7, ~~to reduce~~1999) ~~spending~~through ~~and~~September 30, ~~restructured our operations~~2003. InDuring ~~2003, we retained~~ the ~~investment~~ ~~banking~~three ~~firm~~months ofended ~~Gerard Klauer Mattison & Co.~~September 30, ~~Inc. to~~2003, ~~assist~~we usused cash in ~~reviewing~~operating aactivities ~~range~~ of ~~potential~~$3.0 million ~~strategic alternatives, including mergers, acquisitions~~ and ~~securing~~incurred ~~additional financing. We may need to consummate one or~~ a ~~combination~~net ofloss ~~the potential~~of ~~strategic~~$1.7 million. ~~alternatives,~~As ~~or otherwise obtain capital via the sale or license~~ of ~~certain~~September 30, ~~of our assets~~2003, inwe ~~order~~had tocash ~~satisfy~~and ~~our~~cash ~~future liquidity~~equivalents ~~requirements. Current market conditions present uncertainty~~of ~~as to our ability to effectuate any such merger or acquisition or secure additional financing~~$617,000 asand ~~well~~an asaccumulated ~~our~~deficit ~~ability~~of ~~to reach profitability~~$61.5 million. ~~There~~These ~~can be no assurances that we will be able to effectuate any such merger or acquisition or secure additional financing~~factors, ~~or obtain favorable terms on such financing if it is~~among ~~available~~others, orraise assubstantial todoubt about our ability to ~~achieve~~continue ~~positive~~as ~~cash~~a ~~flow from~~going ~~operations.~~concern ~~Continued~~for ~~negative~~a ~~cash~~reasonable ~~flows~~period ~~create~~of ~~uncertainty~~time. ~~about our~~The ~~ability~~consolidated tofinancial ~~implement~~statements do ~~our~~not ~~operating~~include ~~plan~~any ~~and~~adjustments werelating ~~may have~~ to ~~further~~ ~~reduce~~ the ~~scope~~recoverability and classification of ~~our~~assets ~~planned~~or ~~operations.~~the Ifamounts ~~cash~~ and ~~cash equivalents,~~classification ~~together~~of ~~with cash generated from operations, are~~recorded ~~insufficient~~liabilities tothat ~~satisfy~~might ~~our~~be ~~liquidity~~necessary ~~requirements,~~should we ~~will~~be ~~not~~unable ~~have sufficient resources~~ to continue ~~operations~~as ~~for~~a ~~the next~~going ~~12 months~~concern.

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

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

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

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

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief discussion of the more significant ~~accounting policies and methods used by us. In addition, Financial~~ ~~Reporting Release No. 61 requires all companies to include a discussion~~ ~~addressing, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments.~~

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

Use of estimates

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

Net revenues

We ~~derive~~recognize ~~our~~revenue ~~revenues~~in ~~from~~accordance ~~shipment~~with Statement of ~~finished~~Position ~~products~~97-2, ~~to our customers.~~Software ~~Under~~Revenue ~~certain conditions~~Recognition, ~~we may allow customers to exchange~~ and ~~return~~related ~~our products~~interpretations, ~~and~~when ~~from~~persuasive ~~time~~evidence ~~to time provide price protection or allow returns on certain unsold merchandise in the form~~ of ~~a credit against amounts due from the~~ ~~customer.~~an ~~Net~~arrangement ~~revenues~~exists, ~~from~~delivery ~~product~~has ~~sales~~occurred, ~~are reflected after deducting~~ the ~~estimated~~ ~~cost of allowances for returns and~~ price ~~protection~~has asbeen ~~well~~fixed ~~as discounts~~or ~~given. These estimates are based upon currently known circumstances~~is ~~and~~determinable ~~historical results. The calculation of net revenues will be affected by many factors, including pricing strategies, the channels through which products are distributed, product maturity, exchange~~ and ~~return~~collectibility ~~provisions~~has ~~and~~been ~~price protection~~reasonably assured.

We ~~recognize~~derive ~~revenue~~our inrevenues ~~accordance~~from ~~with~~either ~~Statement~~the ofshipment ~~Position 97-2, Software Revenue Recognition, and related interpretations, when persuasive evidence~~ of an ~~arrangement~~packaged ~~exists, delivery has occurred, the price has been fixed~~ or islicensed ~~determinable~~products ~~and~~to ~~collectability~~our ~~has been reasonably assured~~customers.

Packaged products: Our sales of packaged product are typically made on credit, with terms that vary depending upon the customer and other factors. IfUnder certain aconditions, ~~sale~~we ismay ~~made~~allow oncustomers ~~credit,~~to exchange and areturn ~~significant~~packaged ~~portion~~products ofand ~~the~~from ~~fee~~time isto ~~due~~time ~~after~~provide ~~our~~price ~~normal~~protection ~~payment~~or ~~terms,~~allow ~~which~~returns ~~are normally 30~~on tocertain ~~90 days~~unsold ~~from~~merchandise ~~invoice~~in ~~date,~~the weform ~~account~~of ~~for~~a ~~the~~credit ~~fee~~against asamounts ~~not~~due ~~being~~from ~~fixed or~~the ~~determinable~~customer. ~~and~~Net ~~will~~revenues ~~not~~from ~~recognize~~product ~~revenue~~sales ~~until~~are ~~such~~reflected ~~time~~after asdeducting the ~~fee becomes~~ ~~due.~~estimated ~~While~~cost weof ~~attempt~~allowances tofor ~~carefully~~returns ~~monitor~~and ~~the~~price ~~creditworthiness~~protection ofas ~~our~~well as ~~customers~~discounts ~~and~~given. ~~distributors,~~These weestimates ~~bear~~are ~~the~~based ~~risk~~upon ofcurrently ~~their~~known ~~inability to pay our~~circumstances ~~receivables~~ and ofhistorical ~~any~~results. ~~delay~~The incalculation ~~payment.~~of Ifnet ~~the~~revenues ~~collectability~~will ofbe aaffected ~~receivable~~by ~~becomes~~many ~~uncertain~~factors, ~~after~~including ~~revenue~~pricing ~~has been recognized~~strategies, wethe ~~will~~channels ~~record~~through anwhich products ~~allowance~~are ~~for~~distributed, ~~doubtful~~product ~~accounts~~maturity, ~~against~~exchange ~~our~~and ~~accounts~~return ~~receivable~~provisions and price protection.

~~When~~If wea ~~recognize~~sale ~~revenue~~is made on credit, and a significant portion of the fee is due after our normal payment terms, which are normally 30 to 90 days from invoice date, we account for the ~~estimate~~fee ofas ~~future~~not ~~returns~~being fixed or determinable and will not ~~price~~recognize ~~protection~~revenue onuntil ~~the~~such ~~sale~~time as ~~allowances~~the ~~against~~fee ~~receivables~~becomes due. WeWhile ~~also~~we attempt to ~~estimate~~carefully ~~cooperative~~monitor ~~marketing~~the ~~costs~~creditworthiness onof our customers and distributors, we bear the ~~sale~~risk of their inability to pay our receivables and ~~account~~of any delay in payment. If the collectibility of a receivable becomes uncertain after revenue has been recognized, we will record an allowance for ~~these~~doubtful ~~costs~~accounts against our accounts receivable.

13When we recognize revenue, we account for the estimate of future returns and price protection on the sale as allowances against receivables. We also estimate cooperative marketing costs on the sale and account for these costs as a marketing expense and as an allowance against receivables. We continually monitor, reassess and adjust the adequacy of all these allowances, along with the allowance for doubtful accounts, based on known circumstances, historical results, commitments made, anticipated events and anticipated commitments. Adjustments to these allowances will affect the reported amounts of revenues and expenses during the reporting periods the adjustments are made.

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

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

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

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

Cost of revenues

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

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

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

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

Commencing upon product release, we begin to amortize capitalized software ~~development~~ development costs. We capitalize software development costs subsequent to ~~establishing~~ establishing technological feasibility of a title. Technological feasibility is evaluated on a product-by-product basis. For products where proven game ~~engine~~ engine technology exists, this may be ~~early in the development cycle. Prior to~~ ~~establishing technological feasibility, software development costs are expensed~~ to research and development, and to cost of revenues subsequent to establishing technological feasibility. The following criteria are used to evaluate recoverability of software development costs: historical performance of

1418

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

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

Research and development

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

~~Research and development expenses generally consist of salaries, related~~19 ~~expenses for engineering personnel and third-party development costs.~~

Sales and marketing

Sales and marketing expenses consist primarily of salaries and related expenses for our direct sales force and marketing personnel, commissions to independent sales staff, marketing programs and advertising campaigns.

General and administrative

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, facilities and occupancy charges, insurance premiums, professional fees and bad debt expense.

Amortization of deferred stock compensation

Amortization of deferred stock compensation consists of deferred compensation expenses relating to stock option grants to employees. Deferred compensation represents the difference between the deemed fair market value of our common stock at the grant date and the exercise price of the related stock options. Deferred compensation is represented as a reduction of stockholders’ equity and amortized, using a multiple option award valuation and amortization approach, over the vesting periods of the options, which is generally four years.

Other expense, net

Other expense, net consists mostly of interest expense net of interest income. In the first six months of fiscal 2002, interest expense included the amortized fair value of warrants issued to a finance company.

RESULTS OF OPERATIONS

The following table sets forth the unaudited condensed consolidated results of operations as a percentage of net revenues for the three ~~and six~~ months ended ~~December~~September 3130, ~~2002~~2003 and ~~2001~~2002.

