U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q
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(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 3, 2002

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

FOR THE TRANSITION PERIOD FROM _____ TO _____

COMMISSION FILE NUMBER 0-16986

ACCLAIM ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Exact name of the registrant as specified in its charter)

DELAWARE 38-2698904
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

ONE ACCLAIM PLAZA, GLEN COVE, NEW YORK 11542
--------------------------------------------
(Address of principal executive offices)

(516) 656-5000
--------------
(Registrant's telephone number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.02 PAR VALUE
----------------------------------------------------------------
(Title of class)

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

As of April 15, 2002, 91,399,240 shares of Common Stock of the
Registrant were issued and outstanding.

ACCLAIM ENTERTAINMENT, INC
INDEX TO REPORT ON FORM 10-Q FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION

PAGE
----
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited, except where otherwise noted).............................. 3

Consolidated Balance Sheets - March 3, 2002 and August 31, 2001 (Audited)................................ 3

Consolidated Statements of Operations - Three months and six months ended March 3, 2002 and 2001......... 4
Consolidated Statements of Stockholders' Equity (Deficit) - Six months ended March 3, 2002............... 5

Consolidated Statements of Cash Flows - Six months ended March 3, 2002 and 2001.......................... 6

Notes to Consolidated Financial Statements............................................................... 8

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................................... 18

Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................... 40

PART II OTHER INFORMATION

Item 1. Legal Proceedings........................................................................................ 41

Item 2. Changes in Securities and Use of Proceeds................................................................ 42

Item 4. Submission of Matters to a Vote of Security Holders...................................................... 42

Item 6. Exhibits and Reports on Form 8-K......................................................................... 44

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

MARCH 3, AUGUST 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS

CURRENT ASSETS
Cash......................................................... $ 44,095 $ 26,797
Accounts receivable, net..................................... 72,425 49,074
Inventories.................................................. 9,191 4,043
Prepaid expenses............................................. 5,849 4,816
------------ -----------
TOTAL CURRENT ASSETS............................................... 131,560 84,730
------------ -----------

Fixed assets, net............................................ 30,322 32,645
Other assets................................................. 11,582 8,255
------------ -----------
TOTAL ASSETS....................................................... $ 173,464 $ 125,630
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
Convertible notes............................................ $ - $ 29,225
Short-term borrowings........................................ 34,756 25,428
Trade accounts payable....................................... 28,551 33,630
Accrued expenses............................................. 37,153 31,582
Accrued selling expenses..................................... 11,705 7,284
Income taxes payable......................................... 898 694
------------ -----------
TOTAL CURRENT LIABILITIES.......................................... 113,063 127,843
------------ -----------

LONG-TERM LIABILITIES
Long-term debt............................................... 4,500 4,973
Bank participation advance................................... 9,500 9,500
Other long-term liabilities.................................. 2,963 3,669
------------ -----------
TOTAL LIABILITIES.................................................. 130,026 145,985
------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.01 par value; 1,000 shares
authorized; none issued................................. - -
Common stock, $0.02 par value; 200,000 shares authorized;
91,333 and 77,279 shares issued, respectively........... 1,827 1,546
Additional paid-in capital................................... 309,672 267,436
Accumulated deficit.......................................... (266,411) (287,573)
Accumulated other comprehensive loss......................... (1,650) (1,764)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)............................... 43,438 (20,355)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)............... $ 173,464 $ 125,630
============ ===========

See notes to consolidated financial

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 3, MARCH 3,
--------------------- --------------------
2002 2001 2002 2001
--------- -------- ------ -------

Net revenues.............................................. $ 70,746 $ 40,358 $ 151,770 $ 112,397
Cost of revenues.......................................... 29,261 13,596 58,473 37,654
-------- ------- ------- --------
Gross profit.............................................. 41,485 26,762 93,297 74,743
-------- ------- ------- --------

Operating expenses
Marketing and selling............................... 14,526 3,896 26,267 15,858
General and administrative.......................... 10,959 9,906 21,481 20,432
Research and development............................ 9,552 11,472 18,844 22,928
-------- ------- ------- --------
Total operating expenses.................................. 35,037 25,274 66,592 59,218
-------- ------- ------- --------
Earnings from operations.................................. 6,448 1,488 26,705 15,525
Other income (expense)
Interest income..................................... 179 28 438 332
Interest expense.................................... (2,396) (2,242) (5,178) (5,363)
Other income (expense).............................. (39) 1,215 (551) 1,051
-------- ------- ------- --------
Total other expense....................................... (2,256) (999) (5,291) (3,980)
-------- ------- ------- --------
Earnings before income taxes.............................. 4,192 489 21,414 11,545

Income tax provision (benefit)............................ (830) (54) (969) 197
-------- ------- ------- --------
Earnings before extraordinary loss........................ 5,022 543 22,383 11,348

Extraordinary loss on early
retirement of notes................................. (1,221) - (1,221) -
-------- ------- ------- --------
Net earnings.............................................. $ 3,801 $ 543 $ 21,162 $ 11,348
======== ======= ======== =======
Basic per share data:
Earnings before extraordinary loss.................. $ 0.06 $ 0.01 $ 0.28 $ 0.20
Extraordinary loss.................................. (0.01) - (0.01) -
-------- ------- ------- --------
Net earnings........................................ $ 0.05 $ 0.01 $ 0.27 $ 0.20
======== ======= ======= ========
Diluted per share data:
Earnings before extraordinary loss.................. $ 0.06 $ 0.01 $ 0.27 $ 0.20
Extraordinary loss.................................. (0.02) - (0.02) -
-------- ------- ------- --------
Net earnings........................................ $ 0.04 $ 0.01 $ 0.25 $ 0.20
======== ======= ======= ========

See notes to consolidated financial statements

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

COMMON STOCK
ISSUED
PREFERRED STOCK ------------------------- ADDITIONAL
ISSUED SHARES AMOUNT PAID-IN CAPITAL
----------------- ---------- ------------- ---------------

Balance at August 31, 2001........................... $ - 77,279 $ 1,546 $ 271,031
----------------- ---------- ------------- ---------------
Net earnings.................................... - - - -
Issuances of common stock in private placement.. - 7,167 143 19,642
Issuances of common stock to executive officers. $ - 1,125 23 3,352
Issuances of common stock in
connection with note
retirements and conversions.................. - 5,039 101 18,729
Exercise of stock options and warrants.......... - 1,110 22 3,167
Cancellations of common stock................... - (551) (11) 11
Warrants issued and other non-cash charges
in connection with supplemental bank loan.... - - - 732
Expenses incurred in connection with
issuances of common stock.................... - - - (287)
Issuance of common stock under
employee stock purchase plan................. - 164 3 242
Foreign currency translation gain............... $ - - - -
----------------- ---------- ------------- ---------------
BALANCE AT MARCH 3, 2002 **.......................... $ - 91,333 $ 1,827 $ 316,619
================= ========== ============= ===============

ACCUMULATED
OTHER
NOTES ACCUMULATED COMPREHENSIVE COMPREHENSIVE
RECEIVABLE DEFICIT LOSS TOTAL INCOME
------------- ----------------- ---------------- --------------- ----------------

$ (3,595) $ (287,573) $ (1,764) $ (20,355)
------------- ----------------- ---------------- --------------- ----------------
- 21,162 - 21,162 21,162
- - - 19,785 -
(3,352) - - 23 -

- - - 18,830
- - - 3,189 -
- - - - -

- - - 732 -

- - - (287) -

- - - 245
- - 114 114 114
------------- ----------------- ---------------- --------------- ----------------
$ (6,947) $ (266,411) $ (1,650) $ 43,438 $ 21,276
============= ================= ================ =============== =================

** Amounts for the six months ended March 3, 2002 are unaudited.

See notes to consolidated financial statements.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

SIX MONTHS ENDED
MARCH 3,
---------------------------
2002 2001
----------- --------

CASH FLOWS FROM OPERATING ACTIVITIES
NET EARNINGS.................................................................... $ 21,162 $ 11,348
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH USED IN
OPERATING ACTIVITIES
Depreciation and amortization............................................. 4,083 4,456
Non-cash financing expense................................................ 1,118 -
Extraordinary loss on early retirement of 10% convertible notes........... 1,221 -
Provision for returns and price concessions............................... 11,885 8,928
Deferred compensation expense............................................. - 313
Non-cash royalty charges.................................................. - (1,575)
Amortization of capitalized software development costs.................... 5,863 216
Other non-cash items...................................................... (347) 1,020
CHANGE IN ASSETS AND LIABILITIES
Accounts receivable....................................................... (37,691) (23,587)
Inventories............................................................... (5,180) 1,411
Prepaid expenses.......................................................... (1,106) 5,128
Accounts payable.......................................................... (4,907) (6,616)
Accrued expenses.......................................................... 11,352 (9,406)
Income taxes.............................................................. 245 (59)
Other long-term liabilities............................................... (1,549) 324
----------- --------
TOTAL ADJUSTMENTS............................................................... (15,013) (19,447)
----------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................. 6,149 (8,099)
----------- --------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets..................................................... (1,730) (72)
Disposal of fixed assets........................................................ 5 84
Capitalized software development costs.......................................... (8,472) (1,524)
Other assets.................................................................... (186) (3)
Disposal of other assets........................................................ - 1
----------- --------
NET CASH USED IN INVESTING ACTIVITIES........................................... (10,383) (1,514)
----------- --------

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

SIX MONTHS ENDED
MARCH 3,
---------------------------
2002 2001
----------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of convertible notes.................................................. (12,190) -
Payment of mortgages............................................................ (541) (584)
Proceeds from short-term bank loans, net........................................ 9,650 5,765
Proceeds from exercises of stock options and warrants........................... 3,189 -
Payment of obligations under capital leases..................................... (213) (306)
Proceeds from issuances of common stock......................................... 21,523 900
Proceeds from issuance of common stock under employee stock purchase plan....... 245 108
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... 21,663 5,883
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (131) (837)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 17,298 (4,567)
---------- ----------
CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD................................. 26,797 6,738
---------- ----------
CASH AND CASH EQUIVALENTS: END OF PERIOD....................................... $ 44,095 $ 2,171
========== ==========

Supplemental schedule of non cash investing and financing activities:
Issuance of common stock for payment of convertible
notes and related accrued interest................................... $ 13,309 $ -
Acquisition of equipment under capital leases............................. $ 305 $ -
Conversion of subordinated notes to common stock.......................... $ 4,300 $ -
Cash paid during the period for:
Interest.................................................................. $ 6,614 $ 5,359
Income taxes.............................................................. $ 79 $ (12)

See notes to consolidated financial statements

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

1. BASIS OF PRESENTATION AND BUSINESS

A. BASIS OF PRESENTATION AND CHANGE IN QUARTER-END

The accompanying unaudited consolidated financial statements include
the accounts of Acclaim Entertainment, Inc. and its wholly owned subsidiaries
(collectively, the "Company" or "Acclaim"). These financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included in the accompanying
unaudited consolidated financial statements. All significant intercompany
transactions and balances have been eliminated in consolidation. Operating
results for the three and six months ended March 3, 2002 are not necessarily
indicative of the results that may be expected for the full year ending August
31, 2002. For further information, refer to the consolidated financial
statements and notes thereto, which are included in the Company's Annual Report
on Form 10-K for the year ended August 31, 2001, and other filings with the
Securities and Exchange Commission.

The Company moved its quarterly closing dates from the Saturday closest
to the last day of the calendar quarter to the Sunday closest to the last day of
the calendar quarter effective for the three months ended December 2, 2001. The
Company's fiscal year-end date (August 31) remains unchanged. This change
contributed approximately $2,471 of gross revenues for the six months ended
March 3, 2002, but will have no effect on the Company's gross revenue or net
earnings for the year ending August 31, 2002. The quarterly closing dates for
the current quarter and the remaining quarters of fiscal 2002 are as follows:

QUARTER FISCAL YEAR 2002 FISCAL YEAR 2001
--------------------- ----------------------- -----------------------
Second March 3, 2002 March 3, 2001
Third June 2, 2002 June 2, 2001
Fourth August 31, 2002 August 31, 2001

B. BUSINESS AND LIQUIDITY

The Company develops, publishes, distributes and markets under its
brand names video and computer game software on a worldwide basis for popular
interactive entertainment consoles, such as Sony's PlayStation and PlayStation
2, Nintendo's Game Boy Advance and GameCube and Microsoft's Xbox, and, to a
lesser extent, PCs. The Company develops its own software in its six software
development studios located in the U.S. and the U.K., which includes a motion
capture studio and a recording studio in the U.S., and contracts with
independent software developers to create software for the Company. The Company
distributes its software directly through its subsidiaries in North America, the
U.K., Germany, France, Spain and Australia. The Company uses regional
distributors throughout the rest of the world. The Company also distributes
software developed and published by third parties, develops and publishes
strategy guides relating to its software and issues "special edition" comic
magazines from time to time to support its time valued brands, Turok and Shadow
Man.

At August 31, 2001, the Company's independent auditors' report, as
prepared by KPMG LLP and dated October 23, 2001, which appears in the Company's
2001 Form 10-K, included an explanatory paragraph relating to the then
substantial doubt about the Company's ability to continue as a going concern,
due to its working capital and stockholders' deficits at August 31, 2001 and the
recurring use of cash in operating activities. Since the date of the auditors'
report, the Company has retired $12,735 and converted $4,300 in principal amount
of its convertible subordinated notes in exchange for common stock and repaid
the remaining $12,190 principal amount in full on March 1, 2002, completed a
private placement for net proceeds of $19,785, and maintained profitable
operations. These factors have improved the Company's working capital position
and eliminated its stockholders' deficit. We believe our improved working
capital position and stockholders' equity have contributed to our ability to
continue as a going concern.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

In fiscal 2001, the Company improved profitability by the strategic
transformation of its operating business model from cartridge-based to CD-based
product, which improved gross margins due to lower product costs, reduced
inventory levels due to a reduction in product manufacturing time and improved
inventory turnover. The Company implemented expense reduction initiatives in the
second half of fiscal 2000 that continued into fiscal 2001 which reduced fixed
and variable expenses company-wide, eliminated certain marginal titles under
development, reduced staff and lowered marketing expenses. In fiscal 2001,
operating expenses were reduced $90,960 from the prior year. As a result, the
Company experienced net earnings for fiscal 2001 as compared to a significant
net loss in the prior year. During the six months ended March 3, 2002, the
Company continued to reflect profitable operations.

The Company manages short-term liquidity requirements through
borrowings under its revolving credit and security agreement (the "North
American Credit Agreement") with its primary lender (the "Bank") from which it
received net advances of $9,650 during the six months ended March 3, 2002. To
enhance long-term liquidity, during the six months ended March 3, 2002, the
Company raised net proceeds of $19,785 in a private placement of common stock
and retired $12,735 of 10% convertible subordinated notes through the issuance
of common stock (note 5). During fiscal 2001, to enhance long-term liquidity,
the Company implemented targeted expense reductions, including a significant
reduction in the number of its personnel, and raised net proceeds of $31,534 in
a private placement of common stock, $4,834 from other sales of common stock and
$9,500 from the Bank following a loan participation transaction between the Bank
and certain other lenders (note 3E). The Company's future long-term liquidity
will be significantly dependent on its ability to timely develop and market new
software products that achieve widespread market acceptance for use with the
hardware platforms that dominate the market.

C. ESTIMATES

In the three and six months ended March 3, 2002, net revenues and net
earnings increased by $1,319 and $5,777, respectively, due to the Company's
reduction of the August 31, 2001 allowances for estimated returns and price
concessions as such allowances were not required based on the related products'
sell-through in the retail channel.