				Three months ended						~~Six months ended~~
				December 31,						December 31,
				September 30,
				2002			2001			2002			2001
				2003			2002
Net revenues					100.0	%		100.0	%		~~100.0~~	%		~~100.0~~	%
Costs and expenses:
	Cost of revenues
		Cost of goods sold			6546.04			5650.08			~~61.0~~			~~56.3~~
		Royalties, software costs, and license costs			4250.90			1648.50			~~44.3~~			~~15.7~~
		Project abandonment costs			10.8			—			14.0			—
		Project abandonment			7.7			22.0
		Total cost of revenues			~~118~~104.71			72120.58			~~119.3~~			~~72.0~~
	Research and development (exclusive of amortization of deferred stock compensation)				339.45			214.68			~~6.7~~			~~3.2~~
	Sales and marketing (exclusive of amortization of deferred stock compensation)				1813.93			2632.27			~~22.8~~			~~21.3~~
	General and administrative (exclusive of amortization of deferred stock compensation)				1092.74			1023.4			~~14.3~~			~~9.0~~
	Amortization of deferred stock compensation				05.64			1.98			~~1.0~~			~~2.4~~
	Restructuring costs				8.0			—			5.7			—
	Litigation settlement				(47.7	)		—
			Total costs and expenses		160.3			113.6			169.8			107.9
	Restructuring costs				12.9			—
Loss from operations					(60.3	)		(13.6	)		(69.8	)		(7.9	)
			Total costs and expenses		219.9			193.5
Interest income					0.4			0.5			0.5			0.3
Loss from operations					(119.9	)		(93.5	)
Interest expense					(1.2	)		(6.9	)		(1.7	)		(6.7	)
Interest income					0.1			0.7
Other income					0.1			0.0			(0.1	)		0.0
Interest expense					(2.1	)		(3.1	)
Net loss					(61.0	)%		(20.0	)%		(71.1	)%		(14.3	)%
Other expense					(0.2	)		(0.5	)
* Amortization of deferred stock compensation:
Net loss					(122.1	)%		(96.4	)%
	Research and development				0.1	%		0.3	%		0.1	%		0.4	%
*Amortization of deferred stock compensation:
	Sales and marketing				0.0			0.1			0.1			0.2
	Research and development				0.1	%		0.1	%
	General and administrative				0.5			1.5			0.8			1.8
	Sales and marketing				0.1			0.1
					0.6	%		1.9	%		1.0	%		2.4	%
	General and administrative				5.2			1.6
Total amortization of deferred stock compensation					5.4	%		1.8	%

Net revenues

Net revenues were $221.04 million ~~and $30.7 million~~ for the three ~~and six~~ months ended ~~December~~September 3130, ~~2002, respectively,~~ 2003 compared to $188.97 million ~~and $29.7 million~~ for the comparable ~~periods~~period in ~~2001, respectively~~2002. During the three ~~and~~ ~~six~~ months ended ~~December~~September 3130, ~~2002~~2003, we ~~released~~recognized 11revenue ~~and~~on 16five ~~new~~ products licensed to Acclaim under an exclusive distribution agreement with them for PAL territories. PAL is the television standard for the United Kingdom, continental ~~respectively~~Europe and Australia. With the exception of revenue from Acclaim, ~~compared~~all revenue towas ~~six~~derived ~~and~~from 11packaged ~~new~~product sales. Revenue from Acclaim is recognized as licensed products inrevenue. ~~the~~For ~~comparable~~a ~~periods~~description inof ~~2001~~revenue recognition accounting policies, ~~respectively~~see Critical Accounting Policies - net revenues.

~~During~~We ~~the~~did ~~three~~not ~~months~~release ~~ended~~any ~~December 31,~~new ~~2002,~~products wein ~~released~~North ~~the following~~America ~~products:~~during ~~Reign of Fire for~~ the ~~Sony PlayStation 2~~quarter, ~~Microsoft~~but ~~Xbox,~~did ~~Nintendo GameCube~~make ~~and~~sales ~~Nintendo~~of ~~Game~~products ~~Boy~~first ~~Advance,~~released ~~Dexter’s~~in ~~Laboratory: Chess Challenge~~prior ~~and~~quarters. ~~Powerpuff~~During ~~Girls~~the ~~Him~~three ~~and~~months ~~Seek~~ended ~~for~~September 30, ~~the~~2002 ~~Nintendo~~we ~~Game~~released ~~Boy~~six ~~Advance~~new titles, ~~Powerpuff Girls~~comprising ~~Relish~~our ~~Rampage and~~first ~~Runabout~~Microsoft 3Xbox ~~for~~title, ~~the~~one Sony ~~PlayStation~~PlayStation2 ~~2 and Winnie The Pooh Pre School~~title, ~~Winnie~~one ~~the~~PC ~~Pooh~~title ~~Kindergarden~~ and Mythree ~~Disney~~Nintendo ~~Kitchen~~Game ~~for~~Boy ~~the~~Advance ~~Sony Playstation~~titles.

16The products licensed to Acclaim in the three months ended September 30, 2003 were Wallace & Gromit in Project Zoo for the Sony PlayStation 2, the Microsoft Xbox and the Nintendo GameCube, Ed, Edd, n Eddy: Jawbreakers for the Nintendo Game Boy Advance, and Samurai Jack — The Amulet of Time for the Nintendo Game Boy Advance.

Net revenues by geographical region for the three ~~and six~~ months ended ~~December 31~~September 30, 2003 ~~2002~~ and ~~2001~~2002 ~~are~~is summarized below (in thousands):

Three months ended

~~Six months ended~~

December 31,

September 30,

2002

2001

2002

2001

2003

2002

Net revenues from unaffiliated customers:

North America

~~14,773~~479

157,~~676~~289

~~22,062~~

~~26,380~~

Europe

~~7,073~~782

1,~~841~~419

~~8,492~~

~~1,849~~

Other

~~159~~102

~~1,397~~32

~~191~~

~~1,512~~

Total net revenues

221,~~005~~363

188,~~914~~740

~~30,745~~

~~29,741~~

The following table sets forth our net revenues by customer representing more than 10% of each period’s net revenues for the three ~~and six~~ months ended ~~December~~ September 3130, 2003 ~~2002~~ and ~~2001~~2002 (percentages):

		Three months ended						~~Six months ended~~
		December 31,						December 31,
		September 30,
		2002			2001			2002			2001
		2003			2002
Customer
	Kmart		17	%		*	%		15	%		11	%
	Acclaim		65	%		*	%
	Ubisoft		17			*			14			*
	Kmart		18			11
	Toys “R” Us		12			30			12			26
	Majesco		15			*
	Wal-Mart		*			1012			*			*
Total net revenues by customer representing more than 10% of the period’s net revenues			46	%		40	%		41	%		37	%
	Toys “R” Us		*			11
	Electronics Boutique		*			10
Total net revenues by customer representing more than 10% of the period’s net revenues			98	%		44	%

* less than 10%

Net revenues to Kmart in the three ~~and six~~ months ended ~~December~~September 3130, 2002 were ~~made~~ made under Kmart’s debtor-in-possession financing arrangement.

Cost of revenues

Cost of goods sold was $~~14.3 million~~633,000, or 6546% of net revenues, for the three ~~months~~ months ended ~~December~~September 3130, ~~2002~~2003 as compared to $104.64 million, or 5651% of net revenues, for the comparable period in ~~2001,~~2002. ~~and~~The ~~$18.8 million,~~decrease orin ~~61%~~absolute ofdollars ~~net~~was due to ~~revenues,~~decreased ~~for~~sales ~~the~~of ~~six~~products. ~~months~~There ~~ended~~are ~~December 31,~~no ~~2002~~cost asof ~~compared~~goods tosold ~~$16.7~~on products ~~million,~~licensed orto ~~56%~~Acclaim ofas ~~net~~they ~~revenues,~~are responsible for ~~the~~all ~~comparable~~manufacturing ~~period~~costs. Excluding innet ~~2001.~~revenue ~~The~~arising from products licensed to Acclaim, the percentage ~~increase~~of incost ~~absolute~~of ~~dollars~~goods ~~was~~sold ~~due~~compared to ~~increased~~net ~~sales~~revenue ofdeteriorated ~~products.~~when ~~The~~compared to the ~~decrease~~comparable period in ~~percentage~~2002, ~~was~~and ~~primarily~~this was due to ~~the~~a ~~sale~~number of ~~approximately~~factors, ~~$1.9~~including ~~million~~selling ~~of older~~ products at ~~prices~~low ~~approximating~~margins ~~manufactured~~to ~~cost~~reduce inventory, price protection allowances and ~~markdowns~~returns ~~totaling~~reserved $1against sales.~~7 million~~ ~~offered~~In toabsolute ~~North~~dollars, ~~American~~Cost of ~~customers~~goods ~~with~~sold adecreased ~~view~~compared to ~~reducing~~the ~~channel~~comparable ~~inventory~~period ~~levels~~in at2002 as less product ~~December 31,~~was ~~2002~~sold.

Royalties, software costs, and license costs were $~~9.4 million~~681,000, or 4350% of net revenues, for the three months ended ~~December~~September 3130, ~~2002~~2003 as compared to $34.12 million, or 1748% of net revenues, for the comparable period in ~~2001, and $13.6 million, or 44% of net revenues, for the six months ended December 31,~~ 2002 ~~as compared to $4~~.~~7 million,~~ ~~or 16% of net revenues, for the comparable period in~~The ~~2001.~~decrease ~~The increase~~ in absolute dollars ~~and as a percentage of revenue~~ was due to afewer ~~number~~releases of ~~factors,~~new ~~including~~products ~~the~~in ~~write down of~~ the ~~carrying values of a~~ ~~number of ongoing development projects as a result of reduced future sales volumes and prices anticipated on those products~~period, and ~~the~~no ~~sale~~carryover ofcosts ~~next generation~~amortized from products, ~~which~~released ~~have~~in ~~higher development costs than handheld~~prior ~~products~~quarters.

1721

Project abandonment costs were $~~2.4 million~~105,000, or 118% of net revenues, for the ~~three~~ three months ended ~~December~~September 3130, ~~2002~~2003 as compared to $~~0 for the comparable period in 2001, and $4~~1.39 million, or 1422% of net revenues, for the ~~six months ended December 31, 2002 as compared to $0 for the~~ comparable period in ~~2001~~2002. During the three ~~and six~~ months ended ~~December~~ September 3130, 2003 and 2002 we abandoned ~~two~~one project and six projects , respectively.

Research and development

Research and development expenses were $~~755~~538,000, or 339% of net revenues, for ~~the~~ the three months ended ~~December~~September 3130, ~~2002~~2003, as compared to $~~492~~1.2 million,~~000,~~ or 315% of net revenues, for the comparable period in ~~2001, and $2~~2002.~~0 million,~~ orThe 7%decrease ofin ~~net~~absolute ~~revenues,~~dollars ~~for~~was ~~the~~primarily ~~six~~as ~~months~~a ~~ended~~result ~~December 31, 2002, compared to $941,000, or 3%~~ of ~~net~~reduced ~~revenues,~~headcount ~~for~~and ~~the comparable period in 2001~~development activity. The increase ~~was primarily~~in ~~because~~percentage ofwas ~~increased~~due ~~headcount~~to ~~and~~reduced ~~quality~~sales ~~assurance costs~~volumes.

Sales and marketing

Sales and marketing expenses were $~~4.2 million~~182,000, or 1913% of net revenues, for the three months ended ~~December~~September 3130, ~~2002~~2003, as compared to $52.09 million, or 2633% of ~~net~~ net revenues, for the comparable period in ~~2001~~2002. The decrease was primarily as a result of ~~decreased~~reduced ~~television~~headcount, ~~marketing~~reversals ~~activities~~of accrued sale related expenses, and no releases of new products in North America during the period, ~~offset~~resulting byin ~~increased~~limited marketing ~~efforts~~and inselling ~~Europe~~expenses, ~~and~~as ~~increased~~compared ~~headcount~~the comparable period a year ago where we released six titles.