D. ACCRUED EXPENSES

In the first quarter of fiscal 2002, the Company's obligations ceased
under certain expired intellectual property agreements and, accordingly, accrued
expenses and marketing and selling expenses were reduced by $4,400.

E. RECLASSIFICATIONS

Certain reclassifications were made to prior period amounts to conform
to the current period presentation.

2. ACCOUNTS RECEIVABLE

Accounts receivable are comprised of the following:

MARCH 3, AUGUST 31,
2002 2001
--------------- ---------------

Assigned receivables due from factor............................... $ 67,488 $ 42,845
Unfactored accounts receivable..................................... 8,372 20,706
Other receivables.................................................. 4,435 2,370
Less: Allowances for returns and price concessions................. (7,870) (16,847)
--------------- ---------------

Accounts receivable, net........................................... $ 72,425 $ 49,074
=============== ===============

The Company and the Bank are parties to a certain factoring agreement
(the "Factoring Agreement"), which expires on January 31, 2003 but automatically
renews for additional one-year periods, unless terminated upon 90 days' prior
notice by either party. Pursuant to the Factoring Agreement, the Company assigns
to the Bank and the Bank purchases the Company's U.S. accounts receivable. As a
result, the Bank remits payments to the Company with respect to assigned U.S.
accounts receivable that are within approved credit limits and not in dispute
with the customer. The purchase price of the assigned accounts receivable is the
invoice amount, which is adjusted for any returns, discounts and other customer
credits or

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

allowances. The Bank, in its discretion, may provide advances to the Company
under the North American Credit Agreement (note 3) taking into account, among
other things, eligible receivables due from the Bank, as factor, under the
Factoring Agreement. At March 3, 2002, the Bank was making advances to the
Company based on 60% of eligible receivables due from the Bank. As of March 3,
2002, the factoring charge amounted to 0.25% of the assigned accounts receivable
with invoice payment terms of up to 60 days and an additional 0.125% for each
additional 30 days or portion thereof.

3. DEBT

Debt consists of the following:

MARCH 3, AUGUST 31,
2002 2001
--------------- ---------------

SHORT TERM DEBT:

10% Convertible Subordinated Notes (A)............................. $ - $ 29,225
Mortgage notes (B)................................................. 953 1,270
Obligations under capital leases................................... 739 536
Supplemental bank loan (C)......................................... 5,000 10,000
Advances from International factor (D)............................. 3,200 6,273
Advances from North America factor (note 2)........................ 24,864 7,349
--------------- ---------------
34,756 54,653
--------------- ---------------

LONG TERM DEBT:

Mortgage notes (B)................................................. 4,070 4,396
Obligations under capital leases................................... 430 577
Bank participation advance (E)..................................... 9,500 9,500
--------------- ---------------
14,000 14,473
--------------- ---------------
$ 48,756 $ 69,126
=============== ===============

(A) In February 1997, the Company issued $50,000 of unsecured 10%
convertible subordinated notes (the "Notes") due March 1, 2002 with interest
payable semiannually. The Notes were originally sold at par with proceeds to the
Company of $47,400, net of expenses. On March 1, 2002, the Company repaid the
remaining $12,190 principal balance outstanding plus accrued interest due on the
Notes. The Notes were convertible into shares of common stock prior to maturity
at a conversion price of $5.18 per share. The Notes were redeemable in whole or
in part, at the option of the Company (subject to the rights of holders of
senior indebtedness) at 102% of the principal balance.

In April and March 2001, the Company retired a total of $13,875 in
principal amount of the Notes for an aggregate purchase price of approximately
$6,751. Concurrently with the Note repurchases, the Company sold a total of
3,147 shares of its common stock to the same Note holders for $3,934, based on a
purchase price of $1.25 per share. The $6,751 purchase price of the Notes
included $754 for the excess of the fair value of the common stock at issuance
over the price paid by the Note holders, plus $5,997 of cash paid by the Company
(including the use of the proceeds of the stock sale). As a result of the Note
retirement, the Company recorded an extraordinary gain on the early retirement
of the Notes in the third quarter of fiscal 2001 of approximately $7,124. Due to
the delayed effectiveness of the registration statement filed with the SEC by
the Company covering the resale of the purchased common stock by the former Note
holders, the Company was required to issue a total of 750 shares of common stock
to certain former Note holders which resulted in an extraordinary charge for the
fair value of the common stock in the fourth quarter of fiscal 2001 of
approximately $2,798. On December 12, 2001, the SEC declared the Company's
registration statement effective.

In June 2001, the Company retired $6,650 in principal amount of the
Notes plus accrued interest of approximately $193 in exchange for 2,022 shares
of its common stock. The excess of the $7,198 fair value of the shares issued
over the principal amount of the Notes retired and accrued interest, amounting
to $355, was recorded as an extraordinary loss on the early retirement of the
Notes in the fourth quarter of fiscal 2001.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

In August 2001, the Company issued 250 shares of common stock to one
former Note holder because the registration statement filed by the Company
covering the resale of the common stock issued in connection with the early
retirement of the Notes was not declared effective by August 16, 2001. The fair
value of the common shares was $1,176 and was recorded as an extraordinary
charge in the fourth quarter of fiscal 2001. On December 12, 2001, the SEC
declared the Company's registration statement effective. As a result of all the
fiscal 2001 transactions related to Note retirements, the Company had a net
extraordinary gain of $2,795 in fiscal 2001.

In February 2002, the Company retired $3,400 in principal amount of the
Notes plus accrued interest of approximately $149 in exchange for 956 shares of
its common stock. Also in February 2002, the Company retired an additional
$9,335 in principal amount of the Notes plus accrued interest of approximately
$425 in exchange for 3,253 shares of its common stock. During the second quarter
of fiscal 2002, the Company recorded an aggregate extraordinary loss of $1,221
on the early retirement of the Notes, reflecting the aggregate excess of the
fair value of the shares issued of $14,530 over the principal amount of the
Notes retired plus accrued interest.

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

(B) The Company had a mortgage note which was secured by the Company's
corporate headquarters building in the U.S. and required quarterly principal
payments of $181 through February 1, 2002, plus interest at the mortgagor's
prime lending rate plus 1.00% per annum (6.01% at March 3, 2002; 8.25% at August
31, 2001). The principal balance outstanding under the mortgage note at March 3,
2002 and August 31, 2001 was $169 and $471, respectively. On March 6, 2002, the
Company repaid the principal balance outstanding at March 3, 2002. During the
fourth quarter of fiscal 2001, as additional security for the supplemental loans
(as described below), the Company granted the Bank a second mortgage on its
headquarters building.

The Company granted the Bank's U.K. affiliate (the "U.K. Bank") a
mortgage in connection with its seven-year term secured credit facility entered
into in March 2000 with the U.K. Bank which relates to the Company's purchase of
a building in the United Kingdom. The Company is required to make quarterly
principal payments of (pound)137.5 (approximately $196 at March 3, 2002).
Interest is charged on this facility at 2.00% above LIBOR (6.00% at March 3,
2002; 7.22% at August 31, 2001). The principal balance outstanding under this
credit facility at March 3, 2002 and August 31, 2001 was (pound)3,406
(approximately $4,854) and (pound)3,406 (approximately $5,195), respectively.
The U.K. building is being held for sale by the Company.

(C) The Company and the Bank are parties to the North American Credit
Agreement which expires on August 31, 2003 but automatically renews for
additional one-year periods, unless terminated upon ninety days' prior notice by
either party. Advances under the North American Credit Agreement bear interest
at 1.50% per annum above the Bank's prime rate (6.25% at March 3, 2002; 8.25% at
August 31, 2001). Certain borrowings in excess of an availability formula bear
interest at 2.00% above the Bank's prime rate. Under the North American Credit
Agreement, combined advances may not exceed a maximum loan amount of $70,000 or
the formula amount, whichever is less. The Company draws down working capital
advances and opens letters of credit against the facility in amounts determined
based on a formula that takes into account, among other things, the Company's
inventory, equipment and eligible receivables due from the Bank, as factor.
Obligations under the North American Credit Agreement are secured by
substantially all of the Company's assets. Pursuant to the terms of the North
American Credit Agreement, the Company is required to maintain specified levels
of working capital and tangible net worth, among other financial covenants. As
of March 3, 2002, the Company was in compliance with respect to those financial
covenants contained in the North American Credit Agreement. The Company is
presently negotiating with the Bank to amend and restate the North American
Credit Agreement.

In each of June 2001 and April 2001, the Bank advanced the Company a
discretionary supplemental loan of $5,000 above the standard formula under the
North American Credit Agreement for short-term funding, which was repaid prior
to August 31, 2001.

In July 2001, the Bank advanced the Company a discretionary
supplemental loan of up to $10,000 above the standard formula under the North
American Credit Agreement which was repaid on January 7, 2002.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

On January 14, 2002, the Bank advanced the Company a discretionary
supplemental loan of up to $5,000 above the standard formula under the North
American Credit Agreement which was repaid on March 6, 2002.

On March 14, 2002, the Bank agreed to amend certain provisions of the
North American Credit Agreement to provide for a supplemental discretionary loan
of up to $5,000 above the standard borrowing formula under the North American
Credit Agreement which amount, if borrowed, must be repaid by June 2, 2002 and
is conditional on the Company remaining in compliance with its agreements with
the Bank.

As additional security for the supplemental loans, two of the Company's
executive officers personally pledged as collateral an aggregate of 1,568 shares
of the Company's common stock with an approximate market value of $6,178 as of
March 3, 2002. In the event the market value of such pledged stock (based on a
ten trading day average reviewed by the Bank monthly) decreases below $5,000 and
such officers do not deliver shares of stock of the Company to cover such
shortfall, the Bank is entitled to reduce the outstanding supplemental loan by
an amount equal to the shortfall. The shares pledged as collateral as of March
3, 2002 include an aggregate of 317 shares of common stock that the Company's
officers pledged as additional collateral in October 2001 to cover a shortfall
in the aggregate market value of the shares they had already pledged. The Bank
will release the 1,568 shares of the Company's common stock personally pledged
by the officers following a 30-day period in which the Company is not in an
overformula position under its North American Credit Agreement that exceeds
$1,000. The Company estimates that the fair value of providing the collateral by
its officers for the supplemental loan amounted to approximately $200 and has
amortized this amount as a non-cash financing expense over the term of the
original supplemental loan which ended January 7, 2002. In connection with the
original supplemental loan, on October 31, 2001, the Company issued to the Bank
a five-year warrant to purchase 100 shares of its common stock at an exercise
price of $4.70 per share, the market price per share on the date of issuance.
The fair value of the warrant amounted to $419 and was amortized as a non-cash
financing expense over the term of the original supplemental loan which ended
on January 7, 2002.

(D) In fiscal 2001, the Company and certain of its international
subsidiaries entered into a receivable facility under which the U.K. Bank
provided accounts receivable financing of up to the lesser of approximately
$18,000 or 60% of eligible receivables related to the Company's international
operations. The interest rate is 2.00% above LIBOR (6.12% at March 3, 2002;
6.25% at August 31, 2001). This facility has a term of three years automatically
renewing for additional one-year periods thereafter, unless terminated upon
90 days' prior notice by either party. It is secured by the receivables and
assets of such subsidiaries. As of March 3, 2002, there was $3,200 of borrowings
outstanding under the facility.

(E) In March 2001, the Bank entered into junior participation
agreements (the "Participation") with certain investors (the "Junior
Participants") under and pursuant to the North American Credit Agreement.
Following the Participation, the Bank advanced $9,500 to the Company pursuant to
the North American Credit Agreement for working capital purposes. The North
American Credit Agreement requires the Company to repay the $9,500 Participation
to the Bank upon termination of the North American Credit Agreement for any
reason, and the junior participation agreements require the Bank to repurchase
the Participation from the Junior Participants on the earlier of March 12, 2005
or the date the North American Credit Agreement is terminated and the Company
repays all amounts outstanding thereunder. If the Company were not able to repay
the Participation, the Junior Participants would have subordinate rights
assigned to them under the North American Credit Agreement with respect to the
unpaid Participation.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

(F) Maturities of debt are as follows:

Fiscal Years Ending August 31,

2002............................................................... $ 34,756
2003............................................................... 10,718
2004............................................................... 880
2005............................................................... 813
2006............................................................... 803
Thereafter......................................................... 786
-------------

$ 48,756
=============

4. EARNINGS PER SHARE

THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 3, MARCH 3,
-------------------- ---------------------
2002 2001 2002 2001
------ ------ ------ ------

BASIC EPS COMPUTATION:
Earnings before extraordinary loss................... $ 5,022 $ 543 $ 22,383 $ 11,348
Extraordinary loss on early retirement of notes...... (1,221) - (1,221) -
------- ------ ------- --------
Net income........................................... $ 3,801 $ 543 $ 21,162 $ 11,348
======= ====== ======= ========
Weighted average common shares outstanding........... 81,785 56,877 79,551 56,792
======= ====== ======= ========
Earnings per share before extraordinary loss......... $ 0.06 $ 0.01 $ 0.28 $ 0.20
Extraordinary loss per share......................... (0.01) - (0.01) -
------- ------ ------- --------
Earnings per share................................... $ 0.05 $ 0.01 $ 0.27 $ 0.20
======= ====== ======= ========
DILUTED EPS COMPUTATION:
Net income before extraordinary loss................. $ 5,022 $ 543 $ 22,383 $ 11,348
Extraordinary loss on early retirement of notes...... (1,221) - (1,221) -
------- ------ ------- --------
Net income........................................... $ 3,801 $ 543 $ 21,162 $ 11,348
======= ====== ======= ========
Weighted average common shares outstanding........... 81,785 56,877 79,551 56,792
======= ====== ======= ========
Dilutive potential common shares:
Stock options and warrants....................... 5,108 14 4,911 15
------- ------ ------- --------
Diluted common shares outstanding.................... 86,893 56,891 84,462 56,807
======= ====== ======= ========
Earnings per share before extraordinary loss......... $ 0.06 $ 0.01 $ 0.27 $ 0.20

Extraordinary loss per share......................... (0.02) - (0.02) -
------- ------ ------- --------
Earnings per share................................... $ 0.04 $ 0.01 $ 0.25 $ 0.20
======= ====== ======= ========

5. EQUITY

In February 2002, the Company issued 7,167 shares of common stock in a
private placement to certain qualified institutional investors and accredited
investors, at a price of $3.00 per share, raising net proceeds of $19,785. The
per share price represented a 10% discount to the then-recent public trading
price of the common stock. The Company agreed to file a registration statement
with the SEC covering the resale by the investors of all the shares issued in
the private placement which has yet to become effective. If the registration
statement is not declared effective by the SEC on or prior to May 14, 2002, the

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Company is obligated to pay the investors an amount equal to 1% of the purchase
price paid for the shares. Thereafter, for every 30 days that pass without the
registration statement being declared effective, the Company is obligated to pay
the investors an additional 1% of the purchase price paid for the shares.

As a result of the private placement and anti-dilution provisions
included in certain warrants outstanding on the date the private placement was
consummated, in February 2002, the Company modified the terms of two warrants it
had issued previously. One warrant, which was originally issued in October 2001
to the Bank was modified to increase the number of shares purchasable under the
warrant to 136 from 100 and to decrease the exercise price to $3.00 per share
from $4.70 per share. Another warrant, which was originally issued in August
2001, was modified to decrease the exercise price to $3.56 per share from $3.60
per share. As a result of these modifications, the Company recorded an
additional non-cash financing charge related to these warrants of $113 which is
included in interest expense for the three and six months ended March 3, 2002.

During the six months ended March 3, 2002, the Company issued 27 shares
of common stock in connection with the exercises of warrants issued in
connection with litigation settlements. In fiscal 2001, the Company issued 1,804
shares of common stock, including 250 shares to one of the Junior Participants,
in connection with the exercise of warrants.

In October 2001, the Company issued a total of 1,125 shares of common
stock in connection with warrants exercised by two executive officers of the
Company. The Company received $23, which represents the par value of the shares
issued, and two promissory notes totaling $3,352 for the unpaid portion of the
exercise price of the warrants. The notes provide the Company full recourse
against the officers assets and are payable the earlier of October 2002 and
to the extent of the proceeds of any warrant share sale, following the date upon
which any or all the warrant shares are sold. The notes bear interest at the
same rate the Company is charged from time to time by the Bank, which is the
Bank's prime rate plus 1.50% per annum. Included in other receivables at March
3, 2002 is $93 of accrued interest receivable on the notes. The notes receivable
are reflected as a contra-equity balance in additional paid-in capital.

In October 2001, the Company issued warrants to purchase a total of
1,250 shares of common stock at an exercise price of $2.88 per share, the fair
value of the common stock on the grant date, to two executive officers of the
Company in connection with their pledge of an aggregate of 1,250 shares of
common stock held by them to the Bank as additional security for the Company's
supplemental loans. See note 3(c).

Commencing in September 2001, the Company was required to make a $336
payment monthly to certain investors in connection with the July 2001 private
placement of common stock until the resale of the shares of common stock issued
in association with the private placement was registered with the SEC. During
the six months ended March 3, 2002, the Company paid an aggregate of $1,008 to
the investors, which is included in other expense. On December 12, 2001, the SEC
declared the related registration statement effective. The Company incurred
costs of $287 in connection with the private placement during the six months
ended March 3, 2002 and recorded such costs as a reduction of additional paid-in
capital.

6. RELATED PARTY TRANSACTIONS

Sales commissions are payable to a firm owned and controlled by one of
the Company's executive officers, directors and principal stockholders for
software sales obtained by such company. These commissions amounted to
approximately $292 and $131 for the three months ended March 3, 2002 and 2001,
respectively, and $561 and $199 for the six months ended March 3, 2002 and 2001,
respectively. The Company owed the firm approximately $579 and $18 at March 3,
2002 and August 31, 2001, respectively, for services provided.

In February 2002, the Company loaned one of its executive officers $300
under a promissory note, in accordance with the officer's employment agreement,
to be used toward the purchase of a new residence. The promissory note bears
interest at 6.00% per annum which is due and payable on or before December 31st
of each year the promissory note remains outstanding. The promissory note is
secured by a second deed of trust for which the Company is the beneficiary, on
the real property on which the new residence is situated. The promissory note is
due to be repaid on the earlier of the sale of the officer's new residence and
June 28, 2004; however, if the employment agreement is terminated by the Company
without cause, then, in such event, the promissory note shall be deemed forgiven
by the Company. As of March 3, 2002, the balance outstanding under the loan was
$300.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

In August 2000, the Company loaned one of its officers $200 under a
promissory note, in accordance with the officer's employment agreement. The
note bears no interest and is payable in full on the earlier to occur of the
sale of the officer's personal residence or August 24, 2004. Based on the
officer's employment agreement, the loan is forgiven at a rate of $25 for each
year the officer remains employed with the Company up to a maximum amount
which could be forgiven of $100. Accordingly, in August 2001 the Company
expensed $25 and reduced the officer's outstanding loan balance to $175. As of
March 3, 2002 and August 31, 2001, the balance outstanding under the loan was
$175.

In August 1998, the Company loaned one of its officers $500 under a
promissory note, in accordance with the officer's employment agreement. The note
was reduced by $50 in August 1999, in accordance with the terms of the officer's
employment agreement, and by $200 in January 2000 in connection with the
employee's termination. The note bears no interest and is payable on the earlier
to occur of the sale or transfer of the former officer's personal residence and
August 11, 2003. As of March 3, 2002 and August 31, 2001, the balance
outstanding under the loan was $250.

In April 1998, the Company loaned one of its executive officer's $200
under a promissory note, in accordance with the officer's employment agreement.
The note bears interest at 7.00% per annum; the Company is currently reviewing
an extension of this promissory note which is currently due and payable. As of
March 3, 2002 and August 31, 2001, the balance outstanding under the loan was
$200.

In July 2001, the Company issued 1,500 shares of common stock in
connection with warrants exercised by two officers of the Company. The Company
received $30, which represents the par value of the common shares issued, and
two promissory notes totaling $3,595 for the unpaid portion of the exercise
price of the warrants. The notes provide the Company full recourse against the
officer's assets and are payable the earlier of July 2002 and to the extent
of the proceeds of any warrant share sale, following the date upon which any or
all the warrant shares are sold. The notes bear interest at the same rate the
Company is charged from time to time by the Bank, which is the Bank's prime
rate plus 1.50% per annum. Included in other receivables at March 3, 2002 is
$176 of accrued interest receivable on the notes. The notes receivable are
reflected as a contra-equity balance in additional paid-in capital.

The Company receives legal services from two firms of which two members
of the Company's board of directors are partners. The Company incurred fees from
these firms totaling $174 and $136 for the three months ended March 3, 2002 and
2001, respectively, and $314 and $269 for the six months ended March 3, 2002 and
2001, respectively. As of March 3, 2002 and August 31, 2001, the Company owed
these firms fees of $272 and $154, respectively, for services received.

See also note 5.

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

7. SEGMENT INFORMATION

The Company's chief operating decision-maker is the Company's Chief
Executive Officer. The Company has three reportable segments, North America,
Europe, and Pacific Rim, which are organized, managed and analyzed
geographically and operate in one industry segment: the development, marketing
and distribution of entertainment software. Information about the Company's
operations for the three and six months ended March 3, 2002 and 2001 is
presented below:

NORTH PACIFIC
AMERICA EUROPE RIM ELIMINATIONS TOTAL
-------------- ------------- ------------ --------------- -------------

THREE MONTHS ENDED MARCH 3, 2002
Net revenues from external customers......... $ 54,706 $14,555 $1,485 $ - $ 70,746
Intersegment sales........................... 27 2,694 - (2,721) -
-------------- ------------- ------------ --------------- -------------

Total net revenues........................... 54,733 17,249 1,485 (2,721) 70,746
============== ============= ============ =============== =============

Interest income.............................. 161 17 1 - 179
Interest expense............................. 2,128 267 1 - 2,396
Depreciation and amortization................ 1,685 314 18 - 2,017
Segment operating profit (loss).............. 8,622 (1,765) (409) - 6,448

THREE MONTHS ENDED MARCH 3, 2001
Net revenues from external customers......... $ 25,831 $12,865 $1,662 $ - $ 40,358
Intersegment sales........................... 32 2,471 - (2,503) -
-------------- ------------- ------------ --------------- -------------

Total net revenues........................... 25,863 15,336 1,662 (2,503) 40,358
============== ============= ============ =============== =============

Interest income.............................. 5 20 3 - 28
Interest expense............................. 1,913 325 4 - 2,242
Depreciation and amortization................ 1,803 285 99 - 2,187
Segment operating profit (loss).............. 629 1,199 (340) - 1,488

SIX MONTHS ENDED MARCH 3, 2002
Net revenues from external customers......... $111,064 $36,280 $4,426 $ - $ 151,770
Intersegment sales........................... 28 5,619 - (5,647) -
-------------- ------------- ------------ --------------- -------------

Total net revenues........................... 111,092 41,899 4,426 (5,647) 151,770
============== ============= ============ =============== =============

Interest income.............................. 350 85 3 - 438
Interest expense............................. 4,737 439 2 - 5,178
Depreciation and amortization................ 3,411 635 37 - 4,083
Segment operating profit..................... 22,998 2,826 881 - 26,705
Identifiable assets at March 3, 2002......... 136,948 33,871 2,645 - 173,464

SIX MONTHS ENDED MARCH 3, 2001
Net revenues from external customers......... $ 81,789 $27,007 $3,601 $ - $ 112,397
Intersegment sales........................... 284 5,014 - (5,298) -
-------------- ------------- ------------ --------------- -------------

Total net revenues........................... 82,073 32,021 3,601 (5,298) 112,397
============== ============= ============ =============== =============

Interest income.............................. 283 44 5 - 332
Interest expense............................. 4,953 403 7 - 5,363
Depreciation and amortization................ 3,688 567 201 - 4,456
Segment operating profit (loss).............. 15,115 1,125 (715) - 15,525
Identifiable assets at March 3, 2001......... 50,491 10,044 1,169 - 61,704

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The Company's gross revenues were derived from the following product categories:

THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 3, MARCH 3,
------------------ ------------------
2002 2001 2002 2001
----- ------ ------ ------

Cartridge-based software:

Nintendo Game Boy software.................... 6% 18% 7% 17%
Nintendo 64 software.......................... - 3% - 3%
----- ------ ------ ------
Subtotal for Cartridge-based software.............. 6% 21% 7% 20%
----- ------ ------ ------
CD-based software:

Microsoft Xbox: 128-bit software.............. 7% - 6% -
Nintendo GameCube: 128-bit software........... 20% - 21% -
Sony PlayStation: 32-bit software............. 6% 49% 6% 57%
Sony PlayStation 2: 128-bit software.......... 60% 6% 59% 4%
Sega Dreamcast: 128-bit software.............. - 15% - 14%
----- ------ ------ ------

Subtotal for CD-based software.................... 93% 70% 92% 75%
----- ------ ------ ------
PC Software....................................... 1% 9% 1% 5%
----- ------ ------ ------
Total............................................. 100% 100% 100% 100%
===== ====== ====== ======

Note: The numbers in the above schedule do not give effect to sales credits and
allowances as the Company does not track sales credits and allowances by product
category. Accordingly, the numbers presented may vary materially from those that
would be disclosed were the Company able to present such information net of
sales credits and allowances as a percentage of net revenues.

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

The following is intended to update the information contained in our
Annual Report on Form 10-K for the fiscal year ended August 31, 2001 for Acclaim
Entertainment, Inc. and its wholly owned subsidiaries and presumes that readers
have access to, and will have read the information contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in our Form 10-K.

FORWARD-LOOKING STATEMENTS

Our quarterly report on Form 10-Q contains forward-looking statements.
When used in this report, the words "believe," "anticipate," "think," "intend,"
"plan," "expect," "project," "will be" and similar expressions identify those
forward-looking statements. The forward-looking statements included in our
report are based on our current expectations and assumptions that involve risks
and uncertainties. Those statements regarding future events and/or our future
financial performance are subject to risks and uncertainties, such as the timing
of game console transitions, delays in the completion or release of products,
the continued support of our lead lender and vendors, the availability of
financing, the achievement of sales assumptions as projected, the continuation
of savings from expense reductions, the risk of war, terrorism and similar
hostilities, the possible lack of consumer appeal and acceptance of products we
released, fluctuations in demand, that competitive conditions of the markets in
which we operate will not change materially or adversely, the adverse outcome of
pending litigation, that our forecasts will accurately anticipate market demand,
and the risks discussed in "Factors Affecting Future Performance", which could
cause actual events or our actual future results to differ materially from any
forward-looking statement. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. We
believe that the assumptions underlying the forward-looking statements are
reasonable. Our business and our operations are subject to substantial risks
that increase the uncertainty inherent in the forward-looking statements. In
light of the significant risks and uncertainties inherent in the forward-looking
statements, the inclusion of the statements should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.

OVERVIEW

We develop, publish, distribute and market under our brand name video
and computer game software on a worldwide basis for popular interactive
entertainment consoles, such as Sony's PlayStation and PlayStation 2, Nintendo's
Game Boy Advance and GameCube, and Microsoft's Xbox, and, to a lesser extent,
PCs. In fiscal 2001, we released a total of 35 titles for PlayStation,
PlayStation 2, Game Boy Color, Dreamcast and PCs. In the first quarter of fiscal
2002, we released a total of 13 titles for PlayStation 2, Game Boy Advance,
GameCube, Xbox and PCs. In the second quarter of fiscal 2002, we released a
total of nine titles for PlayStation 2, Game Boy Advance, GameCube and Xbox. We
plan to release a total of approximately 50 titles for PlayStation, PlayStation
2, Game Boy Advance, GameCube, Xbox and PCs during fiscal 2002. We develop our
own software in our six software development studios located in the U.S. and the
U.K., which includes a motion capture studio and a recording studio in the U.S.,
and we contract with independent software developers to create software for us.
We distribute our software directly through our subsidiaries in North America,
the U.K., Germany, France, Spain, and Australia. We use regional distributors
throughout the rest of the world. We also distribute software developed and
published by third parties, develop and publish strategy guides relating to our
software and issue "special edition" comic magazines from time to time to
support our time valued brands, Turok and Shadow Man.

We have traditionally derived our revenues from sales of software for
the then-popular game consoles. Therefore, we must continually anticipate game
console cycles and our research and development group must develop software
programming tools necessary for emerging hardware systems. Our performance has
been, and is expected in the future to be, negatively affected by platform
transitions. In fiscal 2000, the video and computer games industry began
experiencing another platform transition from 32-bit and 64-bit to 128-bit game
consoles and related software. We believe that sales of 32-bit and 64-bit game
consoles peaked in fiscal 1999, and deteriorated in fiscal 2000 and 2001. This
transition resulted in increased competition, fewer hit titles capable of
achieving significant sales levels and increased price weakness for non-hit
titles. The software transition also resulted in an industry-wide software price
weakness which impacted our operating results during fiscal 2000, as the market
commenced a shift to next-generation systems that were launched by Sega in
fiscal 2000 and Sony in fiscal 2001. Sony introduced PlayStation 2 in Japan in
the spring of 2000 and shipped a limited number of units in the U.S. and Europe
in the fall of 2000. Sony has indicated that it sold in excess of 20 million
PlayStation 2 units worldwide to date and approximately 8.1 million units in
North America through the end of February 2002. Microsoft introduced its Xbox
system entering the video game console market for the first time in the U.S. in
November 2001; it has announced that it sold 1.7 million Xbox units in the U.S.
by the end of calendar 2001. Microsoft launched the Xbox in

Japan in February 2002 and in Europe in March 2002. Nintendo introduced its
next-generation system, the GameCube, in Japan in September 2001 and in the U.S.
in November 2001. Nintendo has indicated that it sold 1.3 million GameCube units
in the U.S. by the end of February 2002, and has announced that it sold
approximately 2.5 million units in these two territories by the end of calendar
2001. Nintendo intends to launch the GameCube in Europe in the spring of 2002.
Nintendo also launched its new handheld system, Game Boy Advance, in Japan, the
U.S. and Europe in the spring of 2001. In early 2001, Sega announced its plan to
exit the hardware business, cease distribution and sales of its Dreamcast
console and re-deploy its resources to develop software for multiple platforms.
See "Factors Affecting Future Performance: Industry Trends, Platform Transitions
and Technological Change May Adversely Affect Our Revenues and Profitability".

Our current release schedule is developed around PlayStation 2, Xbox,
Game Boy Advance and GameCube. We will continue to support certain legacy
systems, such as PlayStation, on a limited basis. We did not release any N64
titles in fiscal 2001 or in the first half of fiscal 2002 and do not plan to
release any new N64 or Dreamcast titles during the balance of fiscal 2002.
Although the installed base of next-generation systems in fiscal 2001 did not
support software sales at the levels achieved in fiscal 1999 ($431 million),
which was prior to the recently-completed platform transition, we anticipate
that the eventual installed base of the next-generation systems will provide a
market for our software large enough to substantiate software sales at levels
greater than those achieved in fiscal 1999, and improved gross margins are
expected when compared to fiscal 2000 and 2001 (based on the predominance of
CD-based product rather than cartridge-based product). Although the
next-generation systems appear to have been well received in the marketplace,
there can be no assurance that these next-generation game systems (e.g.,
Nintendo's GameCube, Microsoft's Xbox and Sony's PlayStation 2) will achieve
commercial success similar to and/or consistent with the previous level of
installed bases of the 32-bit PlayStation or 64-bit N64, nor can there be any
assurances made as to the timing of their success. See "Liquidity and Capital
Resources" below and "Factors Affecting Future Performance: Industry Trends,
Console Transitions and Technological Change May Adversely Affect Our Revenues
and Profitability."