Sales and marketing expenses were $7.0 million, or 23% of net revenues, for the six months ended December 31, 2002, compared to $6.3 million, or 21% of net revenues, for the comparable period in 2001. The increase was primarily as a result of increased headcount and increased marketing activities in Europe.

General and administrative

General and administrative expenses were $21.3 million, or 1192% of net revenues, for the three months ended ~~December~~September 3130, ~~2002~~2003, as compared to $2.0 million, or ~~10%~~ 23% of net revenues, for the comparable period in ~~2001~~2002. ~~During~~In the three months ended ~~December~~September 3130, 2002 we incurred an allowance of $~~900~~547,000 ofagainst ~~credit insurance premiums on~~our ~~sales~~receivable ~~made~~balance tofrom Kmart. ~~During~~In the three months ended ~~December~~September 3130, ~~2001,~~2003 we ~~provided~~did anot ~~bad~~incur ~~debt~~any ~~allowance~~allowances ofagainst $1receivables.~~1 million~~ ~~against~~The ~~our~~remaining ~~long-term~~decrease ~~receivable~~was ~~from~~due ~~Kmart.~~to ~~Excluding~~decreased ~~these costs~~headcount, ~~the increase in general~~ and ~~administrative expenses~~lower ~~were due to increased~~ professional fees ~~and facilities costs~~.

General and administrative expenses were $4.4 million, or 14% of net revenues, for the six months ended December 31, 2002, compared to $2.7 million, or 9% of net revenues, for the comparable period in 2001. During the six months ended December 31, 2002 we incurred $900,000 of credit insurance on sales made to Kmart, and increased our bad debt allowance against our Kmart long-term receivable by $547,000. During the six months ended December 31, 2001, we provided a bad debt allowance of $1.1 million against our long-term receivable from Kmart. Excluding these costs, the increase in general and administrative expenses were due to increased professional fees and facilities costs.

Amortization of deferred stock compensation

Amortization of deferred stock compensation was $~~133~~73,000, or 15% of net revenues, for the three months ended ~~December~~September 3130, ~~2002~~2003, as compared to $~~361~~161,000, or 2% of net revenues, for the comparable period in ~~2001,~~2002. ~~and~~Amortization ~~$294,000,~~of ~~or 1%~~deferred ofstock ~~net~~compensation ~~revenues,~~resulted ~~for~~from ~~the~~varying ~~six~~terms ~~months~~of ~~ended~~stock ~~December 31,~~option ~~2002 compared to~~grants ~~$713,000,~~previously ormade 2%during ~~of net revenues, for~~ the ~~comparable~~ period, inand ~~2001. Amortization~~by ~~of deferred stock compensation resulted from~~ using the multiple option award valuation and amortization approach, which is an accelerated ~~amortization~~ amortization method to account for compensatory stock options granted to employees and directors during the six months ended September 30, 2001. We expect to amortize $~~207~~91,000 during the remainder of fiscal ~~2003, $232,000 during fiscal~~ 2004 and $5634,000 during fiscal 2005.

Litigation settlement

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

Restructuring costs

Restructuring costs were $~~1.8 million~~176,000, or 813% of net revenues, for the three ~~months~~ months ended ~~December~~September 3130, ~~2002~~2003, as compared to $0 for the comparable period in ~~2001,~~ 2002, and ~~$1.8 million,~~comprise orthe 6%estimated costs of ~~net~~our ~~revenues,~~early ~~for~~termination ~~the~~of ~~six~~our ~~months~~lease on our former London premises.

ended December 31, 2002 compared to $0 for the comparable period in 2001. Restructuring costs comprised headcount reduction severance payments of $254,000, and costs of $1.6 million incurred upon the disposal of our London development studio, including directly attributable project abandonment costs of $1.3 million.

Interest income

Interest income was $791,000 for the three months ended ~~December~~September 3130, ~~2002~~2003, as compared to $9164,000, or 1% of net revenues, for the comparable period in ~~2001~~2002. Interest income in each period relates to interest earned on funds deposited in money market accounts and decreased ~~because~~as a result of lower money market account balances.

Interest income was $143,000 for the six months ended December 31, 2002, compared to $96,000 for the comparable period in 2001. Interest income increased as a result of the investment of funds raised in our initial public offering completed in November 2001.

Interest expense

Interest ~~expenses~~expense ~~were~~was $~~258~~28,000, or 12% of net revenues, for the three months ~~ended~~ ~~December~~ended September 3130, ~~2002~~2003, as compared to $~~1.3 million~~268,000, or 73% of net revenues, for ~~the~~ the comparable period in ~~2001,~~2002. ~~and~~There ~~$526,000,~~was orless 2%borrowing ofunder ~~net~~the ~~revenues,~~short-term borrowing ~~for~~facilities during the ~~six~~ three months ended ~~December~~September 3130, ~~2002,~~2003 as compared to ~~$2.0 million, or 7% of net revenues, for~~ the comparable period ina ~~2001~~year ago. ~~Interest~~During ~~expense~~the ~~decreased~~three asmonths aended ~~result~~September 30, of2003, ~~our~~interest ~~operating~~expense ~~under~~included ~~our~~a ~~less~~$25,000 ~~expensive~~factoring ~~short-term borrowing~~ line ~~during 2002.~~

~~Other income (expense)~~22

OtherTable incomeof (expense) was $19,000 income for the three months ended December 31, 2002, compared to $8,000 income for the comparable period in 2001, and $24,000 expense for the six months ended December 31, 2002, compared to $7,000 income for the comparable period in 2001. Other income (expense) comprised exchange gains and losses. Contents

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

Other expense

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

LIQUIDITY AND CAPITAL RESOURCES

In ~~November~~October ~~2001~~2003, we completed ~~our~~the ~~initial~~sale ~~public~~of ~~offering~~1,850,000 ~~raising~~shares ~~$39.2 million~~of ~~net~~our ofcommon ~~expenses.~~stock and ~~Subsequent~~warrants to ~~the~~purchase ~~offering~~another 1,665,000 weshares ~~have~~of ~~used~~its ~~the~~common ~~proceeds~~stock, ofresulting ~~the~~in ~~initial~~gross ~~public~~proceeds ~~offering,~~(assuming ~~cash~~no ~~generated~~exercise ~~from~~of the ~~sale~~warrants) of ~~products~~$1.8 million, ~~a product~~in ~~financing arrangement with~~ a ~~finance~~private ~~company,~~offering ~~and short-term liabilities~~ to ~~finance~~institutional ~~our~~and ~~operations~~accredited investors. ~~Prior to the initial public offering,~~Of wethese ~~financed our operations primarily through the private sale of equity securities~~proceeds, ~~cash generated from the sale of products~~$503,000 awas ~~product~~received ~~financing arrangement~~during ~~with a finance company,~~ the ~~issuance~~three ofmonths ~~promissory~~ended ~~notes to~~September ~~stockholders~~30, ~~a commercial line of credit and short-term liabilities~~2003.

~~Net~~We ~~cash~~need ~~used~~to inraise ~~operating~~additional ~~activities~~funds. ~~was~~These ~~$12.4 million~~funds ~~for~~may ~~the~~come ~~six~~from ~~months~~either one or a ~~ended~~combination ~~December 31~~of additional financings, ~~2002~~exercise of outstanding warrants and additional investment rights, ~~compared~~mergers or acquisitions, or otherwise obtain capital via sale or license of certain of its assets, in order to ~~$16~~satisfy its future liquidity requirements.~~3 million~~ ~~for~~Current ~~the~~market ~~comparable~~conditions ~~period~~present inuncertainty as ~~2001~~to our ability to secure additional financing or effectuate any merger or acquisition, as well as our ability to reach profitability. ~~For~~There ~~the~~can ~~six~~be ~~months~~no assurances ~~ended~~that ~~December 31~~we will be able to secure additional financing or effectuate any such merger or acquisition, ~~2002~~or ~~and~~obtain ~~2001~~favorable terms on such financing if it is available, ~~net~~or as to our ability to achieve positive cash ~~used~~flow infrom operations. Continued negative cash flows create significant uncertainty about our ability to implement its operating ~~activities~~plan ~~was~~and ~~the~~we ~~result~~may ofhave ~~net~~to ~~losses,~~further ~~net~~reduce the scope of ~~depreciation, amortization,~~our ~~provision~~planned ~~for~~operations. ~~price~~If ~~protection~~cash and ~~cooperative~~cash ~~advertising~~equivalents, together ~~offset~~with bycash ~~net~~generated ~~increases~~from inoperations, ~~operating~~are ~~assets,~~insufficient ~~primarily~~to ~~prepaid~~satisfy ~~royalties,~~our liquidity ~~capitalized~~requirements, ~~software~~we ~~costs~~will ~~and~~not ~~licensed~~have ~~assets~~sufficient resources to continue operations for the next six months.

Net cash ~~provided~~used byin ~~investing~~operating activities was $73.90 million for the three months ended ~~December~~September 3130, ~~2002~~2003, as compared to ~~net cash used in investing activities of~~ $42.93 million for the comparable period in ~~2001~~2002. ~~Net~~For ~~cash provided by investing activities during~~ the ~~six~~three months ended ~~December~~September 3130, 2003 and 2002, ~~consisted~~net ~~primarily~~cash used ofin ~~the~~operating ~~sale~~activities ofwas ~~short-term investments, offset by~~ the ~~purchases~~result of ~~property~~net ~~and equipment.~~losses, ~~For~~net ~~the~~of ~~comparative period~~depreciation, amortization, ~~net~~provision ~~cash~~for ~~used~~price inprotection ~~investing~~and ~~activities~~cooperative advertising, ~~consisted~~offset ofby ~~the~~net ~~purchase~~increases ofin ~~short-term~~operating ~~investments~~assets, ~~and~~primarily ~~property~~prepaid ~~and equipment~~royalties, ~~offset~~capitalized bysoftware ~~decreases~~costs inand ~~other~~licensed assets.

Net cash ~~provided~~used byin ~~financing~~investing activities was $~~2.1 million~~4,000 for the ~~six~~three months ~~ended~~ ~~December~~ended September 3130, ~~2002~~2003, as compared to net cash provided by ~~financing~~investing activities of of $411.71 million for the comparable period in ~~2001~~2002. Net cash used in investing activities during the three months ended September 30, 2003, consisted of the purchase of property and equipment. For the comparative period, net cash provided by investing activities consisted of the sale of short-term investments offset by the purchase of property and equipment.