The rapid technological advances in game consoles have significantly
changed the look and feel of software as well as the software development
process. Currently, the process of developing software for the new 128-bit
consoles is extremely complex and we expect it to become even more complex and
expensive with the advent of more powerful future game systems. According to our
current estimates, the average development time for a title for dedicated game
consoles is between 12 and 36 months and the average development cost for a
title is between $2.0 million and $8.0 million. The average time to develop our
software for handheld systems is currently between six and nine months and the
average development cost for a title is between $200,000 and $400,000.

Our revenues in any period are generally driven by the titles we
released in that period. We have experienced delays in the introduction of new
titles, which has had a negative impact on our operations, as well as quarterly
and annual reported financial results. It is likely that some of our future
titles will not be released in accordance with our operating plans, in which
event our results of operations and profitability in that period would be
negatively affected. See "Liquidity and Capital Resources" and "Factors
Affecting Future Performance: Revenues and Liquidity Are Dependent on Timely
Introduction of New Titles."

Revenues from sales of our software in fiscal 2001 increased as
compared to fiscal 2000 predominantly as a result of increases in sales of
PlayStation, PlayStation 2 and Game Boy products, and a reduced provision for
returns and price concessions due to the change in the overall product mix from
cartridge-based to CD-based product, which have a shorter order cycle and
require less on-hand inventory. As a result of the industry platform transition,
revenues from our 64-bit software and 128-bit software in fiscal 2001 were
negatively impacted by (1) the continuous decline of the market for N64 software
and our prior emphasis on developing products for the N64 platform, (2) the
decline of the market for Dreamcast software and Sega's exit from the hardware
market, and (3) the limited number of PlayStation 2 consoles. As of August 31,
2001, there were approximately four million PlayStation 2 consoles in the United
States. See "Results of Operations" discussion below.

Revenues from sales of our software increased in the second quarter and
first half of fiscal 2002 as compared to the same periods last year
predominantly from the introduction of new titles for the Xbox and GameCube game
systems in the first quarter of fiscal 2002, the greater global installed base
of PlayStation 2 game consoles and the release of better performing titles
across all three next-generation game systems. See "Net Revenues".

We recorded net earnings of $3.8 million, or $0.04 per diluted share,
for the second quarter of fiscal 2002 (based on weighted average diluted shares
outstanding of 86,893,000) compared to net earnings of $0.5 million, or $0.01
per diluted share, for the same period last year (based on weighted average
diluted shares outstanding of 56,891,000). Earnings before extraordinary loss
were $5.0 million, or $0.06 per diluted share, for the second quarter of fiscal
2002 compared to earnings before extraordinary loss of $0.5 million, or $0.01
per diluted share, for the same period last year. Earnings from

operations of $6.4 million increased by 333% for the second quarter of fiscal
2002 as compared to the same period last year due primarily to an increase of
$14.7 million in gross profit, partially offset by an increase of $9.8 million
in operating expenses. See "Gross Profit" and "Operating Expenses".

Revenues generated by CD-based products represented 93% of gross
revenues while revenues generated by cartridge-based software represented 6% of
gross revenues in the second quarter of fiscal 2002; this compares to 70%
(CD-based) and 21% (cartridge-based) of gross revenues in the same period last
year.

We recorded net earnings of $21.2 million, or $0.25 per diluted share,
for the first half of fiscal 2002 (based on weighted average diluted shares
outstanding of 84,462,000) compared to net earnings of $11.3 million, or $0.20
per diluted share, for the same period last year (based on weighted average
diluted shares outstanding of 56,807,000). Earnings before extraordinary loss
were $22.4 million, or $0.27 per diluted share, for the first half of fiscal
2002 compared to earnings before extraordinary loss of $11.3 million, or $0.20
per diluted share for same period last year. Earnings from operations of $26.7
million increased by 72% for the first half of fiscal 2002 as compared to the
same period last year due primarily to an increase of $18.6 million in gross
profit, partially offset by an increase of $7.4 million in operating expenses.
See "Gross Profit" and "Operating Expenses".

Revenues generated by CD-based products represented 92% of gross
revenues while revenues generated by cartridge-based software represented 7% in
the first half of fiscal 2002; this compares to 75% (CD-based) and 20%
(cartridge-based) in the same period last year.

We implemented a three-tier product development strategy in fiscal 2000
to ensure that our software would be competitive for all of the next-generation
hardware systems: first, we directed our studios to develop the software tools
and engines for all the next-generation hardware systems, second, we ensured
that the development of our key titles for next-generation systems were
performed by our internal studios (for example, Turok, All Star Baseball and
VEXX) and third, we contracted with independent studios for the development of
software for PlayStation and Game Boy Color. Internal development of games
permits us to better control variable expenses, spread the costs of our software
development tools and engines across several different games, shorten the
development time and costs of creating sequels (for example, All Star Baseball
and Legends of Wrestling), protect the proprietary game engine technology for
next-generation systems, and helps ensure the timeliness and quality of our
titles. Products developed by our internal studios generated 70% of our gross
revenues during the second quarter of fiscal 2002 and 55% of our gross revenues
during the first half of fiscal 2002. A significant amount of the research and
development work for developing the next-generation game engines was completed
in fiscal 2000 and 2001. We generally expect research and development costs to
increase ratably with net revenue in the future as we expand our product lines
through the addition of more teams in our internal studios and the acquisition
of more titles from a select group of key independent developers. See "Factors
Affecting Future Performance: Profitability is Affected By Research and
Development Expenditure Fluctuations due to Console Transitions and Development
for Multiple Consoles."

As we emerge from the recent game console transition and compete in the
software market for next-generation systems, it is necessary that we continue to
meet our product release schedule, sales projections and manage our operational
expenditures at planned levels in order to generate sufficient liquidity to fund
our operations. See "Liquidity and Capital Resources". Our results of operations
in the future will be dependent in large part on (1) the rate of growth of the
software market for 128-bit and other emerging game systems, and (2) our ability
to identify, develop and timely publish, in accordance with our product release
schedule, software that performs well in the marketplace.

RESULTS OF OPERATIONS

The following table shows certain consolidated statements of operations
data as a percentage of net revenues for the periods indicated:

THREE MONTHS ENDED SIX MONTHS ENDED
March 3, March 3,
--------------------- -----------------------
2002 2001 2002 2001
------ ------ ------- -------

Domestic revenues............................................. 77.3% 64.0% 73.2% 72.8%
Foreign revenues.............................................. 22.7% 36.0% 26.8% 27.2%
------- ------- ------- -------
Net revenues.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................................. 41.4% 33.7% 38.5% 33.5%
------- ------- ------- -------
Gross profit.................................................. 58.6% 66.3% 61.5% 66.5%
------- ------- ------- -------
Operating expenses
Marketing and selling.................................... 20.5% 9.7% 17.3% 14.1%
General and administrative............................... 15.5% 24.5% 14.2% 18.2%
Research and development................................. 13.5% 28.4% 12.4% 20.4%
------- ------- ------- -------

Total operating expenses...................................... 49.5% 62.6% 43.9% 52.7%
------- ------- ------- -------
Earnings from operations...................................... 9.1% 3.7% 17.6% 13.8%

Other income (expense)
Interest income.......................................... 0.3% 0.1% 0.3% 0.3%
Interest expense......................................... (3.4%) (5.6%) (3.4%) (4.8%)
Other income (expense)................................... (0.1%) 3.0% (0.4%) 1.0%
------- ------- ------- -------

Total other expense........................................... (3.2%) (2.5%) (3.5%) (3.5%)
------- ------- ------- -------

Earnings before income taxes.................................. 5.9% 1.2% 14.1% 10.3%

Income tax provision (benefit)................................ (1.2%) (0.1%) (0.6%) 0.2%
------- ------- ------- -------

Earnings before extraordinary loss............................ 7.1% 1.3% 14.7% 10.1%

Extraordinary loss on early retirement of notes............... (1.7%) - (0.8%) -
------- ------- ------- -------

Net earnings.................................................. 5.4% 1.3% 13.9% 10.1%
======= ======= ======= =======

NET REVENUES

Our gross revenues were derived from the following product categories:

THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 3, MARCH 3,
------------------ ------------------
2002 2001 2002 2001
----- ------ ------ ------

Cartridge-based software:

Note: The numbers in the above schedule do not give effect to sales credits
and allowances as we do not track sales credits and allowances by product
category. Accordingly, the numbers presented may vary materially from those
that would be disclosed were we able to present such information net of
sales credits and allowances as a percentage of net revenues.

We derive net revenues from the shipment of finished products to our
customers. Net revenues from product sales are recorded after deducting
provisions for returns and price concessions.

For the second quarter of fiscal 2002, net revenues of $70.7 million
reflect an increase of approximately $30.4 million, or 75%, as compared to $40.4
million for the same period last year. The increase in net revenues resulted
from a $35.6 million increase in gross revenues that was partially offset by a
$5.2 million increase in our net provision for returns and price concessions.
The increase in gross revenues was driven by sales of newly released software
titles for the three recently introduced next-generation game systems: Xbox,
GameCube and PlayStation 2. Sales of software titles for the three game systems
accounted for 87% of gross revenues during the quarter. The greatest level of
sales was for software titles released for PlayStation 2 which to date has the
highest installed base of the three game systems.

For the first half of fiscal 2002, net revenues of $151.8 million
reflect an increase of approximately $39.4 million, or 35%, as compared to
$112.4 million for the same period last year. The increase in net revenues
resulted from a $42.3 million increase in gross revenues that was partially
offset by a $2.9 million increase in our net provision for returns and price
concessions. The increase in gross revenues was driven by sales of newly
released software titles for the three recently introduced next-generation game
systems: Xbox, GameCube and PlayStation 2. Sales of software titles for the
three game systems accounted for 86% of gross revenues during the first half of
fiscal 2002. The greatest level of sales was for software titles released for
PlayStation 2 which to date has the highest installed base of the three game
systems.

Increased unit volume during the second quarter of fiscal 2002, as
compared to the same period last year, contributed $55.6 million to the increase
in net revenues, which was partially offset by the impact of lower average
selling prices of software titles. Increased unit volume during the first half
of fiscal 2002, as compared to the same period last year,

contributed $98.5 million to the increase in sales, which was partially offset
by the impact of lower average selling prices of some software titles. See
"Gross Profit".

Products developed by our internal studios generated 70% of gross
revenues during the second quarter of fiscal 2002 and 55% of our gross revenues
during the first half of fiscal 2002.

The following game franchises accounted for a significant percentage of
our gross revenues during the three and six months ended March 3, 2002 and 2001:

THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 3, MARCH 3,
-------------------- ----------------
GAME FRANCHISE PLATFORM 2002 2001 2002 2001
- ---------------------------- --------------- ------ ------- ------ -------

All-Star Baseball Multiple 24% - 15% -
Legends of Wrestling PlayStation 2 13% - 8% -
Dave Mirra Freestyle BMX Multiple 9% 13% 17% 31%
Burnout PlayStation 2 7% - 12% -
Mary-Kate and Ashley Multiple 3% 23% 4% 20%
Ducati Multiple - 10% - 4%
Vanishing Point Multiple - 17% - 6%

Our revenues for the first half of 2002 are better distributed among
our game franchises than revenues for the same period last year as several of
our game franchises materially contributed to our revenues in the current year
as compared to the prior year where fewer titles had an impact. During the
second quarter of fiscal 2002, All Star Baseball 2003 was rated "best of the
breed" by Newsweek magazine and received the editor's choice award from Ign.com
and is one of the top five selling titles as rated by NPD.

A significant portion of our revenues in any quarter are generally
derived from software first released in that quarter or in the immediately
preceding quarter. See "Factors Affecting Future Performance: Revenues and
Liquidity Are Dependent on Timely Introduction of New Titles," and "Our Future
Success is Dependent on Our Ability to Release "Hit" Titles."

We anticipate that our mix of domestic and foreign net revenues will
continue to be affected by the content of titles we release to the extent such
titles are more relatively positioned for the domestic consumer.

In the first quarter of fiscal 2002, we moved our quarterly closing
dates from the Saturday closest to the last calendar day of the quarter to the
Sunday closest to the last calendar day of the quarter. This change resulted in
approximately $2.5 million of additional gross revenues in the first half of
fiscal 2002 but will have no effect on our gross revenues or net earnings for
the year ending August 31, 2002. Our fiscal year-end date (August 31) remains
unchanged.

GROSS PROFIT

Gross profit is significantly affected by the sales mix between
CD-based and cartridge-based software. Gross profit is also from time to time
significantly affected by the level of price concessions provided to retailers
and distributors as well as from fees paid to third-party distributors for
software sold overseas. We grant price concessions to our key customers who are
major retailers that control market access to the consumer, when those
concessions are necessary to maintain our relationships with the retailers and
access to our retail channel customers. If the consumers' demand for a specific
title falls below expectations or significantly declines below previous rates of
sale, a price concession or credit may be requested by our customers to spur
further sales. Gross profit percentages earned on foreign software sales to
third-party distributors are generally one-third lower than those on sales we
make directly to foreign retailers.

Gross profit of $41.5 million (59% of net revenues) for the second
quarter of fiscal 2002 increased $14.7 million, or 55%, from $26.8 million (66%
of net revenues) for the same period last year. The increased gross profit is
due to significant Xbox, GameCube and PlayStation 2 software sales volume. See
"Net Revenues".

Gross profit as a percentage of net revenues decreased approximately 8%
for the second quarter of fiscal 2002 as compared to the same period last year.
Our gross profit as a percentage of net revenues decreased approximately 5% for
the

first half of fiscal 2002 as compared to the same period last year. This
decrease was primarily a result of the amortization of capitalized software
development costs, included in cost of revenues, off-price sales of catalog
software at lower margins to certain customers in a new distribution channel and
sales of software in the rental market designed to drive consumer awareness for
the launch of our All-Star Baseball 2003 software title. Amortization of
capitalized software development costs amounted to $3.2 million (5% of net
revenues) for the second quarter of fiscal 2002 as compared to $0.2 million of
amortization for the same period last year. Amortization of capitalized software
development costs amounted to $5.9 million (4% of net revenues) for the first
half of fiscal 2002 as compared to $0.2 million of amortization for the same
period last year.

Gross profit of $93.3 million (62% of net revenues) for first half of
fiscal 2002 increased $18.6 million, or 25%, from $74.7 million (67% of net
revenues) for the same period last year. The increased gross profit is due to
significant PlayStation 2, GameCube and Xbox software sales volume.

Our gross profit in fiscal 2002 will be dependent in large part on the
rate of growth of the software market for 128-bit and other emerging game
consoles, primarily PlayStation 2, Nintendo's GameCube and Microsoft's Xbox, and
our ability to identify, develop and timely publish, in accordance with our
product release schedule, software that sells through at projected levels at
retail. See "Factors Affecting Future Performance: Liquidity and Meeting Cash
Requirements are Dependent on Achieving Timely Product Releases and Sales
Objectives."

OPERATING EXPENSES

Operating expenses for the second quarter of fiscal 2002 of $35.0
million (50% of net revenues) were $9.8 million, or 39%, higher than the $25.3
million (63% of revenues) of operating expenses for same period last year.
Operating expenses for the first half of fiscal 2002 of $66.6 million (44% of
net revenues) were $7.4 million, or 13%, higher than the $59.2 million (53% of
revenues) of operating expenses for same period last year.

Marketing and Selling

Marketing and selling expenses of $14.5 million (21% of net revenues)
for the second quarter of fiscal 2002 increased by $10.6 million, or 273%, from
$3.9 million (10% of net revenues) for the same period last year. The second
quarter fiscal 2002 increase was primarily attributable to a $3.9 million
increase in royalties, a $5.3 million increase in Acclaim-directed (TV, print)
and customer-directed advertising expenses in addition to a $1.4 million
increase in sales commissions due to larger sales volume. The royalties increase
of $3.9 million is net of a $1.1 million recovery of previously paid royalties,
and is attributable to increased sales volume generated from our top selling
game franchises. See "Net Revenues".

Marketing and selling expenses of $26.3 million (17% of net revenues)
for the first half of fiscal 2002 increased by $10.4 million, or 66%, from $15.9
million (14% of net revenues) for the same period last year. The increase was
primarily attributable to a $5.6 million net increase in royalty expenses, a
$7.3 million increase in Acclaim-directed and customer-directed advertising
expenses in addition to a $0.9 million increase in sales commissions due to
larger sales volume, partially offset by a $4.4 million reduction of accrued
expenses for obligations that ceased under certain expired intellectual property
agreements. The $5.6 million net increase in royalty expenses is attributable to
increased sales volume generated from our top selling game franchises. See "Net
Revenues".

During the second quarter and the first half of fiscal 2001, we limited
our funding of TV and media advertising because the estimated installed base in
North America of the PlayStation 2 system was not deemed sufficient to allow
marketing expenditures to be cost effective.

Marketing and selling expenses are expected to range between 18% and
20% of projected net revenues for the balance of fiscal 2002.

General and Administrative

General and administrative expenses of $11.0 million (16% of net
revenues) for the second quarter of fiscal 2002 increased by $1.1 million, or
11%, from $9.9 million (25% of net revenues) for the same period last year. The
increase was due primarily to an increase in employee-related expenses of $1.2
million due to an increase in headcount. As a percentage of net revenues,
general and administrative expenses decreased to 16% for the second quarter of
fiscal 2002 from 25% for the same period last year. The improvement in general
and administrative expenses as a percentage of net revenues resulted primarily
from the increases in net revenues for the second quarter of fiscal 2002 as
compared to the same period last year.

General and administrative expenses of $21.5 million (14% of net
revenues) for the first half of fiscal 2002 increased by $1.0 million, or 5%,
from $20.4 million (18% of net revenues) for the same period last year. The
increase was due primarily to a increase in employee-related expenses of $1.6
million resulting from an increase in headcount, partially offset by a $0.6
million reduction in computer related expenses. As a percentage of net revenues,
general and administrative expenses decreased to 14% from 18% for the same
period last year. The improvement in general and administrative expenses as a
percentage of net revenues resulted primarily from the increases in net revenues
for the first half of fiscal 2002 as compared to the same period last year.

Research and Development.

Research and development expenses of $9.6 million (14% of net revenues)
decreased by $1.9 million, or 17%, for the second quarter of fiscal 2002 from
$11.5 million (28% of net revenues) for the same period last year. The decrease
was due primarily to the greater number of software titles in development that
met the test of technological feasibility resulting in a $3.3 million increase
in the amount of software development costs capitalized, and a $1.3 million
reduction in external development costs, partially offset by a $3.3 million
increase in internal development costs. As a percentage of net revenues,
research and development expenses decreased to 14% for the second quarter of
fiscal 2002 from 28% for the same period last year. The reduction in expense
resulted primarily from the increase in capitalized software development costs.

Research and development expenses of $18.8 million (12% of net
revenues) decreased by $4.1 million, or 18%, for the first half of fiscal 2002
from $22.9 million (20% of net revenues) for the same period last year. The
decrease was due primarily to the greater number of software titles in
development that met the test of technological feasibility resulting in a $6.9
million increase in the amount of software development costs capitalized, and a
$2.0 million reduction in external development costs, partially offset by a $6.0
million increase in internal development costs. As a percentage of net revenues,
research and development expenses decreased to 12%, from 20% for the same period
last year. The reduction resulted primarily from the increase in capitalized
software development costs.

Because expenditures for developing the software tools and the game
engines for next-generation consoles are complete, we expect we now possess
proprietary game engines and technology for the next-generation systems, which
will allow for more cost-effective and quicker development of games. We expect
research and development expenditures to increase proportionately as our net
revenues increase. Research and development expenses are expected to range
between 14% and 16% of projected net revenues for the balance of fiscal 2002.

OTHER INCOME AND EXPENSE

Interest Income

For the second quarter of fiscal 2002, interest income increased by
$151,000, or 539%, to $179,000 (0.3% of net revenues) from $28,000 (0.1% of net
revenues) for the same period last year. The increase is due to an increase in
our average cash balances, partially offset by a general decrease in interest
rates.

For the first half of fiscal 2002, interest income increased by $0.1
million, or 32%, to $0.4 million (0.3% of net revenues) from $0.3 million (0.3%
of net revenues) for the same period last year. The increase is due to an
increase in our average cash balances, partially offset by a general decrease in
interest rates.

Interest expense.

For the second quarter of fiscal 2002, interest expense increased by
$0.2 million, or 7%, to $2.4 million (3% of net revenues) from $2.2 million (6%
of net revenues) for the same period last year. The increase was due primarily
to $0.3 million of interest expense incurred in connection with our
supplemental loan (see "Liquidity and Capital Resources"), and a $0.5 million
increase in interest expense incurred from the greater level of advances on
accounts receivable we received from our factor, partially offset by a $0.6
million decrease in interest expense related to the decrease in the outstanding
balance of our 10% convertible subordinated notes, which were repaid on March 1,
2002.

For the first half of fiscal 2002, interest expense decreased by $0.2
million, or 3%, to $5.2 million (3% of net revenues) from $5.4 million (5% of
net revenues) for the same period last year. The decrease was due primarily to a
$1.0 million decrease in interest expense incurred on the outstanding balance of
our 10% subordinated convertible notes, partially offset by a $0.7 million
increase in interest expense incurred in connection with our supplemental bank
loan.

During the third and fourth quarters of fiscal 2001 we retired $20.5
million principal amount of our 10% convertible subordinated notes. During this
period, we incurred short-term bank loans that bear interest at lower rates than
the notes.

Other income (expense).

For the second quarter of fiscal 2002, other income (expense) decreased
by $1.3 million, or 103%, to expense of $39,000 (0.1% of net revenues) from
income of $1.2 million (3% of net revenues) for the same period last year. The
decrease resulted primarily from $1.0 million we paid to investors as a result
of the delayed effectiveness of a registration statement covering the resale of
the shares of common stock issued in connection with our July 2001 private
placement, and foreign currency exchange losses.

For the first half of fiscal 2002, other income (expense) decreased by
$1.6 million, or 152%, to expense of $0.6 million (0.4% of net revenues) from
income of $1.1 million (0.9% of net revenues) for the same period last year. The
decrease resulted primarily from $1.0 million we paid to investors as a result
of the delayed effectiveness of a registration statement covering the resale of
the shares of common stock issued in connection with our July 2001 private
placement, and foreign currency exchange losses.

INCOME TAXES

For the second quarter of fiscal 2002, income tax provision (benefit)
changed by $776,000 to a benefit of $830,000 (1.2% of net revenues) from a
benefit of $54,000 (0.1% of net revenues) in the same period last year. The
change was due primarily to a $0.8 million foreign tax credit we received in
connection with tax returns we filed in prior years.

For the first half of fiscal 2002, income tax provision (benefit)
changed by $1.2 million to a benefit of $1.0 million (0.6% of net revenues) from
a provision of $197,000 (0.2% of net revenues) in the same period last year. The
change was due primarily to a $0.8 million foreign tax credit we received in
connection with tax returns we filed in prior years. We had a federal income tax
receivable of $1.6 million at March 3, 2002.

As of August 31, 2001, we had a U.S. tax net operating loss
carryforward of approximately $201.0 million expiring in fiscal years 2011
through 2021.

EXTRAORDINARY LOSS

During the second quarter and first half of fiscal 2002 we incurred an
extraordinary loss of $1.2 million on the early retirement of $12.7 million in
principal amount of convertible notes (plus $0.6 million accrued interest)
through the issuance of a total of 4,209,420 common shares with a fair value of
$14.3 million.

NET EARNINGS

We recorded net earnings of $3.8 million, or $0.04 per diluted share
(based on weighted average diluted shares outstanding of 86,893,000), for the
second quarter of fiscal 2002 compared to net earnings of $0.5 million, or $0.01
per diluted share (based on weighted average diluted share outstanding of
56,891,000) for the same period last year.

We recorded net earnings of $21.2 million, or $0.25 per diluted share
(based on weighted average diluted shares outstanding of 84,462,000), for the
first half of fiscal 2002 compared to net earnings of $11.3 million, or $0.20
per diluted share (based on weighted average diluted shares outstanding of
56,807,000) for the same period last year.

SEASONALITY

Our business is seasonal, with higher revenues and operating income
typically occurring during our first, second and fourth fiscal quarters (which
corresponds to the holiday-selling season). The timing of the delivery of
software titles and the release of new products cause material fluctuations in
the our quarterly revenues and earnings, which causes our results to vary from
the seasonal patterns of the industry as a whole. See "Factors Affecting Future
Performance: Revenues Vary Due to the Seasonal Nature of Video and PC Game
Software Purchases."

LIQUIDITY AND CAPITAL RESOURCES

At March 3, 2002, we had working capital of approximately $18.5 million
as compared to ($43.1) million at August 31, 2001. The improvement of $61.6
million in working capital during the first half of fiscal 2002 is mainly
attributable to the retirement of our 10% convertible subordinated notes of
$29.2 million, the net proceeds from our February 2002 private placement of
$19.8 million, and the increase in accounts receivable, net, of $23.4 million.
See "Factors Affecting Future Performance: Our Ability to Meet Cash Requirements
and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary
Lender and Vendors, and Our Ability to Achieve Our Projected Revenue Levels".

At August 31, 2001, our working capital and stockholders' deficits, and
the recurring use of cash in operating activities raised substantial doubt at
that time about our ability to continue as a going concern. We managed our
short-term liquidity during the first half of fiscal 2002, by receiving advances
of $9.7 million from our primary lender under our North American credit
agreement and under international factoring agreements . In fiscal 2001 we also
addressed our short-term liquidity by receiving additional interim borrowings
under our credit agreement with our primary lender and with short-term financing
from affiliates, which was borrowed and repaid in each of the second and third
quarters of fiscal 2001. To enhance long-term liquidity during the first half of
fiscal 2002 we raised net proceeds of $19.8 million in a private placement of
common stock and retired $12.7 million of 10% convertible subordinated notes
through the issuance of common stock. During fiscal 2001, to enhance long-term
liquidity, we implemented targeted expense reductions, including a significant
reduction in the number of our personnel, and raised net proceeds of $31.5
million from a private placement of common stock, $4.8 million from other sales
of common stock and $9.5 million from a loan participation transaction between
our primary lender and other lenders. Our future long-term liquidity will be
significantly dependent on our ability to timely develop and market new software
products that achieve widespread market acceptance for use with the hardware
platforms that dominate the market.

The Company's liquidity and capital resources are subject to certain
risks. See "Factors Affecting Future Performance: Our Ability to Meet Cash
Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation
of Our Primary Lender and Vendors, and Our Ability to Achieve Our Projected
Revenue Levels."

In March 2002, our primary lender agreed to amend certain provisions of
our revolving credit and security agreement to provide for a supplemental
discretionary loan of up to $5.0 million above the standard borrowing formula as
long as we are in compliance with our agreements with the lender, which amount,
if borrowed, is required to be repaid by us by no later than June 2, 2002.

In January 2002, our primary lender advanced us a discretionary
supplemental loan of $5.0 million above the standard borrowing formula under our
revolving credit and security agreement, which we repaid in full on March 6,
2002.

In July 2001, our primary lender agreed to advance us a discretionary
supplemental loan of $10 million above the standard borrowing formula under our
revolving credit and security agreement, which we repaid in full on January 7,
2002.

As additional security for the supplemental loans, we granted our
primary lender a second mortgage on our headquarters located in Glen Cove, New
York, and two of our officers personally pledged to the lender a total of
1,568,000 shares of our common stock, with an approximate total market value of
$6.2 million at March 3, 2002. In the event the market value of the pledged
stock (based on a ten trading day average reviewed by our lender monthly)
decreases below $5.0 million and the executive officers do not deliver
additional shares of our stock to cover the shortfall, our lender is entitled to
reduce the supplemental loan by an amount equal to the shortfall. The shares
pledged as collateral as of March 3, 2002 included an aggregate of 317,000
shares of common stock that the officers delivered as additional

collateral in October 2001 to cover a shortfall in the market value of the
shares they had already pledged. Those shares were timely delivered to our
lender and no reduction to our supplemental loan was necessary. We estimate that
the fair value of providing the collateral by the officers for the supplemental
loans amounted to approximately $0.2 million. In connection with the
supplemental loans, we issued to our lender a five-year-warrant to purchase
100,000 shares of our common stock at an exercise price of $4.70 per share,
which was equal to the market price per share on the date of issuance. The fair
value of the warrants was $0.4 million. Our lender will release all of the
pledged shares following a 30-day period in which we are not in an overformula
position that exceeds $1.0 million.

On February 12, 2002, we retired $3.4 million in principal amount of
10% convertible subordinated notes plus accrued interest of approximately
$148,000 in exchange for 956,000 shares of our common stock. On February 14,
2002, we retired an additional $9.3 million in principal amount of the notes
plus accrued interest of approximately $425,000 in exchange for 3,253,420 shares
of common stock. We recorded a total extraordinary loss on the early retirement
of these notes of $1.2 million in the second quarter of fiscal 2002, reflecting
the total excess of the fair value of the shares issued of $14.5 million over
the principal amount of the notes retired plus accrued interest.

During the second quarter of fiscal 2002, a total of $4.3 million in
principal amount of the 10% convertible subordinated notes was converted to
830,000 shares, pursuant to the indenture governing our notes, at a conversion
price of $5.18 per share.

On March 1, 2002, we timely repaid in full, the $12.8 million of
remaining outstanding principal ($12.2 million) and interest (approximately $0.6
million) due on the 10% convertible subordinated notes.

On February 13, 2002, we issued a total of 7,166,667 shares of our
common stock in a private placement to certain qualified institutional buyers
and accredited investors at a price of $3.00 per share, for aggregate gross
proceeds of $21.5 million. We recorded $19.8 million to stockholders' equity
during the first half of fiscal 2002 to reflect the net proceeds from the
placement. Direct expenses incurred in connection with the private placement of
$1.7 million were payable at March 3, 2002. The per share price represented an
approximate 10% discount to the then-recent public trading price of the common
stock. We intend to use the proceeds of the private placement for our working
capital, the acquisition of products and product licensing, and possible
strategic acquisitions. We agreed to file a registration statement with the SEC
covering the resale by the investors of all the common stock issued in the
offering. If the registration statement is not declared effective on or prior to
May 14, 2002, we are obligated to pay each investor an amount equal to 1% of the
purchase price paid for the shares purchased by that investor. Thereafter, for
every 30 days that pass without the registration statement being declared
effective, we are obligated to pay to each investor an additional amount equal
to 1% of the purchase price paid for the shares purchased by that investor.