19Net cash provided by financing activities was $2.6 million for the three months ended September 30, 2003, as compared to net cash used in financing activities of $1.3 million for the comparable period in 2002. Net cash provided by financing activities during the three months ended September 30, 2003 consisted mostly of advances under a finance agreement with a finance company, funds received in advance of a future private placement, and a loan from a director. For the comparable period, net cash used in financing activities consisted mostly of net repayments under a finance agreement with a finance company.

byIn ~~financing~~September ~~activities~~2003, ~~during~~we ~~the~~entered into a six ~~months~~month ~~ended~~agreement ~~December 31,~~(the ~~2002~~“Agreement”) ~~consisted~~with ~~mostly~~a offinance ~~net~~company, ~~advances~~pursuant ~~under~~to awhich the finance ~~agreement~~company ~~with~~extends us a ~~finance~~line ~~company~~of credit facility to fund domestic inventory purchases. ~~For~~We may sell the inventory purchased under the ~~comparable~~Agreement. ~~period,~~We ~~net~~are ~~cash~~required ~~provided~~to byremit ~~financing~~customer ~~activities~~receipts ~~consisted~~from ~~mostly~~those ofsales ~~net~~directly ~~proceeds~~to onthe finance company up to the ~~sale~~amounts offunded 5by them.~~75 million~~ We ~~shares~~retain collections in excess of ~~common~~the ~~stock~~amounts infunded by the finance company, ~~our~~we ~~initial~~are ~~public~~responsible ~~offering~~for ~~completed~~collecting inthe ~~November~~customer ~~2001~~receivables, and ~~the~~we ~~issuance~~bear ofthe ~~common~~risk ~~stock~~of ~~arising~~loss ~~from~~on ~~the~~all ~~exercise~~uncollectible ofaccounts. ~~warrants~~The finance company has a security interest in our accounts receivable and inventory.

InUnder ~~February~~the ~~2002,~~terms weof ~~entered~~the ~~into~~Agreement, ~~a two year factoring agreement (~~the ~~“Agreement”)~~ ~~with a~~ finance company,’s ~~pursuant~~aggregate tooutstanding funding ~~which~~is welimited ~~assign~~to ~~our~~$3.2 million. ~~North American~~We ~~receivables~~are required to pay the finance company.’s ~~The~~expenses ~~finance~~under ~~company~~the ~~is responsible for collecting customer receivables~~contract, ~~and~~a ~~upon~~facility ~~collection,~~fee ~~remits~~equal ~~the funds~~ to ~~us,~~ ~~less a service fee~~5.0% ~~Under~~of the funds ~~Agreement,~~advanced weby ~~may obtain advances, subject to~~ the finance company’s, ~~discretion~~ and ~~our~~interest ~~compliance~~at ~~with~~prime ~~certain~~plus ~~liquidity~~0.5%. The ~~covenants,~~Agreement interminates ~~the~~on ~~form~~March 31, of2004 ~~cash~~and orany assums ~~collateral~~outstanding ~~for~~become repayable ~~letters~~on ofthat ~~credit,~~date. upWe tomay ~~a maximum~~repay ofany ~~75%~~sums ofadvanced ~~outstanding~~prior ~~domestic~~to ~~receivables~~the atdue ~~any~~date ~~point~~of payment inwithout ~~time~~penalty. As of ~~December~~ September 3130, ~~2002~~2003, we nohad ~~longer~~advances ~~met the liquidity covenants under the~~of ~~Agreement~~$1,745,000 ~~and~~outstanding ~~accordingly we may not be able to obtain further advances~~ under the Agreement.

~~Under~~Prior ~~the~~to ~~terms~~entering ofinto the Agreement, we ~~pay~~had aentered ~~service~~into ~~fee~~a ontwo ~~all~~year ~~receivables~~factoring ~~assigned,~~agreement (the “Factoring Agreement”) with a ~~minimum~~different ~~annual~~finance ~~fee~~company ofin February ~~$150~~2002,~~000,~~ ~~and~~pursuant ~~interest~~to atwhich ~~prime~~we ~~plus~~assigned ~~1% on~~our ~~all~~North ~~cash~~American ~~sums~~receivables ~~advanced.~~to the ~~All~~finance ~~fees~~company. ~~are~~The ~~included~~finance incompany ~~interest~~was ~~expense.~~responsible Wefor ~~bear~~collecting ~~the~~customer ~~collection~~receivables, ~~risk~~and onupon ~~our~~collection, ~~accounts~~remitted ~~receivable~~the ~~that~~funds ~~are~~to ~~assigned~~us, ~~unless~~less ~~the~~a ~~finance~~service ~~company~~fee. ~~approves~~Under the ~~receivable~~Factoring atAgreement, ~~the~~we ~~time~~could ofobtain ~~assignment~~advances, ~~in which~~subject ~~case~~to the finance company’s ~~bears~~discretion ~~the~~and ~~risk.~~our ~~The~~compliance ~~finance~~with ~~company~~certain ~~has a security~~liquidity ~~interest~~covenants, in ~~our~~the ~~accounts~~form ~~receivable,~~of ~~inventory,~~cash ~~fixed~~or ~~assets~~as ~~and~~collateral ~~intangible assets.~~for Asletters of ~~December 31~~credit, ~~2002,~~up weto ~~had~~a maximum ~~advances~~ of ~~$3.4 million~~75% of outstanding ~~under~~ ~~the~~domestic ~~Agreement~~receivables at any point in time.

InUnder ~~February~~the ~~2000,~~terms ~~prior~~of ~~to entering into~~ the Factoring Agreement, ~~Bam~~we ~~had~~paid ~~entered into~~ a ~~master~~ ~~purchase~~service ~~order~~fee ~~assignment~~on ~~agreement~~all receivables assigned, with a ~~different~~minimum ~~finance~~annual ~~company~~fee of $150,000, interest at prime ~~whereby~~plus ~~Bam~~1% ~~assigned~~on ~~customer~~all ~~purchase~~cash ~~orders~~sums toadvanced. ~~the~~All ~~finance~~fees ~~company~~were ~~and~~included in interest expense. ~~requested~~We bore the ~~finance~~collection ~~company~~risk ~~purchase~~on ~~finished~~the ~~goods~~accounts toreceivable ~~fulfill~~that ~~such~~were ~~customer~~assigned, ~~purchase~~unless ~~orders.~~the ~~The~~finance ~~master~~company ~~purchase~~approved ~~order~~the ~~assignment~~receivable ~~agreement,~~at ~~and~~the ~~a factoring~~time ~~agreement~~of ~~entered into~~ assignment, in ~~August~~which ~~2001~~case ~~with~~the anfinance ~~affiliate~~company ofbore the risk. The finance company, ~~terminated~~had a security interest in ~~February~~our ~~2002~~accounts receivable, ~~and~~inventory, ~~all~~fixed ~~outstanding~~assets ~~amounts~~and ~~funded~~intangible ~~were fully repaid~~assets.

As of ~~December~~June 3130, ~~2002~~2003 we did not meet the Factoring Agreement’s liquidity covenants and we had no ~~letters~~sums ofadvanced ~~credit~~under ~~outstanding~~the Factoring Agreement. AtThe Factoring ~~June 30~~Agreement was mutually terminated in September 2003, and all ~~2002~~liabilities wesettled. ~~had~~Upon ~~outstanding~~the ~~letters~~termination of ~~credit~~the ~~issued~~Factoring Agreement, the minimum annual fee for the second year of the Factoring Agreement was waived, and we paid a termination payment of $225,000.~~3 million.~~

As of ~~December~~September 3130, ~~2002~~2003 ~~we had cash~~ and ~~cash equivalents of $2.3 million. As of~~ June 30, ~~2002,~~2003 we had ~~cash~~no ~~and~~outstanding ~~cash~~letters ~~equivalents~~ of credit ~~$4.7 million~~issued ~~and~~on ~~short-term investments~~our ~~of $8~~behalf.~~2 million.~~

During the ~~six~~three months ended ~~December~~September 3130, ~~2002~~2003, we used cash in operating activities of $123.40 million and incurred a net loss of $211.97 million. As of ~~December~~September 3130, ~~2002~~2003, we had cash and cash equivalents of $~~2.4 million~~617,000 and an accumulated deficit of $4561.5 million. As of June 30, 2003, we had cash and cash equivalents of $1.1 million. During the ~~quarter~~year ended ~~December~~June 3130, ~~2002~~2003, we undertook measures to reduce spending and restructured our operations. In ~~2003,~~February 2003 we retained, through July 31, 2003, the investment banking firm of Gerard Klauer Mattison & Co., Inc. to assist us in reviewing a range of potential ~~strategic alternatives,~~ ~~including mergers, acquisitions and securing additional financing. We may need to consummate one or a combination of the potential~~ strategic alternatives~~, or otherwise obtain capital via the sale or license of certain of our assets, in order to satisfy our future liquidity requirements~~. ~~Current~~No ~~market~~transactions ~~conditions~~arose ~~present~~from ~~uncertainty as~~this toassistance ~~our ability to effectuate any such merger~~ or ~~acquisition or~~were ~~secure~~consummated ~~additional~~during ~~financing,~~this ~~as well as our ability to reach profitability~~period. ~~There can be no assurances that we will be able to~~ ~~effectuate any such merger or acquisition or secure additional~~ financing, or obtain favorable terms on such financing if it is available, or as to our ability to achieve positive cash flow from operations. Continued negative cash flows create uncertainty about our ability to implement our operating plan and we may have to further reduce the scope of our planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy our liquidity requirements, we will not have sufficient resources to continue operations for the next 12 months.

Capital expenditures were $~~309~~4,000 and $~~467~~236,000 for the ~~six~~three months ended ~~December~~September 3130, ~~2002~~2003 and ~~2001~~2002, respectively. We did not have any material commitments for capital expenditures at ~~any~~either of those dates.

~~Our~~In ~~principal~~January ~~commitments~~2003 atwe ~~December 31~~granted, ~~2002~~subject ~~comprised~~to oflandlord’s ~~operating leases~~consent, ~~guaranteed~~ ~~royalty~~a ~~payments~~sublease ~~and~~on ~~contractual marketing commitments. At~~our ~~December 31,~~London ~~2002, we had commitments to spend $1~~premises.~~7 million~~ ~~under~~In ~~operating~~October ~~leases~~2003, ~~prepay~~ ~~$1.9 million~~the ~~for~~lessee ~~royalties~~advised ~~under~~us ~~agreements~~that ~~with~~they ~~various content~~were ~~providers~~terminating ~~and spend $2.9 million in advertising on~~ the ~~networks~~sublease ~~and~~effective ~~websites of these content providers. Of these amounts, $4.4~~November ~~million must be paid no later than December 31~~30, 2003. ~~Guaranteed royalty payments will be applied against any~~ ~~royalties that may become payable to the content providers. In January 2003 we~~ ~~granted, subject to landlord’s consent, an underlease on our London premises.~~

20Our principal commitments at September 30, 2003 comprised operating leases, guaranteed royalty payments, and contractual marketing commitments. As of September 30, 2003, we had commitments to spend $1.6 million under operating leases, prepay $400,000 for royalties under an agreement with a content provider, of which $200,000 was due by September 30, 2003, and spend $943,000 in advertising on the networks and websites of these content providers, of which $180,000 was due by September 30, 2003. Of these amounts, $1.9 million must be paid no later than September 30, 2004. Guaranteed royalty payments will be applied against any royalties that may become payable to the content providers. Sublease income is offset against operating lease expense.