As a result of the private placement and anti-dilution provisions
included in certain of our warrants outstanding on the date the private
placement was consummated, in February 2002 we modified the terms of two
warrants we had previously issued. One warrant, which was originally issued in
October 2001 to our primary lender was modified to increase the number of shares
purchasable under the warrant to 136,171 from 100,000 and to decrease the
exercise price to $3.00 per share from $4.70 per share. Another warrant, which
was originally issued in August 2001, was modified to decrease the exercise
price to $3.56 per share from $3.60 per share. As a result of these
modifications, the Company recorded an additional non-cash financing charge
relating to these warrants of $113,000 which is included in interest expense for
the first half of fiscal 2002.

In July 2001, we successfully completed a private placement of
9,335,334 shares of our common stock to certain investors for gross proceeds of
$33.6 million. The capital raised from the private placement was utilized for
ongoing product development for the next-generation systems, the acquisitions of
additional strategic properties, integrated marketing and advertising campaigns
and the continued reduction of outstanding liabilities. The common stock issued
to the investors is covered by a registration statement on file with the SEC,
which was declared effective on December 12, 2001. As a result of the delayed
effectiveness of the registration statement covering the resale of the shares of
common stock issued in connection with the private placement, we paid to the
investors a total of $1.0 million during the first half of fiscal 2002 which is
included in other expense in our statement of operations.

In March 2001, our primary lender entered into participation agreements
with junior participants under our credit agreement. Following the
participation, our lender advanced $9.5 million to us under our credit agreement
for working capital purposes. Our credit agreement requires that we repay the
$9.5 million to our lender upon termination of the credit agreement for any
reason, and the junior participation agreements require our lender to
repurchase the participation from the junior participants on March 12, 2005 or
the date our credit agreement is terminated and we repay all amounts outstanding
thereunder,

whichever is earlier. If we are not able to repay the participation, the junior
participants would have subordinate rights assigned to them under our North
American credit agreement with respect to the unpaid participation.

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

The actions we have taken have contributed to returning our annual
operations to profitability in fiscal 2001 and the first half of fiscal 2002,
and we currently anticipate no need to implement further expense reductions.
However, we cannot assure our stockholders and investors that we will achieve
the overall projected sales levels based on our planned product release
schedule, achieve profitability or achieve the cash flows necessary to avoid
further expense reductions in fiscal 2002. See "Industry Trends, Console
Transitions and Technological Change May Adversely Affect Our Revenues and
Profitability".

We derived net cash from operating activities of approximately $6.1
million during the first half of fiscal 2002 and used cash from operating
activities of $8.1 million during the first half of fiscal 2001. The $14.2
million change in net receipt of cash is primarily attributable to the following
in the first half of fiscal 2002 as compared to the same period last year:

o $9.8 million increase in net earnings,
o $20.8 million increase in the growth of accrued expenses,
o $5.6 million increase in amortization of capitalized software
development costs,
o $2.9 million increase in the net provision for returns and price
concessions, partially offset by a;
o $15.1 million increase in the growth of accounts receivable,
o $6.2 million increase in the growth of prepaid expenses,
o $6.6 million increase in the growth of inventories.

The increased growth of accounts receivable, net, represents a greater use of
cash in the first half of fiscal 2002 as compared to the same period last year
as a result of the increase in net revenues as well as an increase in the
average time it took to collect accounts receivable. The increased growth of
accrued expenses represents a generation of cash in the first half of fiscal
2002 as compared to a use of cash in the same period last year. This change is
due to an increase in cost of revenues for the first half of fiscal 2002
associated with the increase in revenues in that period as compared to a
decrease in product related costs in the first half of fiscal 2001 associated
with the lower revenues in that period. The increased growth of prepaid expenses
represents a use of cash in the first half of fiscal 2002 rather than a
derivation of cash in the first half of fiscal 2001. This change is due to the
timing of prepaid royalties and other prepayments.

We used net cash in investing activities of approximately $10.4 million
during the first half of fiscal 2002 and $1.5 million during the first half of
fiscal 2001. Net cash used in investing activities in the first half of fiscal
2002 was primarily for capitalized software development costs in the amount of
$8.5 million and in the first half of fiscal 2001 was primarily for capitalized
software development costs in the amount of $1.5 million.

We derived net cash from financing activities of approximately $21.7
million during the first half of fiscal 2002 as compared to $5.9 million during
the first half of fiscal 2001. The net cash provided by financing activities in
the first half of fiscal 2002 is primarily attributable to the $21.5 million
gross proceeds received from the February 2002 private placement, and the $9.7
million of net advances received under the North American credit agreement with
our primary lender and $3.2 million of proceeds received from the exercise of
stock options and warrants. The net cash derived from financing activities
during the first half of fiscal 2001 primarily resulted from $5.8 million of net
advances received under the North American credit agreement with our primary
lender.

We generally purchase our inventory of Nintendo software by opening
letters of credit when placing the purchase order. At March 3, 2002, the amount
outstanding under letters of credit was approximately $0.3 million.
Additionally, there were open letters of credit amounting to $1.9 million. Other
than such letters of credit and ordinary course of business minimum royalty and
payable obligations, as of March 3, 2002, we did not have any material operating
or capital expenditure commitments.

Our relationship with our primary lender was established in 1989
pursuant to our North American credit agreement. The credit agreement expires on
August 31, 2003 but automatically renews for additional one-year periods, unless
terminated upon 90 days' prior notice by either party. Advances under the credit
agreement bear interest at 1.50% above our lender's prime rate. Borrowings in
excess of an availability formula bear interest at 2.00% above our lender's
prime rate. Under the credit agreement, combined advances may not exceed a
maximum loan amount of $70 million or the formula amount, whichever is less. We
draw down working capital advances and open letters of credit against the
facility in amounts determined based on a formula that takes into account, among
other things, our inventory, equipment and eligible receivables due from our
lender, as factor. All obligations under the credit agreement are secured by
substantially all of our assets. Pursuant to the terms of the credit agreement,
we are required to maintain specified levels of working capital and tangible net
worth, among other financial covenants. As of March 3, 2002, we were in
compliance with those financial covenants. We are presently negotiating with our
lender to amend and restate the credit agreement.

We and our primary lender also are parties to a factoring agreement,
which expires on January 31, 2003 but automatically renews for additional
one-year periods, unless terminated upon 90 days' prior notice by either party.
Pursuant to the factoring agreement, we assign to our lender and our lender
purchases our U.S. account receivables. Under the factoring agreement, our
lender remits payments to us with respect to assigned U.S. accounts receivable
that are within approved credit limits and that are not in dispute. The purchase
price of the assigned accounts receivable is the invoice amount which is
adjusted for any returns, discounts and other customer credits or allowances.
Our lender, in its discretion, may provide advances to us under the North
American credit agreement taking into account, among other things, eligible
receivables due from them, as factor under the factoring agreement; at March 3,
2002 our lender was making advances to us based on 60% of eligible receivables
due from them. As of March 3, 2002, the factoring charge amounted to 0.25% of
the assigned accounts receivable with invoice payment terms of up to 60 days and
an additional 0.125% for each additional 30 days or portion thereof.

In addition, Acclaim Entertainment, Ltd., our U.K. subsidiary, and GMAC
Commercial Credit Limited (GMAC U.K.) are parties to a seven-year term secured
credit facility entered into in March 2000, related to our purchase of a
building in the U. K. Borrowings, which may not exceed(pound)3,805,000 under the
facility, bear interest at LIBOR plus 2.00%. The maximum amount of the facility
has been advanced to us. As of March 3, 2002, the balance due to GMAC U.K.
was(pound)3,406,000 (approximately $4,854,000). All obligations under our
international facility are secured by substantially all of our subsidiary's
assets including a building currently held for sale by us in the U.K. We and a
number of our foreign subsidiaries have guaranteed the obligations of Acclaim
U.K. under this international facility and related agreements.

GMAC U.K. , Acclaim U.K. and a number of our other foreign subsidiaries
are also parties to separate factoring agreements. Under those factoring
agreements, the foreign subsidiaries assign the majority of their accounts
receivable to GMAC U.K., on a full recourse basis. Under the factoring
agreements, upon receipt by GMAC U.K. of confirmation that our subsidiary has
delivered product to our customers and remitted the appropriate documentation to
GMAC U.K., GMAC U.K. remits payments to our subsidiary, less discounts and
administrative charges.

We have a mortgage on our corporate headquarters. At March 3, 2002, the
outstanding principal balance on the mortgage was $0.3 million. On March 6,
2002, we repaid the principal balance outstanding.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying
notes. On an ongoing basis, we evaluate the estimates to determine their
accuracy and make adjustments when deemed necessary. Note 1 to our consolidated
financial statements in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2001 describes the significant accounting policies and methods we use
in the preparation of our consolidated financial statements. Estimates are used
for, but not limited to, accounting for the allowance for returns and price
concessions, the valuation of inventory, the recoverability of advance royalty
payments and the amortization of capitalized software development costs. We base
estimates on our historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results for which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from these estimates. Our critical accounting policies include the following:

Revenue Recognition

We apply the provisions of Statement of Position 97-2, "Software
Revenue Recognition." Accordingly, revenue

for noncustomized software is recognized when persuasive evidence of an
arrangement exists, we have delivered the software, our selling price is fixed
and determinable and collectibility of the resulting receivable is deemed
probable. All revenues associated with sales of software products is recognized
at the time they are shipped to customers as our revenue arrangements do not
include multiple elements such as upgrades, postcontract customer support or
other elements. Our selling price for software products is fixed and
determinable at the time titles are shipped to retail customers. Revenues for
shipments to distributors are recognized when the invoice is paid or the product
has been resold by the distributor. Software sales are typically evidenced by a
signed customer purchase order. We record sales net of an allowance for
estimated returns and price concessions we may grant to our key customers. See
our policy related to "Allowances for Returns and Price Concessions" below.
Collectibility is generally deemed probable at the time titles are shipped to
customers as the majority of our sales are to major retailers that possess
significant economic substance, our arrangements consist of payment terms
ranging between 60 and 90 days, and the customers' obligation to pay is not
contingent on product resale in the retail channel.

Allowances for Returns and Price Concessions

We are not contractually obligated to accept returns, except for
defective product. We grant price concessions to our key customers who are major
retailers that control the market access to the consumer when those concessions
are necessary to maintain our relationship with the retailers and access to its
retail channel customers. If the consumers' demand for a specific title falls
below expectations or significantly declines below previous rates of sale, then,
a price concession or credit may be negotiated to spur further sales. We record
revenue net of an allowance for estimated returns and price concessions. In
order to evaluate the adequacy of those allowances, we analyze historical
returns, current sell through of product and retailer inventory, current
economic trends, changes in consumer demand and acceptance of our products in
the marketplace, among other factors. Significant management judgements and
estimates must be used in connection with establishing the allowance for returns
and price concessions in any accounting period. Material differences may result
in the amount and the timing of our revenue for any period if management made
different judgements or utilized different estimates. Allowances for returns and
price concessions are reflected as a reduction of accounts receivable when we
have agreed to grant credits to our customers for items; otherwise, they are
reflected as an accrued liability.

Prepaid Royalties

Royalty advances represent non-refundable advance payments primarily
made to licensors of intellectual properties. All royalty payments included in
prepaid expenses are recoupable against future royalties due from software or
intellectual properties licensed under the terms of the agreements. Prepaid
royalties are expensed at contractual royalty rates based on actual net product
sales. That portion of prepaid royalties deemed unlikely to be recovered through
product sales is charged to expense. We evaluate whether or not royalties are
likely to be recovered based on our estimate of future net product sales.
Significant management judgements and estimates must be used in connection with
estimating future net product sales. Material differences between actual future
sales and those projected may result in the amount and timing of royalty expense
to vary. Royalty advances are classified as current or noncurrent assets based
on projected net product sales within the next fiscal year.

Capitalized Software Development Costs

We capitalize software development costs once technological feasibility
of the product is established in accordance with Statement of Financial
Accounting Standard No. 86 "Accounting for the Costs of Computer Software to be
Sold, Licensed, or Otherwise Marketed". Prior to establishing technological
feasibility, we expense software development costs to research and development.
Subsequent to establishing technological feasibility but before general release
of the software, we capitalize development costs. For sequel products, once a
proven game engine technology exists and we have detailed program designs and
other criteria supporting the technological feasibility of the title in
development have been met, we capitalize the remaining software development
costs and begin to expense them upon release of the product or when they are
deemed unrecoverable. Once the software is released to the public, we expense
ongoing development costs and amortize capitalized development costs to cost of
revenues. We capitalized approximately $4.6 million and $8.8 million of software
development costs and amortized $3.3 million and $5.9 million of previously
capitalized costs in the first half of fiscal 2002, respectively, while we
capitalized $1.0 million and $1.5 million of software development costs in the
same periods last year. We amortize capitalized software development costs for a
product and record in cost of revenues the greater of the amount computed using
the ratio that current gross revenues for that product bear to the total of
current and anticipated future gross revenues for that product or using the
straight-line method over the estimated economic life of the product up to a
maximum of three months. Significant management judgements and estimates must be
used in connection with estimating future gross revenues. Material differences
between actual gross revenues and those projected may result in the amount and
timing of amortization to vary.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142, which supercedes APB Opinion No. 17,
"Intangible Assets", provides financial accounting and reporting for acquired
goodwill and other intangible assets. While SFAS 142 is effective for fiscal
years beginning after December 15, 2001, early adoption is permitted for
companies whose fiscal years begin after March 15, 2001. SFAS No. 142 addresses
how intangible assets that are acquired individually or with a group of assets
should be accounted for in financial statements upon their acquisition as well
as after they have been initially recognized in the financial statements. While
the Company is not yet required to adopt SFAS No. 142, it believes the adoption
will not have a material effect on the financial condition or results of
operations of the Company.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143, which amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies," is applicable to
all companies. SFAS No. 143, which is effective for fiscal years beginning after
June 15, 2002, addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. As used in SFAS No. 143, a legal obligation is
an obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. While the
Company is not yet required to adopt SFAS No. 143, it believes the adoption will
not have a material effect on the financial condition or results of operations
of the Company.

FACTORS AFFECTING FUTURE PERFORMANCE

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

OUR ABILITY TO MEET CASH REQUIREMENTS AND MAINTAIN NECESSARY LIQUIDITY RESTS IN
PART ON THE COOPERATION OF OUR PRIMARY LENDER AND VENDORS, AND OUR ABILITY TO
ACHIEVE OUR PROJECTED REVENUE LEVELS

We rely on our primary lender to assist us in meeting our cash needs on
an ongoing basis. We also rely on our vendors to provide us with favorable
payment terms. If we do not substantially achieve our projected revenue levels
for fiscal 2002, fail to operate within our projected expense levels, or do not
receive the ongoing support of our lender and our vendors, we may be unable to
meet our cash and operating requirements for the next twelve months, which would
require additional financing to fund operations and/or the implementation of
expense reductions, and which may result in a default under our North American
credit agreement. Some of these measures would require third-party consents or
approvals, including that of our lender, and there can be no such assurance that
those consents or approvals, or additional financing, could be obtained. Based
on the interim support provided by our lender, from time to time, in the form of
advances against receivables and inventory and periodic discretionary
supplemental loans, our recent repayment in full of our 10% convertible
subordinated notes, our February 2002 private placement of common stock for net
proceeds of $19.8 million, the ongoing support of our vendors and anticipated
positive cash flow from operations, we expect to meet our currently projected
cash and operating requirements for the next twelve months, although this is not
assured.