RISK FACTORS

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

RISKS RELATED TO OUR FINANCIAL RESULTS

If we are unable to successfully ~~enter~~ ~~into~~obtain aadditional ~~merger~~financing or ~~acquisition~~enter ~~with~~into ~~another~~a merger ~~entity~~ or ~~secure additional financing~~acquisition, we may not have sufficient cash to continue operations for the next 12 six months.

InAlthough ~~2003,~~ we ~~retained~~raised ~~the~~gross ~~investment banking~~proceeds ~~firm~~ of ~~Gerard~~approximately ~~Klauer Mattison & Co~~$1.,8 million ~~Inc.~~through tothe sale ~~assist~~of ~~us in~~our ~~reviewing~~common astock, ~~range~~warrants ofand ~~potential~~additional ~~strategic~~investment ~~alternatives,~~rights ~~including~~in October ~~mergers~~2003, ~~acquisitions~~we ~~and~~will ~~securing~~need to raise additional ~~financing~~funds. WeThese funds may ~~need to~~come ~~consummate~~from either one or a combination of ~~the~~additional ~~potential~~financings, ~~strategic~~exercise of outstanding warrants ~~alternative~~and additional investment rights, mergers or acquisitions, or otherwise obtain capital via sale or license of certain of our assets, in order to satisfy our future liquidity requirements. Current market conditions present uncertainty as to our ability to ~~effectuate~~secure ~~any~~additional ~~such~~financing ~~merger~~ or ~~acquisition~~effectuate orany ~~secure additional~~merger ~~financing~~or acquisition, as well as our ability to reach profitability. There can be no assurances that we will be able to ~~effectuate~~secure ~~any such~~additional ~~merger~~financing or ~~acquisition~~effectuate any orsuch ~~secure~~merger ~~additional~~or ~~financing~~acquisition, or obtain favorable terms on such financing if it is available, or as to our ability to achieve positive cash flow from operations. Continued negative cash flows create significant uncertainty about our ability to implement our operating plan and we may have to further reduce the scope of our planned operations. If cash and cash equivalents, together with cash generated from operations, are insufficient to satisfy our liquidity requirements, we ~~may~~will not have sufficient resources to continue operations for the next 12six months.

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

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

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

• secure additional financing and fund purchases of inventory; • expand our domestic and international customer base; • secure popular entertainment properties upon which to base future products; • develop and enhance products in response to new interactive entertainment hardware platform releases, customer demand and competitive market conditions; • expand our interactive entertainment software development and sales and marketing capabilities; • expand our international operations; • attract, retain and motivate qualified personnel; and • maintain adequate control of our expenses.

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

We incurred net losses of $211.97 million infor the ~~six~~three months ended ~~December~~September 3130, ~~2002~~2003, ~~and~~$36.2 million for the year ended June 30, 2003, $15.7 million for the year ended June 30, 2002, and $1.6 million Wefor the year ended June 30, 2001. We will need to generate significant revenues and control expenses to achieve profitability. There can be no assurance that our revenues will grow in the future or that we will achieve sufficient revenues for profitability. If we fail to achieve profitability, or sustain or increase profitability if we achieve it, this will have a negative impact on our operating results.

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

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

21Our operating results would be, and historically have been, harmed by a decrease in sales, price erosions, and a failure to meet our sales expectations. Uncertainties associated with interactive entertainment software development, lengthy manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship.

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

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

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

~~first~~again ~~calendar~~result ~~quarters.~~in, ~~This~~revenues ~~is due primarily to the increased demand for games during~~ and ~~immediately following the holiday buying season. Our failure~~ orearnings ~~inability~~that tofall ~~introduce~~short ~~products~~of onanalysts’ aexpectations ~~timely~~for ~~basis~~any toindividual ~~meet seasonal~~quarter ~~fluctuations in demand will harm our business~~ and ~~operating~~the ~~results.~~fiscal ~~These fluctuations, as well as fluctuations caused by other factors, could harm our business and have a material adverse effect on our operating results~~year.

Our expense levels are based, in part, on our expectations regarding future sales. Therefore, our operating results would be, and historically have been, harmed by a decrease in sales, price erosions and a failure to meet our sales expectations. Uncertainties associated with interactive entertainment software development, lengthy manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship. These and other factors could harm our business and have a material adverse effect on our operating results.

Product development schedules are frequently unpredictable and make estimating quarterly results difficult.

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

Pursuant to a license agreement with a production company, we are obligated to issue 68,738 shares of our common stock after the release of any film for which we elect to produce interactive entertainment software products, up to 10 films or 687,375 shares of common stock. To date, we have elected to produce titles for three films and have issued 137,476 shares under this agreement for an aggregate value of $816,000. We are required to issue these shares when the films are released and will then incur a non-cash charge. We cannot estimate the aggregate dollar amount of these future non-cash charges as they ~~are~~will ~~based~~be based on ~~its~~our share price at a future point in time, but they may be substantial. All of the non-cash charges on the shares issued to date under the agreement had been amortized as of ~~December~~September 3130, ~~2002~~2003.

In connection with the issuance of warrants pursuant to a separate license agreement with another production company, we incurred a non-cash charge of $~~354~~97,000, of which is$8,000 ~~being~~was amortized onto aproject ~~straight-line~~abandonment ~~basis~~in ~~over~~the ~~five~~year ~~years.~~ended ~~This~~June, ~~amortization~~30, ~~commenced~~2003. inWe ~~October~~are ~~2000~~amortizing ~~and~~the weremaining ~~had~~licensed ~~amortized~~asset of $~~154~~89,000 ~~as of~~over ~~December 31,~~the ~~2002.~~life Inof ~~connection~~the ~~with~~software ~~these~~products ~~warrants,~~on anwhich ~~additional~~the ~~non-cash charge~~warrants ofare ~~$278~~exercisable,~~000~~ expected ~~was~~to ~~amortized~~be ~~during~~between ~~the~~ three ~~months~~and ~~ended~~six ~~December 31~~months, ~~2002~~ oncommencing ~~the~~upon release of athe products, ~~subject~~which ~~title.~~occurred Ain ~~further~~September ~~non-cash~~2003. ~~charge~~As of September 30, 2003, we had amortized $~~278~~12,000 ~~will~~ beof ~~amortized~~this ~~over~~charge. aUnder ~~period~~the agreement, ~~expected~~additional warrants to purchase beup ~~between~~to ~~three~~an toadditional ~~six~~15,000 ~~months~~shares may be issued, contingent upon ~~commencing~~certain onfuture events occurring, such as exercising the ~~release~~right ofto develop a product. ~~second~~Upon ~~subject~~issuance ~~title,~~of ~~which~~the iswarrants ~~expected~~we towill beincur an additional non-cash ~~released~~charge. inWe cannot estimate the ~~first~~aggregate ~~fiscal~~dollar ~~quarter~~amount of ~~2005~~these future non-cash charges as they are based on our share price at future points in time. Each of these future charges will affect our gross margins and profitability.

In connection with the issuance of warrants pursuant to a ~~separate~~first ~~license agreement~~look agreement with another production company, we ~~incurred~~granted a ~~non-cash~~warrant ~~charge~~to ~~of $93~~purchase up to 200,000. shares ~~Under~~of ~~the~~our ~~agreement~~common stock, ~~additional~~of ~~warrants~~which to15,000 ~~purchase~~became upimmediately toexercisable anupon ~~additional~~the 25signing of the agreement. The remaining 185,000 ~~shares~~will ~~may~~only bebecome exercisable, ~~issued~~in multiples of either 4,625 ~~contingent~~or 13,875 shares, upon certain future ~~events~~ events occurring. ~~Upon~~relating ~~issuance~~to the development and release of products. Upon the warrant ~~warrants~~for we15,000 ~~will~~shares ~~incur~~becoming anexercisable, ~~additional~~we incurred a non-cash charge of $29,000, which had been fully amortized as of June 30, 2003. We will incur additional non-cash charges as the remaining 185,000 shares become exercisable. Upon release of the software products on which the warrants are ~~issued~~exercisable, we we will amortize the non-cash charges over the life of the products, which are expected to be between three and six months. We cannot estimate the aggregate dollar amount of these future non-cash charges as they ~~are~~will be based on our ~~share~~ share price at future points in time. Each of these future charges will affect ~~our~~ our gross margins and profitability.

In connection with the issuance of warrants pursuant to a separate license agreement with another production company, we granted a warrant to purchase up to 200,000 shares of our common stock, of which 15,000 became immediately exercisable upon the signing of the agreement. The remaining 185,000 will only become exercisable, in

multiples of either 4,625 or 13,875 shares, upon certain future events occurring relating to the development and release of products. Upon the warrant for 15,000 shares becoming exercisable, we incurred a non-cash charge of $29,000, which is being amortized on a straight-line basis over five years. This amortization commenced in May 2002 and we had amortized $3,000 as of December 31, 2002. We will incur additional non-cash charges as the remaining 185,000 shares become exercisable. Upon release of the software products on which the warrants are exercisable, we will amortize the non-cash charges over the life of the products, which are expected to be between three and six months. We cannot estimate the aggregate dollar amount of these future non-cash charges as they are based on our share price at future points in time. Each of these future charges will affect our gross margins and profitability.

RISKS RELATED TO OUR BUSINESS

Our ability to effectuate a additional financing ~~transaction~~transactions to fund our operations could impair the value of your investment~~, and we cannot assure you that we will be able to meet our future capital requirements~~.