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

In March 2002, we amended certain provisions of our credit agreement
and factoring agreements with our lender, and we are currently negotiating with
our lender to amend and restate those agreements. Although we currently comply
with the financial covenants contained in the agreement with our lender, in the
past we have received waivers for noncompliance with such covenants. We cannot
make any assurances that we will continue to be able to comply with the
financial covenants, or that if we do not comply, that such noncompliance will
be waived.

GOING CONCERN CONSIDERATION

At August 31, 2001, our independent auditors' report, as prepared by
KPMG LLP and dated October 23, 2001, which appears in our 2001 Form 10-K,
includes an explanatory paragraph relating to substantial doubt as to our
ability to continue as a going concern, due to our working capital and
stockholders' deficits at August 31, 2001 and the recurring use of cash in
operating activities.

Since the date of this auditors' report, we have retired $12.7 million
and converted $4.3 million in principal amount of our convertible subordinated
notes in exchange for common stock and repaid the remaining $12.2 million
principal amount in full on March 1, 2002, completed a private placement for net
proceeds of $19.8 million, and maintained profitable operations. These factors
have improved our working capital position and eliminated our stockholders'
deficit. We believe our improved working capital position and stockholders'
equity have contributed to our ability to continue as a going concern.

REVENUES AND LIQUIDITY ARE DEPENDENT ON TIMELY INTRODUCTION OF NEW TITLES

The timely shipment of a new title depends on various factors,
including the development process, debugging, approval by hardware licensors,
and approval by third-party licensors. It is likely that some of our titles will
not be released in accordance with our operating plans. Because net 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,
a significant delay in the introduction of one or more new titles would
negatively affect or limit sales (as was the case in the first quarter of fiscal
2002) and have a negative impact on our financial condition, liquidity and
results of operations, as was the case in fiscal 2000 and 2001. We cannot assure
stockholders that our new titles will be released in a timely fashion in
accordance with our business plan.

The average life cycle of a new title generally ranges from less than
three months to upwards of twelve to eighteen months, with the majority of sales
occurring in the first 30 to 120 days after release. Factors such as competition
for access to retail shelf space, consumer preferences and seasonality could
result in the shortening of the life cycle for older titles and increase the
importance of our ability to release new titles on a timely basis. Therefore, we
are constantly required to introduce new titles in order to generate revenues
and/or to replace declining revenues from older titles. In the past, we
experienced delays in the introduction of new titles, which have had a negative
impact on our results of operations. The complexity of next-generation systems
has resulted in higher development expenditures, longer development cycles, and
the need to carefully monitor and plan the product development process. If we do
not introduce titles in accordance with our operating plans for a period, our
results of operations, liquidity and profitability in that period could be
negatively affected.

INDUSTRY TRENDS, CONSOLE TRANSITIONS AND TECHNOLOGICAL CHANGE MAY ADVERSELY
AFFECT OUR REVENUES AND PROFITABILITY

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

In addition, the cyclical nature of the video and computer games
industry requires us to continually adapt software development efforts to
emerging hardware systems. The industry recently completed a hardware transition
from 32-bit and 64-bit to 128-bit game consoles such as Sony's PlayStation 2,
Nintendo's GameCube and Microsoft's Xbox. Although the initial launch of the
Xbox in the U.S. and the GameCube in the U.S. and Japan appears to have been
successful, no assurance can be given that these new game consoles will achieve
commercial success worldwide similar to and/or consistent with the previous
level of installed bases of the 32-bit PlayStation or 64-bit N64, nor can any
assurances be made as to the timing of their success. For example, in early
2001, Sega announced its plans to exit the hardware business, cease distribution
and sales of its Dreamcast console and re-deploy its resources to develop
software for multiple consoles. In addition, we cannot guarantee that we will be
successful in developing and publishing software for these new systems. Further,
we have no control over the release dates of new game systems or the number of
units that will be shipped upon release. It is difficult to ensure that our
schedule for releasing new titles will coincide with the release of the
corresponding game systems. Additionally, if fewer than expected units of a new
game system are produced or shipped, such as occurred in early fiscal 2001 with
Sony's PlayStation 2, we may experience lower-than-expected sales. Although the
number of consoles produced and shipped during the initial introduction of
Microsoft's Xbox in the U.S. and Nintendo's GameCube in the U.S. and Japan met
expectations, there can be no assurance that the introduction of the Xbox in
Europe and Japan and the GameCube in Europe will be as successful.

OUR FUTURE SUCCESS IS DEPENDENT ON OUR ABILITY TO RELEASE "HIT" TITLES

The market for software is "hits" driven. Therefore, our future success
depends on developing, publishing and distributing "hit" titles for popular
systems. If we do not publish "hit" titles in the future, our financial
condition, results of operations and profitability could be negatively affected,
as has occurred in the past. It is difficult to predict consumer preferences for
titles, and few titles achieve sustained market acceptance. We cannot assure
stockholders that we will be able to publish "hit" titles in the future.

IF PRODUCT RETURNS, PRICE CONCESSIONS AND ADJUSTMENTS EXCEED ALLOWANCES, WE MAY
INCUR LOSSES

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

Management makes significant estimates and assumptions regarding
allowances for estimated product returns and price concessions in preparing the
financial statements. Management establishes allowances at the time of product
shipment, taking into account the potential for product returns and price
concessions based primarily on: market acceptance of products in retail and
distributor inventories; level of retail inventories and product retail
sell-through rates; seasonality; and historical return and price adjustment
rates. Management monitors and adjusts these allowances quarterly to take into
account actual developments and results in the marketplace. We believe that at
March 3, 2002, our allowances for returns and price concessions were adequate,
but we cannot guarantee the adequacy of our current or future allowances.

IF WE ARE UNABLE TO OBTAIN OR RENEW LICENSES FROM HARDWARE DEVELOPERS, WE WILL
NOT BE ABLE TO RELEASE SOFTWARE FOR POPULAR SYSTEMS

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

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

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

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

PROFITABILITY IS AFFECTED BY RESEARCH AND DEVELOPMENT EXPENDITURE FLUCTUATIONS
DUE TO CONSOLE TRANSITIONS AND DEVELOPMENT FOR MULTIPLE CONSOLES

Our cash outlays for product development for the first half of fiscal
2002 (a portion of which were expensed and the remainder of which were
capitalized) were higher than the same period last year, and our product
development cash outlays may increase in the future as a result of releasing
more games across multiple platforms, delayed attainment of technological
feasibility and the complexity of developing games for the new 128-bit game
consoles, among other reasons. We anticipate that our profitability will
continue to be impacted by the levels of research and development expenditures
relative to revenues, and by fluctuations relating to the timing of development
in anticipation of future platforms.

During fiscal 2001, we focused our development efforts and costs on
N64, PlayStation, PlayStation 2, Xbox and Dreamcast, while incurring incremental
costs in the development of tools and engines necessary for the new platforms.
Our fiscal 2002 release schedule is developed around PlayStation 2, GameCube,
Xbox, Game Boy Advance and PCs. The

release schedule for fiscal 2002 will also continue to support certain legacy
systems, such as PlayStation, on a limited basis, as development for such
systems is carried out by a select group of independent software developers.

INABILITY TO PROCURE COMMERCIALLY VALUABLE INTELLECTUAL PROPERTY LICENSES MAY
PREVENT PRODUCT RELEASES OR RESULT IN REDUCED PRODUCT SALES

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

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

COMPETITION FOR MARKET ACCEPTANCE AND RETAIL SHELF SPACE, PRICING COMPETITION,
AND COMPETITION WITH THE HARDWARE MANUFACTURERS, AFFECTS OUR REVENUE AND
PROFITABILITY

The video and computer games market is highly competitive. Only a small
percentage of titles introduced in the market achieve any degree of sustained
market acceptance. If our titles are not successful, our operations and
profitability will be negatively impacted. We cannot guarantee that our titles
will compete successfully.

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

o availability of significant financial resources;
o the quality of titles;
o reviews received for a title from independent reviewers who publish
reviews in magazines, websites, newspapers and other industry
publications;
o publisher's access to retail shelf space;
o the success of the game console for which the title is written;
o the price of each title;
o the number of titles then available for the system for which each title
is published; and
o the marketing campaign supporting a title at launch and through its
life.

Our chief competitors are the developers of games consoles, to whom we
pay royalties and/or manufacturing charges, as well as a number of independent
software publishers licensed by the hardware developers, such as Electronic
Arts, Activision and Konami.

The hardware developers have a price, marketing and distribution
advantage with respect to software marketed by them. Our competitors vary in
size from very small companies with limited resources to very large corporations
with greater financial, marketing and product development resources, such as
Sony, Nintendo and Microsoft.

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

REVENUES VARY DUE TO THE SEASONAL NATURE OF VIDEO AND COMPUTER GAMES SOFTWARE
PURCHASES

The video and computer games industry is highly seasonal. Typically,
net revenues are highest in the last calendar quarter, decline in the first
calendar quarter, are lower in the second calendar quarter and increase in the
third calendar quarter. The seasonal pattern is due primarily to the increased
demand for software during the year-end holiday selling season and the reduced
demand for software during the summer months. Our earnings vary significantly
and are materially affected by releases of "hit" titles and, accordingly, may
not necessarily reflect the seasonal patterns of the industry as a

whole. We expect that operating results will continue to fluctuate significantly
in the future. See "Fluctuations in Quarterly Operating Results Lead to
Unpredictability of Revenues and Income" below.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS LEAD TO UNPREDICTABILITY OF REVENUES
AND INCOME

The timing of release of new titles can cause material quarterly
revenues and earning fluctuations. A significant portion of revenues in any
quarter is often derived from sales of new titles introduced in that quarter or
in the immediately preceding quarter. If we are unable to begin volume shipments
of a significant new title during the scheduled quarter, as has been the case in
the past (including the third and fourth quarters of fiscal 2001, and the first
quarter of fiscal 2002), our revenues and earnings will be negatively affected
in that period. In addition, because a majority of the unit sales for a title
typically occur in the first 30 to 120 days following its introduction, revenues
and earnings may increase significantly in a period in which a major title is
introduced and may decline in the following period or in a period in which there
are no major title introductions.

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

We moved our quarterly closing dates from the Saturday closest to the
last calendar day of the quarter to the Sunday closest to the last calendar day
of the quarter effective for the first quarter of fiscal 2002. This change
resulted in approximately $2.5 million of additional gross revenue in the first
half of fiscal 2002, but will have no effect on our gross revenue or net
earnings for the year ending August 31, 2002. Our fiscal year-end date (August
31) remains unchanged.

STOCK PRICE IS VOLATILE AND STOCKHOLDERS MAY NOT BE ABLE TO RECOUP THEIR
INVESTMENT

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

IF OUR SECURITIES WERE DELISTED FROM THE NASDAQ SMALLCAP MARKET, IT MAY
NEGATIVELY IMPACT THE LIQUIDITY OF OUR COMMON STOCK

In the fourth quarter of fiscal 2000, our securities were delisted from
quotation on The Nasdaq National Market. Our common stock is currently trading
on The Nasdaq SmallCap Market. Although we meet the current listing criteria for
The Nasdaq SmallCap Market, no assurance can be given as to our ongoing ability
to meet The Nasdaq SmallCap Market maintenance requirements. In order to obtain
relisting of our common stock on The Nasdaq National Market, we must satisfy
certain quantitative designation criteria. No assurance can be given that we
will be able to meet such relisting criteria for The Nasdaq National Market in
the near future.

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

INFRINGEMENT COULD LEAD TO COSTLY LITIGATION AND/OR THE NEED TO ENTER INTO
LICENSE AGREEMENTS, WHICH MAY RESULT IN INCREASED OPERATING EXPENSES

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

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

FACTORS SPECIFIC TO INTERNATIONAL SALES MAY RESULT IN REDUCED REVENUES AND/OR
INCREASED COSTS

International sales have historically represented material portions of
our revenues and are expected to continue to account for a significant portion
of our revenues in future periods. Sales in foreign countries may involve
expenses incurred to customize titles to comply with local laws. In addition,
titles that are successful in the domestic market may not be successful in
foreign markets due to different consumer preferences. We continue to evaluate
our international product development and release schedule to maximize the
delivery of products that appeal specifically to that marketplace. International
sales are also subject to fluctuating exchange rates. The recent adoption of the
euro as the single currency of most European Union member nations may reduce our
exposure to fluctuating exchange rates within the European Union if the price of
the euro remains tied to that of the U.S. dollar; however, consumers in the
European Union may face slight price increases as a result of the transition as
retailers round up the price of goods calculated in euros. These and other
factors specific to international sales may result in reduced revenues and/or
increased costs.

CHARTER AND ANTI-TAKEOVER PROVISIONS COULD NEGATIVELY AFFECT RIGHTS OF HOLDERS
OF COMMON STOCK

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

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

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

SHARES ELIGIBLE FOR FUTURE SALE

As of April 15, 2002, we had 91,399,240 shares of common stock issued
and outstanding, of which 24,662,082 are "restricted" securities within the
meaning of Rule 144 under the Securities Act. Generally, under Rule 144, a
person who has held restricted shares for one year may sell such shares, subject
to certain volume limitations and other restrictions, without registration under
the Securities Act.

As of the date of this report, 48,562,710 shares of common stock are
covered by effective registration statements under the Securities Act for resale
on a delayed or continuous basis by certain of our security holders, of which
598,343 shares of common stock are issuable upon the exercise of warrants issued
in settlement of litigation. In addition, a registration statement was filed
with the SEC on March 15, 2002. Although we cannot guarantee the timeliness of
its effectiveness, once the registration statement is declared effective by the
SEC, the 8,714,395 shares covered by it will be available for future sale.

As of March 3, 2002, a total of 3,956,111 shares of common stock are
issuable upon the exercise of warrants to purchase our common stock (not
including warrants issued in settlement of litigation).

We have also registered on Form S-8 a total of 24,236,000 shares of
common stock (issuable upon the exercise of options) under our 1988 Stock Option
Plan and our 1998 Stock Incentive Plan, and a total of 2,448,425 shares of
common

stock under our 1995 Restricted Stock Plan. As of March 3, 2002, options to
purchase a total of 10,345,134 shares of common stock were outstanding under the
1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which 6,629,957
were exercisable.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Our results of operations are affected by fluctuations in the value of
our subsidiaries' functional currency as compared to the currencies of their
foreign denominated sales and purchases. The results of operations of the our
subsidiaries, as reported in U.S. dollars, may be significantly affected by
fluctuations in the value of the local currencies in which we transact business.
This amount is recorded upon the translation of the foreign subsidiaries'
financial statements into U.S. dollars, and is dependent upon the various
foreign exchange rates and the magnitude of our foreign subsidiaries' financial
statements. At March 3, 2002 and 2001, our foreign currency translation
adjustments were not material. In addition to the direct effects of changes in
exchange rates, which are a changed dollar value of the resulting sales and
related expenses, changes in exchange rates also affect the volume of sales or
the foreign currency sales price as competitors' products become more or less
attractive.

We are not exposed to material future earnings or cash flow exposures
from changes in interest rates on long-term obligations since the majority of
our long-term obligations are at fixed rates, however, we are exposed to
fluctuations in future earnings and cash flow from changes in interest rates on
our short term borrowings which are set at minimal thresholds of our lender's
prime or LIBOR plus a fixed rate.

PART II

ITEM 1. LEGAL PROCEEDINGS.