IfAlthough we ~~are~~raised ~~not~~gross ~~acquired~~proceeds byof orapproximately ~~merge~~$1.8 million ~~with~~through the ~~another~~sale ~~entity,~~of weour ~~may~~common ~~need~~stock, towarrants ~~consummate~~and aadditional ~~financing~~investment ~~transaction pursuant~~rights toin ~~which~~October 2003, if we ~~receive~~are ~~additional~~not ~~liquidity.~~acquired ~~This~~by ~~additional financing~~or ~~may~~merge ~~take~~with ~~the~~another ~~form~~entity ofor usif ~~raising~~we ~~additional~~are ~~capital through~~not ~~public~~able orto ~~private~~raise ~~equity~~additional ~~offerings~~capital orvia ~~debt~~sale ~~financing.~~or Welicense ~~cannot~~of be certain ~~that~~of ~~additional~~our ~~capital~~assets, we will beneed ~~available~~ to usconsummate onadditional ~~favorable terms,~~financing ortransactions atpursuant ~~all.~~to If which we ~~cannot~~receive ~~effectuate~~additional aliquidity. ~~financing~~These ~~transaction~~additional tofinancings will likely take ~~raise~~the ~~needed~~form ~~funds~~of onus ~~acceptable~~raising ~~terms,~~additional wecapital ~~may~~through ~~not~~either beone ~~able~~or toa ~~develop~~combination of public or ~~enhance~~private ~~our~~equity ~~products,~~offerings ~~take~~or ~~advantage~~debt offinancings ~~future~~and ~~opportunities~~the orexercise of ~~respond~~outstanding towarrants ~~competitive~~and ~~pressures~~additional orinvestment ~~unanticipated requirements~~rights. To the extent we raise additional capital by issuing equity securities, our stockholders ~~may~~will likely experience substantial dilution. Also, any new equity securities may have greater rights, preferences or privileges than our existing common stock. ~~A material shortage of capital will~~ ~~require us to take drastic steps such as reducing our level of~~ ~~operations, disposing of selected assets or seeking protection under federal bankruptcy laws.~~

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

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

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

A significant portion of our revenues is derived each quarter from a relatively limited number of products that were released in that quarter or the or in the immediately preceding quarter. During the three months ended ~~December~~September 3130, ~~2002,~~ 2003, sales of four products each accounted for between 139% and 1941% of our net revenues,. ~~while~~During ~~during~~ the ~~six~~three months ended ~~December~~September 3130, 2002, sales of four products each accounted for between 103% and 1640% of our net revenues. During the three months ended December 31, 2001, sales of five products each accounted for between 11% and 25% of our net revenues, while during the six months ended December 31, 2001, sales of three products each accounted for between 10% and 16% of our net revenues. We expect that a limited number of products will continue to produce a disproportionately large amount of our net revenues. Due to this dependence on a limited number of brands, the failure of one or more products to achieve anticipated results could, and in the past has, significantly harmed our business and operating results.

~~Our~~We ~~market~~cannot isassure ~~characterized~~you bythat ~~changing~~new ~~consumer~~products ~~preferences~~introduced ~~and~~by ~~short~~us ~~product~~will achieve ~~life~~significant ~~cycles.~~market Toacceptance ~~compete~~and ~~effectively~~be wesufficient ~~must~~in ~~continually~~order ~~introduce~~for ~~new~~us ~~products that~~to achieve ~~market acceptance~~ profitability.

The interactive entertainment software market is characterized by short product life cycles, continually changing consumer preferences that are difficult to predict and frequent introduction of new products. WeThe ~~believe~~life ~~that~~cycle ~~our~~of ~~success~~a ~~will~~game generally beconsists ~~dependent on the production~~ of ~~successful~~ ~~titles on~~ a ~~continuous~~relatively ~~basis.~~high Welevel ~~cannot~~of ~~assure~~sales ~~you~~during ~~that~~the ~~new~~first ~~products~~few ~~introduced~~months byafter usintroduction, ~~will~~followed ~~achieve~~by ~~significant~~a ~~market~~decline ~~acceptance~~in ~~or that such acceptance~~sales, ~~if achieved, will be sufficient to permit us to recover development~~ and ~~other~~sales ~~associated costs. Consumer preferences for interactive entertainment~~price ~~software products are continually changing and are difficult to predict~~erosion. Even the most successful titles remain popular for only limited periods of time, often less than six months. ~~The~~We ~~life~~believe ~~cycle~~that ofour asuccess ~~game~~will be ~~generally~~dependent ~~consists~~on ofthe ~~a relatively~~production ~~high level~~ of ~~sales~~successful ~~during~~titles ~~the~~on ~~first~~a ~~few~~continuous ~~months~~basis. ~~after introduction,~~We ~~followed~~cannot byassure ayou ~~decline~~that innew ~~sales,~~products ~~and~~introduced ~~price~~by ~~erosion.~~us ~~Accordingly,~~will weachieve ~~expect that substantially all~~significant ofmarket ~~our~~acceptance ~~net~~or ~~sales~~that ~~for~~such aacceptance, ~~particular~~if ~~year~~achieved, will be ~~generated~~sufficient ~~by titles released~~ in ~~that~~order ~~year~~for ~~and~~us into ~~the~~achieve ~~latter part of the prior year~~profitability.

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

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

software, obtain approval from the manufacturer and licensor if required, and have the initial order of cartridges or disks manufactured. During the development cycle, the market appeal of a title or of a property on which the title is based may decline. If market acceptance is not achieved, we may grant markdown allowances to maintain our relationship with retailers and our access to distribution channels. Because we introduce a relatively limited number of new products in a given period, the failure of one or more of our products to achieve market acceptance could harm our business.

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

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

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

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

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

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

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

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

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

24If interactive entertainment hardware platforms fail to achieve significant market acceptance, it may negatively impact our business.

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

IfOver ~~new~~98% ~~interactive~~of ~~entertainment~~our ~~hardware~~net ~~platforms~~revenues ~~fail~~are derived from sales to ~~achieve~~our ~~significant~~three ~~market~~largest customers. ~~acceptance,~~We itcould ~~may~~be ~~harm~~adversely ~~our~~affected ~~business~~if any of them reduced or terminated their purchases from us or did not pay their obligations to us.

~~Our~~Revenues ~~sales~~from ~~are~~our ~~dependent~~three ~~on,~~largest ~~among~~customers ~~other~~collectively ~~factors,~~accounted ~~the~~for ~~popularity~~98% ~~and~~of ~~unit sales~~our ofnet ~~the~~revenues ~~interactive~~for ~~entertainment hardware platforms of~~ the ~~various manufacturers.~~three ~~The~~months ~~interactive~~ended ~~entertainment~~September 30, ~~industry~~2003, ~~has~~as ~~experienced~~compared ~~periods~~to 34% of ~~significant~~our ~~growth~~net inrevenues ~~consumer~~for ~~interest~~the ~~and~~three ~~popularity~~months ended September 30, ~~followed~~2002. byAs ~~periods~~of inSeptember 30, ~~which~~2003, ~~consumer~~four ~~demand~~customers each accounted for ~~interactive~~between ~~entertainment~~5% ~~products~~and ~~has~~28% ~~slowed.~~of our ~~Unexpected~~gross ~~shortfalls~~trade inaccounts ~~the~~receivable, ~~market~~and ~~acceptance~~as of aJune 30, ~~particular hardware platform~~2003, ~~such~~four ascustomers ~~occurred~~each accounted ~~with~~for ~~Microsoft’s~~between ~~Xbox~~8% and ~~Nintendo’s~~19% ~~Gamecube~~of ~~and Game~~our ~~Boy~~gross ~~Advance,~~trade ~~can~~accounts ~~and~~receivable. We have ~~significantly~~no ~~harmed~~written ~~consumer~~agreements ~~demand~~or ~~for~~other ~~titles released~~understandings orwith ~~scheduled~~any ~~for~~of ~~release~~our ~~for~~ customers that ~~hardware~~relate ~~platform~~to future purchases. Therefore, wepurchases ~~are~~by these customers or any ~~dependent~~others ~~upon~~could ~~the~~be ~~successful~~reduced ~~marketing~~or ~~efforts~~terminated ofat ~~the~~any ~~manufacturers~~time. ofA ~~the~~substantial reduction or a ~~various~~termination ~~hardware~~of ~~platforms~~purchases toby ~~meet~~any ~~financial~~of ~~expectations~~our largest customers would negatively impact us.

Over 48% of our net revenues are derived from sales to our four largest customers. We could be adversely affected if any of them reduced or terminated their purchases from us or did not pay their obligations to us.

Revenues from our four largest customers collectively accounted for 55% and 48% of our net revenues for the three and six months ended December 31, 2002, respectively, as compared to 53% of our net revenues for both the three and six months ended December 31, 2001. As of December 31, 2002, four customers each accounted for between 10% and 30% of our net accounts receivable, and as of December 31, 2001, four customers each accounted for between 8% and 32% of our net accounts receivable. We have no written agreements or other understandings with any of our customers that relate to future purchases. Therefore, purchases by these customers or any others could be reduced or terminated at any time. A substantial reduction or a termination of purchases by any of our largest customers would harm us.

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

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

Product returns and markdown allowances could ~~harm~~negatively impact our business.

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

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

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

manufacturer choose not to renew or extend our license agreement at the end of its current term, or if the manufacturer were to terminate our license for any reason, we would be unable to publish additional titles for that manufacturer’s hardware platform.

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

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

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

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

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

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

Many of our titles, such as those from our ~~Powerpuff~~Wallace ~~Girls~~& Gromit series, ~~Dexter’s~~Powerpuff ~~Laboratory~~Girls series, ~~Ecks v Sever~~ and ~~Reign~~Dexter’s ofLaboratory ~~Fire~~series are based upon entertainment properties licensed from third parties. We cannot assure you that we will be able to obtain new licenses, or renew existing ones, on reasonable terms, if at all. If we are unable to obtain licenses for the properties which we believe offer significant consumer appeal, we would be required to obtain licenses for less popular properties or would have to develop all of our titles based upon internally developed concepts. ~~To the extent a licensed property is less~~ ~~popular than we anticipate, or is unsuccessful, sales of titles based on that~~ property may be negatively impacted. We have in the past experienced unsuccessful titles based on properties that we licensed from third parties. Titles based on less popular properties, or on internally developed concepts typically require greater marketing expense in order to establish brand identity and may not achieve broad market acceptance or prove to be successful.

WeTo ~~are~~the ~~dependent~~extent ona ~~third-party~~licensed ~~interactive~~property ~~entertainment~~is ~~software~~less ~~developers~~popular ~~for~~than ~~developing~~we ~~and~~anticipate, ~~completing~~or ~~many~~is unsuccessful, sales of ~~our~~ titles based on that property may be negatively impacted.

We ~~rely~~have onin ~~third-party interactive entertainment software developers for~~ the ~~development~~ ofpast aexperienced ~~significant~~unsuccessful ~~number~~releases of ~~our~~titles ~~interactive~~based ~~entertainment software~~on ~~titles.~~properties ~~Quality~~that ~~third-party~~we ~~developers~~licensed ~~are~~from ~~continually~~third inparties. ~~high~~Titles ~~demand.~~based ~~For~~on ~~this~~less popular ~~reason~~properties, weor ~~cannot~~on ~~assure~~internally ~~you that the third-party software developers who have~~ developed ~~titles~~concepts, ~~for~~typically usrequire ~~in the past will continue to be available to develop~~greater ~~software~~marketing ~~for~~expense us in ~~the~~order ~~future. Due~~ to ~~the~~establish ~~limited~~brand ~~number~~identity ~~of third-party software developers~~ and ~~the~~may ~~lack~~not ~~of control that we exercise over them, we~~achieve ~~cannot~~broad ~~assure~~market ~~you~~acceptance ~~that these developers will complete titles for us on a timely basis~~ or ~~within~~prove ~~acceptable~~to ~~quality~~be ~~standards, if at all~~successful.

~~Our~~We ~~success~~are ~~is highly~~ dependent on ~~our~~third-party ~~proprietary~~interactive entertainment software developers for developing and ~~intellectual~~completing ~~property~~our titles.

We rely ~~primarily~~ on athird-party ~~combination~~interactive entertainment software developers for the development of ~~copyright,~~our ~~trademark~~interactive ~~and~~entertainment ~~trade~~software ~~secret~~titles. Quality ~~laws~~third-party developers are continually in high demand. For this reason, ~~employee~~we cannot ~~and~~assure you that the third-party ~~nondisclosure~~software ~~agreements~~developers ~~and~~who ~~other~~have ~~methods~~developed titles for us in the past will continue to be available to develop software for ~~protect~~us ~~our~~in ~~proprietary~~the ~~rights~~future. WeDue ~~require~~to ~~our~~the ~~employees,~~limited ~~consultants~~number of third-party software developers and ~~other~~the lack of control that we exercise over them, we cannot assure you that ~~outside~~these ~~individuals~~developers ~~and~~will ~~entities~~complete totitles ~~execute~~for ~~confidentiality~~us ~~and~~on ~~nondisclosure~~a timely basis or within ~~agreements~~acceptable ~~upon~~quality standards, if at all.

26Our future success is highly dependent on our proprietary software and intellectual property.

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

the start of employment, consulting or other contractual relationships with us. However, our ability to police these individuals and entities and enforce these agreements is costly and uncertain. We are aware that unauthorized copying occurs within our industry. If a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, our business would be harmed. We generally obtain ownership of the software code and related documentation from third-party software developers. In instances where we do not retain sole ownership of the source code, the owner may use or license the code for development of other software products that may compete directly with our products and we may not have sufficient rights in the source code to produce derivative products.

We rely on existing copyright laws to prevent unauthorized distribution of our products. Existing copyright laws afford only limited protection. Policing unauthorized use of our products is difficult, and software piracy is a persistent problem, especially in international markets. In addition, the laws of some countries in which our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States or are weakly enforced. Legal protection of our rights may be ineffective in these countries. Any unauthorized use of our proprietary information could result in costly and time-consuming litigation to enforce our proprietary rights.

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

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

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

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

• international consumer acceptance of existing and proposed titles; • the impact of possible recessions in foreign economies; • our ability to protect our intellectual property; • the time and costs associated with translating and localizing products for foreign markets; • foreign currency fluctuations; • unexpected changes in regulatory requirements; • difficulties and costs of staffing and managing foreign operations, or licensing to foreign entities; and • political and economic instability.

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• political and economic instability.

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

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

Our officers and directors own a substantial amount of our common stock and therefore have substantial influence over our operations and can significantly influence matters requiring stockholder approval.

Our officers and directors beneficially own approximately 54% of our common stock. As a result, they have the ability to control all matters requiring approval by our stockholders, including the election and removal of directors, approval of significant corporate transactions and the decision of whether a change in control will occur.

RISKS RELATED TO OUR INDUSTRY

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

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

Competitive pressures could have the following effects on us:

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

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

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

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

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

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

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platforms increases, competition for shelf space will intensify and may require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products constitute a relatively small percentage of any retailer’s sales volume, and we cannot assure you that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support. As a result of their positions in the industry, the manufacturers of interactive entertainment hardware platforms generally have better bargaining positions with respect to retail pricing, shelf space and retailer accommodations than do any of their licensees, including us.

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

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

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

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

RISKS RELATED TO OUR COMMON STOCK

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

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

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

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

29We transferred to The Nasdaq SmallCap Market from The Nasdaq National Market on March 27, 2003. Nasdaq advised us at the time of transfer that we met all the specified listing requirements of The Nasdaq SmallCap Market with the exception of the minimum $1.00 bid price per share requirement and that we had until November 17, 2003

~~We have received two letters from The Nasdaq Stock Market notifying us that our common stock failed~~ to ~~meet~~regain ~~certain~~compliance ~~listing~~with ~~maintenance~~this ~~standards~~requirement. ~~The~~On ~~first~~September 29, ~~letter~~2003, ~~from~~ Nasdaq advised us that ~~our~~we ~~common~~had ~~stock~~regained ~~failed~~compliance towith ~~maintain~~ the ~~required~~ ~~minimum bid price of~~ $1.00 bid price per share ~~over~~requirement, ~~a period of 30 consecutive trading days~~ and that we ~~will~~now ~~have~~met ~~until~~all ~~February 18, 2003 to regain compliance with~~ the ~~requirements;~~specified that is, our common stock must close above $1.00 per share for 10 consecutive trading days, or it will be subject to delisting from The Nasdaq National Market. If we are unable to regain compliance with these listing requirements ~~during the cure period, Nasdaq will provide us with a staff determination letter~~ of ~~delisting. We may then file for an extension or exception to comply with The~~ Nasdaq ~~National~~SmallCap Market ~~listing requirements, which Nasdaq may grant if it deems appropriate~~. ~~Otherwise our common stock will be~~ ~~delisted from The Nasdaq National Market.~~

~~The~~We ~~second~~currently ~~letter~~do ~~from~~not meet The Nasdaq ~~Stock~~SmallCap Market’s ~~advised~~required uslevels ~~that our common stock~~of ~~failed~~stockholders’ toequity, ~~maintain~~net ~~the~~income ~~minimum~~or market value of ~~$5 million~~listed ~~over~~securities, aone ~~period~~ of 30 ~~consecutive~~which ~~trading~~must ~~days~~be ~~and~~met ~~that~~to wesatisfy ~~will~~the ~~have~~listing ~~until~~maintenance ~~March 4,~~standards. ~~2003~~While towe ~~regain~~have ~~compliance~~not ~~with~~received ~~the~~a ~~requirements;~~notification ~~that~~letter ~~is,~~from ~~the~~Nasdaq ~~publicly~~that ~~held shares of~~ our common stock, ~~other~~fails ~~than~~to meet ~~shares~~these ~~held~~required bylisting ~~our~~standards, ~~officers~~we ormay ~~directors~~receive orsuch bynotification letter ~~beneficial~~at ~~owners~~any oftime. ~~10%~~If orwe ~~more~~do ofreceive ~~our~~such ~~common~~notification ~~stock~~letter, ~~must~~we ~~equal~~will orhave ~~exceed the~~10 days ~~minimum~~to ~~market~~provide ~~value~~Nasdaq ofwith ~~$5 million~~a ~~for~~plan 10setting ~~consecutive~~forth ~~trading~~how ~~days,~~we orexpect ~~our common~~to ~~stock~~regain ~~will~~compliance with bethe ~~subject~~required tolisting ~~delisting~~standards. ~~from~~ The ~~Nasdaq~~notification ~~National~~letter ~~Market.~~does Ifnot result wein ~~are~~the ~~unable~~delisting toof ~~regain~~our ~~compliance~~common ~~with~~stock; ~~these~~however, ~~listing~~if ~~requirements~~our ~~during~~plan ~~the~~of compliance is not ~~cure~~accepted ~~period,~~by Nasdaq, we will ~~provide~~receive ~~us with~~ a staff determination letter of delisting. At Wethat ~~may~~time, ~~then~~we ~~file~~would ~~for~~have anthe ~~extension~~opportunity ~~or exception~~ to ~~comply~~appeal ~~with The~~ Nasdaq’s ~~National~~decision ~~Market listing requirements, which Nasdaq may grant if it deems~~to ~~appropriate.~~delist ~~Otherwise~~ our common stock ~~will be delisted from The Nasdaq National Market~~.

WeIf ~~currently intend to transfer~~ our common stock tois ~~the~~delisted from The Nasdaq SmallCap Market~~. To transfer~~, weour ~~must~~common ~~satisfy~~stock ~~the~~would ~~continued~~trade ~~inclusion~~on ~~requirements for~~ the ~~Nasdaq~~Over-The-Counter ~~SmallCap Market~~Bulletin Board, which ~~make~~is ~~available~~viewed ~~an extended grace period for the minimum~~by ~~$1.00~~most ~~bid~~investors ~~price~~as ~~requirement and has~~ a ~~minimum~~less ~~market~~desirable ~~value requirement~~and ofless $1liquid ~~million~~marketplace. ~~If we submit a transfer application and pay the applicable listing fee by February 18~~Thus, ~~2003, initiation of~~ delisting ~~proceedings will be stayed pending the review of the~~ ~~transfer~~from ~~application.~~The ~~If the transfer application is approved, we will have until May 19, 2003 to regain compliance. If at this date, our common stock is in compliance with the initial listing requirements of the~~ Nasdaq SmallCap Market, wecould ~~will~~adversely beaffect ~~granted an additional 180 day grace period, or until November 13, 2003, for compliance with~~ the ~~$1.00~~liquidity ~~per~~and ~~share minimum bid requirement. In the event that the bid~~ price of our common stock ~~maintains~~ ~~the~~and ~~$1.00~~could ~~per~~have ~~share~~a ~~requirements~~long-term ~~for~~impact ~~30 consecutive trading~~on ~~days~~our byability ~~November 13, 2003, we may be eligible~~ to ~~transfer~~raise ~~back~~additional tocapital ~~the~~in ~~Nasdaq National Market. If~~ the ~~transfer application is not approved, we will receive notification that our common stock will be delisted~~future. ~~At that time, we would have the opportunity to appeal~~ ~~Nasdaq's decision to delist our common stock.~~

If our common stock is delisted from The Nasdaq National Market, our common stock would trade on either The Nasdaq SmallCap Market (if the relevant listing requirements are met and the requisite transfer application is approved) or on the Over-The-Counter Bulletin Board, both of which are viewed by most investors as less desirable and less liquid marketplaces. Thus, delisting from The Nasdaq National Market could adversely affect the liquidity and price of our common stock and could have a long-term impact on our ability to raise additional capital in the future. In addition, we would incur additional costs under state blue sky laws to sell shares of our common stock if it is delisted from The Nasdaq National Market.

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

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

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

FOREIGN CURRENCY EXCHANGE RATE RISK

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

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

INTEREST RATE RISK

We do not consider our cash and cash equivalents to be subject to interest rate risk due to the short maturities of the instruments in which we have invested. We are exposed to interest rate risk on our financing arrangement with a finance company. We do not enter into derivative securities or other financial instruments for trading or speculative purposes. We estimate that a 10% change in interest rates would have impacted our results of operations by less than $505,000 for the ~~six~~three months ended ~~December~~September 3130, ~~2002~~2003.