We and other companies in the entertainment industry were sued in an
action entitled James, et al. v. Meow Media, et al. filed in April 1999 in the
U.S. District Court for the Western District of Kentucky, Paducah Division,
Civil Action No. 5:99 CV96-J. The plaintiffs alleged that the defendants
negligently caused injury to the plaintiffs as a result of, in the case of
Acclaim, its distribution of unidentified "violent" video games, which induced a
minor to harm his high school classmates, thereby causing damages to plaintiffs,
the parents of the deceased individuals. The plaintiffs seek damages in the
amount of approximately $110 million. The U.S. District Court for the Western
District of Kentucky dismissed this action; however, it is currently on appeal
to the U.S. Court of Appeals for the Sixth Circuit. Oral arguments were held in
late November 2001. We intend to defend this action vigorously.

We and other companies in the entertainment industry were sued in an
action entitled Sanders et al. v. Meow Media et al., filed in April 2001 in the
U.S. District Court for the District of Colorado, Civil Action No. 01-0728. The
complaint purports to be a class action brought on behalf of all persons killed
or injured by the shootings which occurred at Columbine High School on April 20,
1999. We are a named defendant in the action along with more than ten other
publishers of computer and video games. The complaint alleges that the video
game defendants negligently caused injury to the plaintiffs as a result of their
distribution of unidentified "violent" video games, which induced two minors to
kill a teacher related to the plaintiff and to kill or harm their high school
classmates, thereby causing damages to plaintiffs. The complaint seeks:
compensatory damages in an amount not less than $15,000 for each plaintiff in
the class, but up to $20 million for some of the members of the class; punitive
damages in the amount of $5 billion; statutory damages against certain other
defendants in the action; and equitable relief to address the marketing and
distribution of "violent" video games to children. This case was dismissed on
March 4, 2002. Following dismissal, the plaintiffs moved for relief and the U.S.
District Court for the District of Colorado denied the relief sought by
plaintiffs. Plaintiffs have now noted an appeal.

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

On February 11, 2002, a copyright infringement case was filed against
us in U.S. District Court for the Southern District of New York entitled Harry
Grivas and Roderick Kohn v. Acclaim Entertainment, Inc., No. 02CV 1125. The
plaintiffs allege that they licensed a copyrighted musical composition entitled
"This is Extreme", and the master recording of that composition, to us for use
in our games "ECW Hardcore Revolution" and "ECW Anarchy Rulz", but we used
Grivas' master recording of his composition entitled "This is Extreme! Y2K (1999
and Beyond)" in addition without approval. The complaint further alleges that we
failed to provide certain video game equipment and promotional services called
for by the license, thus breaching the contract. The plaintiffs seek to enjoin
us from the use of "This is Extreme! Y2K (1999 and Beyond)", withdrawal and
destruction of the unsold copies of the games, an accounting with respect to
damages sustained by the plaintiffs, and compensatory damages in the approximate
amount of $1,750,000. We intend to defend this action vigorously. Due to the
preliminary nature of this suit we are unable at this time to predict the final
outcome of this litigation.

We are also party to various litigation arising in the ordinary course
of its business, the resolution of none of which, we believe, will have a
material adverse effect on our liquidity or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On February 13, 2002, we issued a total of 7,166,667 shares of our
common stock in a private placement to certain qualified institutional buyers
and accredited investors at a price of $3.00 per share, for aggregate gross
proceeds of $21,500,000. The per share price represented an approximate 10%
discount to the then-recent public trading price of the common stock. We intend
to use the proceeds of the private placement for our working capital, the
acquisition of products and product licensing, and possible strategic
acquisitions.

The private placement was effected under the exemption from
registration provided under Section 4(2) of the Securities Act of 1933. We
agreed to file a registration statement with the SEC covering the resale by the
investors of all the common stock issued in the offering. If the registration
statement is not declared effective on or prior to May 14, 2002, we are
obligated to pay each investor an amount equal to 1% of the purchase price paid
for the shares purchased by that investor. Thereafter, for every 30 days that
pass without the registration statement being declared effective, we are
obligated to pay to each investor an additional amount equal to 1% of the
purchase price paid for the shares purchased by that investor.

On February 12, 2002, we retired $3.4 million in principal amount of
our 10% convertible notes, plus accrued interest, in exchange for consideration
consisting solely of 956,000 shares of our common stock. On February 14, 2002,
we retired an additional $9.3 million principal amount of our 10% convertible
subordinated notes, plus accrued interest, in exchange for 3,253,420 shares of
our common stock. The issuance of these shares of common stock was effected
under the exemption from registration provided by Section 3(a)(9) of the
Securities Act of 1933. We recorded an aggregate extraordinary loss on the early
retirement of these notes of $1.2 million in the second quarter of fiscal 2002,
reflecting the aggregate excess of the fair market value of the shares of
approximately $14.6 million over the principal amount of the notes retired plus
accrued interest.

On January 25, 2002, we amended our certificate of incorporation to
increase the number of shares of authorized common stock from 100 million to 200
million shares. Such amendment was approved by our stockholders at the 2002
Annual Meeting of Stockholders held on January 17, 2002.

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

On January 17, 2002, we held our 2002 Annual Meeting of Stockholders. In
connection with the meeting, we solicited proxies from our stockholders pursuant
to Regulation 14 of the Securities Exchange Act of 1934. At the meeting, our
stockholders (1) elected as directors Gregory E. Fischbach, James R. Scoroposki,
Kenneth L. Coleman, Bernard J. Fischbach, Robert H. Groman, James Scibelli, and
Michael Tannen; (2) approved the proposed adoption of an increase in the number
of shares with respect to which options or other awards may be granted under our
1998 Stock Incentive Plan from 5,442,143 to 15,442,143; (3) authorized a
proposal to amend our Certificate of Incorporation to increase the number of
shares of authorized common stock from 100 million to 200 million; and (4)
ratified the selection by the Board of Directors of KPMG LLP as our independent
certified public accountants for fiscal 2002.

The following tables summarize the votes cast at the meeting on the
matters brought before the stockholders:

1. ELECTION OF DIRECTORS

VOTES
-----
FOR WITHHELD
--- --------
Gregory E. Fischbach 59,941,679 1,297,259
James R. Scoroposki 59,907,890 1,331,048
Kenneth L. Coleman 59,907,925 1,331,013
Bernard J. Fischbach 59,941,794 1,297,144
Robert H. Groman 59,907,630 1,331,308
James Scibelli 59,842,287 1,396,651
Michael Tannen 59,942,259 1,296,679

2. INCREASE IN NUMBER OF SHARES WITH RESPECT TO WHICH OPTIONS OR OTHER AWARDS
MAY BE GRANTED UNDER THE 1998 STOCK INCENTIVE PLAN FROM 5,442,143 TO
15,442,143

VOTES
FOR AGAINST ABSTAIN NOT VOTED
--- ------- ------- ---------
33,777,293 10,818,612 115,892 16,527,141

3. AMENDMENT OF CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 100 MILLION TO 200 MILLION

VOTES
-----
FOR AGAINST ABSTAIN
--- ------- -------
58,269,816 2,866,114 103,008

4. RATIFICATION OF KPMG LLP AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS OF THE
COMPANY FOR FISCAL YEAR 2002

VOTES
-----
FOR AGAINST ABSTAIN
--- ------- -------
60,697,972 487,458 53,508

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit No. Description
- ----------- ------------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, filed on April 21, 1989, as amended
(Commission File No. 33-28274))

3.2 Amendment to the Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1, filed on April 21, 1989,
as amended (Commission File No. 33-28274))

3.3 Amendment to the Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 4(d) to the Company's
Registration Statement on Form S-8, filed on May 19, 1995
(Commission File No. 33-59483))

3.4 Amendment to the Certificate of Incorporation of the Company
(filed herewith)

3.5 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3 to the Company's Current Report on
Form 8-K, filed on June 12, 2000)

4.1 Specimen form of the Company's common stock certificate
(incorporated by reference to Exhibit 4 to the Company's
Annual Report on Form 10-K for the year ended August 31,
1989, as amended)

4.2 Rights Agreement dated as of June 5, 2000, between the
Company and American Securities Transfer & Trust, Inc.
(incorporated by reference to Exhibit 4 to the Company's
Current Report on Form 8-K, filed on June 12, 2000)

4.3 Form of Warrant Agreement between the Company and American
Securities Transfer & Trust, Inc. as warrant agent, relating
to Class D Warrants (incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-3, filed on
August 23, 1999 (Commission File No. 333-72503))

4.4 Form of Warrant Certificate relating to Class D Warrants
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3, filed on August 23, 1999
(Commission File No. 333-72503))

+10.1 Employee Stock Purchase Plan (incorporated by reference to
the Company's definitive proxy statement relating to fiscal
1997 filed on August 31, 1998)

+10.2 1998 Stock Incentive Plan (incorporated by reference to the
Company's definitive proxy statement relating to fiscal 2001
filed on December 21, 2001)

+10.3 Employment Agreement dated as of September 1, 1994 between
the Company and Gregory E. Fischbach; and Amendment No. 1
dated as of December 8, 1996 between the Company and Gregory
E. Fischbach (incorporated by reference to Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the year ended
August 31, 1996)

+10.4 Employment Agreement dated as of September 1, 1994 between
the Company and James Scoroposki; and Amendment No. 1 dated
as of December 8, 1996 between the Company and James
Scoroposki (incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year ended
August 31, 1996)

+10.5 Service Agreement effective January 1, 1998 between Acclaim
Entertainment Limited and Rodney Cousens (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended August 31, 1996)

Exhibit No. Description
- ----------- ------------
+10.6 Employment Agreement dated as of August 11, 2000 between the
Company and Gerard F. Agoglia (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended August 31, 2000)

+10.7 Employment Agreement dated as of October 2, 2000 between the
Company and John Ma (incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the year
ended August 31, 2001)

+10.8 Amendment No. 3, dated August 1, 2000, to the Employment
Agreement between the Company and Gregory E. Fischbach, dated
as of September 1, 1994 (incorporated by reference to Exhibit
10.12 to the Company's Quarterly Report on Form 10-Q for the
period ended December 2, 2000)

+10.9 Amendment No. 3, dated August 1, 2000, to the Employment
Agreement between the Company and James Scoroposki, dated as
of September 1, 1994 (incorporated by reference to Exhibit
10.12 to the Company's Quarterly Report on Form 10-Q for the
period ended December 2, 2000)

10.10 Revolving Credit and Security Agreement dated as of January
1, 1993 between the Company, Acclaim Distribution Inc., LJN
Toys, Ltd., Acclaim Entertainment Canada, Ltd. and Arena
Entertainment Inc., as borrowers, and GMAC Commercial Credit
LLC as successor by merger to BNY Financial Corporation
("GMAC"), as lender, as amended and restated on February 28,
1995 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended
February 28, 1995), as further amended and modified by (i)
the Amendment and Waiver dated November 8, 1996, (ii) the
Amendment dated November 15, 1998, (iii) the Blocked Account
Agreement dated November 14, 1996, (iv) Letter Agreement
dated December 13, 1986, and (v) Letter Agreement dated
February 24, 1997 (each incorporated by reference to Exhibit
10.4 to the Company's Report on Form 8-K filed on March 14,
1997)

10.11 Restated and Amended Factoring Agreement dated as of February
28, 1995 between the Company and GMAC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the period ended February 28, 1995), as
further amended and modified by the Amendment to Factoring
Agreements dated February 24, 1997 between the Company and
GMAC (incorporated by reference to Exhibit 10.5 to the
Company's Report on Form 8-K filed on March 14, 1997)

10.12 Amendment to Revolving Credit and Security Agreement and
Restated and Amended Factoring Agreement, dated March 14,
2002 (filed herewith)

10.13 Form of Participation Agreement between GMAC and certain
junior participants (incorporated by reference to Exhibit 1
to the Company's Quarterly Report on Form 10-Q for the period
ended February 28, 1998)

10.14 Note and Common Stock Purchase Agreement dated March 30, 2001
between the Company and Triton Capital Management, Ltd.
(incorporated by reference to exhibit 10.1 to the Company's
Registration Statement on Form S-3 filed on April 16, 2001
(Commission File No. 333-59048))

10.15 Note and Common Stock Purchase Agreement dated March 31, 2001
between the Company and JMG Convertible Investments, L.P.
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-3 filed on April 16, 2001
(Commission File No. 333-59048))

10.16 Note and Common Stock Purchase Agreement dated April 10, 2001
between the Company and Alexandra Global Investment Fund I,
Ltd. (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-3 filed on April
16, 2001 (Commission File No. 333-59048))

Exhibit No. Description
- ----------- ------------
10.17 Note Purchase Agreement dated June 14, 2001 between the
Company and Alexandra Global Investment Fund, Ltd.
(incorporated by reference to Exhibit 10.4 to Amendment No. 2
to the Company's Registration Statement on Form S-3 filed on
August 8, 2001 (Commission File No. 333-59048))

10.18 Form of Share Purchase Agreement between the Company and
certain purchasers relating to the 2001 private placement
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3 filed on September 26,
2001 (Commission File No. 333-70226))

10.19 Form of Registration Rights Agreement between the Company and
certain purchasers relating to the 2001 private placement
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3 filed on September 26,
2001 (Commission File No. 333-70226))

*10.20 License Agreement dated as of December 14, 1994 between the
Company and Sony Computer Entertainment of America
(incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K filed on December 17, 1996)

*10.21 Licensed Publisher Agreement dated as of April 1, 2000
between the Company and Sony Computer Entertainment America
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on August 14, 2001)

*10.22 Licensed Publisher Agreement dated as of November 14, 2000 by
and between the Company and Sony Computer Entertainment
(Europe) Limited (incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K/A filed on
November 28, 2001)

*10.23 Confidential License Agreement for Nintendo's N64 Video Game
System (Western Hemisphere) between Nintendo of America Inc.
and the Company, effective as of February 20, 1997
(incorporated by reference to Exhibit 1 to the Company's
Quarterly Report on Form 10-Q for the period ended February
28, 1998)

*10.24 Confidential License Agreement for Game Boy Advance (Western
Hemisphere) between Nintendo of America Inc. and the Company,
effective July 11, 2001 (incorporated by reference to Exhibit
10.23 to the Company's Annual Report on Form 10-K for the
period ended August 31, 2001)

*10.25 Xbox Publisher License Agreement dated as of October 10, 2000
between the Company and Microsoft Corporation (incorporated
by reference to Exhibit 10.24 to the Company's Annual Report
on Form 10-K for the period ended August 31, 2001)

*10.26 Confidential License Agreement for Nintendo GameCube by and
between the Company and Nintendo of America Inc., dated as of
the 15th day of November, 2001 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed December 4, 2001)

+10.27 Employment Agreement, dated as of December 20, 2001 between
the Company and Edmond Sanctis (incorporated by reference to
Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q
for the period ended December 2, 2001)

10.28 Form of Share Purchase Agreement between the Company and
certain purchasers relating to the February 2002 Private
Placement (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-3 filed on March
15, 2002(Commission File No. 333-84368))

10.29 Form of Registration Rights Agreement between the Company and
certain purchasers relating to the February 2002 Private
Placement (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-3 filed on March
15, 2002(Commission File No. 333-84368))

- -----------------------------------

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

+ Management contract or compensatory plan or arrangement.

(b) Current Reports on Form 8-K:

(1) Current Report on Form 8-K, filed on February 11, 2002;

(2) Current Report on Form 8-K, filed on February 21, 2002; and

(3) Current Report on Form 8-K, filed on December 4, 2001.

ITEM 7. SIGNATURES

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

/s/ James Scoroposki Co-Chairman of the Board; Senior Executive Vice April 15, 2002
- ------------------------------------------ President; Secretary; Treasurer and Director --------------------------
James Scoroposki Date

/s/ Gerard F. Agoglia Executive Vice President and April 15, 2002
- ------------------------------------------ Chief Financial Officer --------------------------
Gerard F. Agoglia (principal financial and accounting officer) Date