INFLATION

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

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures The term “disclosure controls and procedures” refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under Rule 13a - 14 of the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. As of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed with the Securities and Exchange Commission under the Exchange Act. (b) Changes in internal controls There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date.

~~The term “disclosure controls and procedures” refers to the controls and~~36 ~~procedures of a company that are designed to ensure that information~~ ~~required to be disclosed by a company in the reports that it files under~~ ~~Rules 13a – 14 of the Securities Exchange Act of 1934 (the “Exchange Act”)~~ is recorded, processed, summarized and reported within required time periods. Within 90 days prior to the date of filing of this report (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed under the Exchange Act.

(b) Changes in internal controls

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

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS ~~– Not Applicable~~

~~ITEM~~On 2April 1, 2003, Amaze Entertainment, Inc. ~~CHANGE~~asserted INcounterclaims ~~SECURITIES~~against ~~AND~~us in ~~USE~~an OFaction ~~PROCEEDS~~captioned BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC. et. al. that we commenced in the Superior Court of California, County of Santa Clara (Case No. CV814820) on February 18, 2003, and which Amaze had removed to the United States District Court for the Northern District of California (Case No. C03 01286 PVT) on or about March 24, 2003. Our action asserted claims for, inter alia, relief based on rescission, breach of contract, declaratory relief, and money paid and received with regard to an agreement for a video game titled “Crushed Baseball” that Amaze Entertainment was developing for us. Amaze Entertainment’s counterclaims alleged breach of contract and unjust enrichment with regard to each of the “Crushed Baseball” development agreement and a separate development agreement for another video game titled “Samurai Jack.” The counterclaims sought, inter alia, compensatory damages of approximately $3.5 million and additional damages to be proven at trial. On July 11, 2003 we and Amaze agreed to compromise and settle all claims either asserted or that could be asserted in connection with the dispute and to mutually release any and all future claims and contentions we have against each other. This compromise required Amaze to make us two payments, one in July 2003 and one in October 2003 of $325,000 each. We have received both of these two payments and we recorded them in the three months ended September 30, 2003. The settlement agreement stipulated that upon payment by Amaze to us of the payment due in October 2003, the parties would execute a stipulation for dismissal of the legal actions. The parties executed the stipulation for dismissal on October 21, 2003.

AsWe ofoccasionally ~~December 31,~~become ~~2002,~~involved ~~there~~in ~~were~~litigation ~~14,668,676~~arising ~~shares~~from the normal course of business. ~~our~~Other ~~common~~than ~~stock~~the foregoing, we believe that any liability with respect ~~issued~~to ~~and~~pending ~~outstanding~~legal actions, ~~and~~individually noor ~~shares~~in ofthe aggregate, will not have a material adverse effect on our ~~preferred~~business, ~~stock~~financial ~~issued~~condition ~~and~~or results of ~~outstanding~~operations.

~~Our~~ITEM ~~authorized capital stock consists of 100,000,000 shares of common stock, par value $0~~2.~~001~~ ~~per~~CHANGE ~~share~~IN ~~and~~SECURITIES ~~10,000,000~~AND ~~shares~~USE ofOF ~~authorized~~PROCEEDS ~~preferred~~— ~~stock, par~~Not ~~value $0.001 per share.~~Applicable

InITEM ~~November 2001, we completed the initial public offering (the “Offering”) of 5,750,000 shares of our common stock~~3. ~~The~~DEFAULTS ~~managing~~UPON ~~underwriters~~SENIOR inNOTES ~~the Offering~~— ~~were~~Not ~~Jefferies & Company, Inc. and Morgan Keegan & Company, Inc. (the~~Applicable ~~“Underwriters”). The shares of common stock sold in the Offering were~~ ~~registered under the Securities Act of 1933, as amended, on a registration~~ ~~statement on Form S-1 (Reg. No. 333-62436) (the “Registration Statement”) that was declared effective by the Securities and Exchange Commission (the “SEC”) on November 14, 2001.~~

~~The~~ITEM Offering was terminated after all 5,750,000 shares (including 750,000 shares sold pursuant to the exercise of the Underwriters’ over-allotment option) registered under the Registration Statement were sold by us at a purchase price of $84.00 ~~per~~SUBMISSION ~~share.~~OF ~~The~~MATTERS ~~aggregate~~TO ~~price~~A ofVOTE ~~the~~OF ~~Offering~~SECURITY ~~amount registered~~HOLDERS ~~and~~— ~~sold was $46.0 million. In connection with the Offering, we~~None ~~paid an aggregate of approximately $3.2 million in underwriting discounts and~~ ~~commissions to the Underwriters. Expenses incurred in connection with the~~ ~~Offering, other than underwriting discounts and commissions, totaled approximately $3.6 million.~~

~~After~~ITEM ~~deducting the underwriting discounts and commissions and the estimated expenses incurred in connection with the Offering, we received net proceeds of approximately $39~~5.~~2 million.~~ OfOTHER ~~these~~INFORMATION ~~proceeds,~~— ~~$2.4 million~~Not ~~was unused as of~~Applicable ~~December 31, 2002, and was held as cash and cash equivalents. The following~~ ~~summarizes the use of the remaining $36.8 million:~~

• $24.1 million for product development • $6.0 million for expansion of sales and marketing activities • $6.7 million for additional working capital, including payment of $400,000 of accrued salaries owed to members of our executive management.

ITEM 3. DEFAULTS UPON SENIOR NOTES – Not Applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 13, 2002, the registrant held its annual meeting of stockholders. Of 14,668,676 shares eligible to vote, 13,369,759 votes were returned, or 91%, formulating a quorum. At the stockholders meeting, the following matters were submitted to stockholders for vote: Proposal No. 1 – Election of directors, Proposal No. 2 – Approval of an amendment to the registrant’s 2000 Stock Incentive Plan increasing the number of shares of common stock authorized for issuance under the Plan by an additional 1,972,500 shares, and Proposal No. 3 – Ratification of appointment of independent accountants.

The results of voting on these proposals are as follows:

Proposal No. 1 – Election of Directors

Director	For		Against		Elected
Mark Dyne		13,331,705		38,054	Yes
Robert E. Lloyd		13,343,705		26,054	Yes
David E. Tobin		13,321,605		48,154	Yes

Proposal No. 2 – Approval of an amendment to the registrant’s 2000 Stock Incentive Plan increasing the number of shares of common stock authorized for issuance under the Plan by an additional 1,972,500 shares.

Proposal No. 2 was approved with 8,700,395 shares voted for, 465,159 voted against, and 116,838 abstained from voting thereby approving the amendment to the registrant’s 2000 Stock Incentive Plan increasing the shares of common stock authorized for issuance under the Plan from 1,527,500 shares to 3,500,000 shares.

Proposal No. 3 – Ratification of appointment of independent accountants.

Proposal No. 3 was approved with 13,330,640 shares voted for, 34,519 voted against, and 4,600 abstained from voting thereby approving the ratification of appointment of Deloitte & Touche LLP as independent accountants to provide audit services to the registrant and its subsidiaries for the fiscal year ending June 30, 2003.

ITEM 5. OTHER INFORMATION – Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.3		Amended Employment Agreement dated as of November 21, 2002 between the Registrant and Raymond C. Musci.
10.1*		Letter of Intent dated July 17, 2003 between BAM Entertainment Limited, a subsidiary of the Registrant, and Acclaim Entertainment, Ltd., a subsidiary of Acclaim Entertainment, Inc.
10.4		Amended Employment Agreement dated as of November 21, 2002 between the Registrant and Anthony R. Williams.
10.1(a)*		Amendment to Letter of Intent dated September 30, 2003 between BAM Entertainment Limited, a subsidiary of the Registrant, and Acclaim Entertainment, Ltd., a subsidiary of Acclaim Entertainment, Inc.
10.5		Amended Agreement For Chairman of the Board of Directors dated as of November 21, 2002 between the Registrant and Robert W. Holmes, Jr.
10.2		Loan and Security Agreement dated September 25, 2003 between the Registrant and Phillips Land LLC.
10.6		Agreement for Sale of Assets dated as of January 14, 2003 among BAM Studios (Europe) Limited, a subsidiary of the Registrant, VIS Entertainment PLC, BAM Entertainment Limited, a subsidiary of the Registrant, and the Registrant.
10.2(a)		Amendment to Loan and Security Agreement dated October 17, 2003 between the Registrant and Phillips Land LLC.
99.1		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a - 14(a).
31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a - 14(a).
32		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

(b) Reports on Form 8-K

On ~~November~~July 2123, ~~2002~~2003, under Item 5 –— Other ~~Events~~events. Regarding the ~~issuance of a~~registrant’s ~~press~~announcement ~~release~~ on ~~November~~July 2023, ~~2002~~2003 ~~announcing~~ that ~~the~~its ~~registrant~~subsidiary, ~~had~~Bam ~~received notification~~Entertainment ~~from~~Ltd., ~~the~~had entered ~~Nasdaq~~into ~~Stock~~a ~~Market,~~distribution ~~Inc.~~agreement ~~indicating~~whereby ~~that~~Acclaim itEntertainment ~~had~~Ltd, ~~failed~~a tosubsidiary ~~comply~~of ~~with~~Acclaim ~~the~~Entertainment, ~~minimum~~Inc. ~~bid~~(NASDAQ: ~~price~~AKLM), ~~requirement~~would ~~for continued listing set~~distribute ~~forth~~certain incomputer ~~Marketplace~~and ~~Rule 4450~~video ~~(a)~~game ~~(5),~~titles ~~and~~of ~~that~~the ~~its~~Registrant ~~common~~in ~~stock~~PAL isterritories, ~~therefore,~~including ~~subject~~Europe toand ~~future~~Australia. ~~proceedings~~A ~~regarding~~copy ~~delisting~~of ~~from~~ the ~~Nasdaq~~press release was furnished as ~~National~~Exhibit 99.1 ~~Market~~to the Form 8-K.

34On August 20, 2003, under Item 5 — Other events. The registrant announced that two members of its Board of Directors had resigned from the Board on August 14, 2003 to pursue other interests.

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

SIGNATURES

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

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

3539

CERTIFICATIONS

I, Raymond C. Musci, certify that:

1. I have reviewed this quarterly report on Form 10-Q of BAM! Entertainment, Inc.

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

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

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

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date: February 14, 2003

/S/ RAYMOND C. MUSCI Raymond C. Musci, Chief Executive Officer

I, Stephen M. Ambler, certify that:

1. I have reviewed this quarterly report on Form 10-Q of BAM! Entertainment, Inc.

d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; e) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and f) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: February 14, 2003

/S/ STEPHEN M. AMBLER Stephen M. Ambler, Chief Financial Officer and Vice President of Finance

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Filing Compare · BAM ENTERTAINMENT INC