SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                   FORM 10-KSB

|X|  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the fiscal year ended October 31, 1997

     OR

|_|  Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

                                     0-29230
                              (Commission File No.)

                       TAKE-TWO INTERACTIVE SOFTWARE, INC.
        (Exact name of Small Business Issuer as specified in its charter)

                  Delaware                                 51-0350842     
        (State or other jurisdiction                   (I.R.S. Employer
          of incorporation)                           Identification No.)
                                                    
                     575 Broadway, New York, New York 10012
                     (Address of principal executive offices
                               including zip code)

  Small Business Issuer's telephone number, including area code: (212) 941-2988

        Securities registered pursuant to Section 12(b) of the Act: None

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

                          Common Stock, $.01 par value

Check  whether the Small  Business  Issuer (1) 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 |_|

Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B contained  herein,  and no disclosure  will be contained,  to the
best of Small Business  Issuer's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. |X|

The Small Business  Issuer's revenues for the fiscal year ended October 31, 1997
were $19,014,083.

The aggregate  market value of the Small Business  Issuer's Common Stock held by
non-affiliates  as of January  26,  1998 was  approximately  $25,578,800.  As of
January  26, 1998 there were  9,750,043  shares of the Small  Business  Issuer's
Common Stock outstanding.

                      Documents Incorporated by Reference:

                                      None




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                                     PART I



Item 1. Business.


General

     Take-Two  Interactive  Software,  Inc. (the "Company")  designs,  develops,
markets and  distributes  high quality  interactive  software  games.  Since its
initial  public  offering in April 1997,  the Company has shifted its focus from
engaging  primarily  in software  development  to  publishing  and  distributing
software products.  During this period, the Company has achieved rapid growth by
making selective  acquisitions of products,  businesses and distribution  rights
which the Company believes have significantly enhanced its prospects.

     o  GameTek Acquisition:  In July  1997,  the  Company  acquired  all of the
outstanding  capital  stock of  GameTek  (UK)  Limited,  now  known as  Take-Two
Interactive   Software  Europe  Limited   ("TTE"),   and   Alternative   Reality
Technologies,   Inc.  ("ART")  from  GameTek  (FL),  Inc.  ("GameTek  FL").  TTE
distributes  computer software games in Europe and other  international  markets
and ART is a developer  of software  games.  The Company also  acquired  certain
software  games from GameTek FL,  including  Dark Colony,  The Quivering and The
Reap.

     o  Wheel of Fortune(R) and Jeopardy!(R)  Distribution  Rights:  The Company
entered  into two  agreements  with  GameTek,  Inc.  ("GameTek"),  the parent of
GameTek FL, pursuant to which GameTek granted the Company the exclusive right to
distribute  Wheel of Fortune - German  Edition,  Pinball  Deluxe,  Race Days and
Humans for use on the  Nintendo  Gameboy  portable  console in certain  European
Economic  Community  countries and the exclusive  worldwide rights to distribute
the Wheel of Fortune and Jeopardy! games for use on Nintendo 64 console systems.

     o  Inventory  Management  Systems  Acquisition:  In July 1997,  the Company
acquired all of the outstanding  capital stock of Inventory  Management Systems,
Inc.  ("IMSI") and  Creative  Alliance  Group,  Inc.  ("CAG").  IMSI and CAG are
engaged in the  wholesale  distribution  of  interactive  software  games in the
United States.

     o  Monty Python Series  Distribution  Rights: In November 1997, the Company
entered into a Master Distribution  Agreement with 7th Level Inc. ("7th Level"),
pursuant to which 7th Level granted the Company the exclusive worldwide right to
distribute Monty Python's Complete Waste of Time, Monty Python and the Quest for
the Holy Grail, Monty Python's Desktop Pythonizer and Monty Python's The Meaning
of Life  games  designed  for PC  platforms,  and a right  of first  refusal  to
distribute And Now for Something Completely Different,  if and when developed by
7th Level.  In  November  1997,  the  Company  entered  into an  agreement  with
Panasonic  Interactive  Media  ("Panasonic")  which  provides  for  Panasonic to
distribute these products in North America.

     o Alliance Distributors Acquisition: In December 1997, the Company acquired
all of the issued and  outstanding  capital stock of L&J  Marketing,  Inc. d/b/a
Alliance Distributors ("Alliance"),  now known as Alliance Inventory Management,
Inc. ("AIM"). AIM is engaged in the wholesale distribution of computer and video
game software and hardware in the United States.

     o  Additional Financing: In October 1997, the Company received net proceeds
of $4,007,000 from the issuance of $4,200,000  aggregate principal amount of 10%
secured  promissory  notes to  Infinity  Investors  Limited,  Infinity  Emerging
Opportunities Limited and Glacier Capital Limited  (collectively,  the "Funds").
The proceeds  were used to finance the  manufacture  of the Wheel of Fortune and
Jeopardy! games. In December 1997, IMSI and AIM entered into a revolving line of
credit agreement with  NationsBank,  N.A. which provides for borrowings of up to
$5,000,000.


                                       -2-




<PAGE>



     The Company's principal executive offices are located at 575 Broadway,  New
York, New York 10012,  and its telephone  number is (212)  941-2988.  Unless the
context otherwise  requires,  all references herein to the "Company" include the
operations of the Company's  subsidiaries,  Mission Studios,  Inc.  ("Mission"),
TTE, ART, IMSI, CAG and AIM.


Products

     The  Company's  software  is  designed  to operate on  multiple  platforms,
including IBM  compatible  multimedia  PCs with  high-capacity  CD-ROM  (compact
disc-read  only  memory)  drives  running  Windows  95  software,  and on  Apple
MacIntosh  PCs,  DVD  (digital  video  discs) and video game  console  platforms
manufactured by Sony Corporation,  Sega Enterprises,  Inc. and Nintendo Co. Ltd.
Since its  inception in September  1993,  the Company has released the following
action, adventure, comedy, strategy and simulation titles:

     Star  Crusader.  Star  Crusader  is a  science  fiction  flight  simulation
adventure  game which allows the player to fly on both sides of an  interstellar
war. This unique  simulation  features rich 3-D graphics,  intricately  designed
space  vessels and  dazzling  special  effects.  Star  Crusader  was released in
September  1994 and is  designed  to  operate  on an IBM  compatible  PC  CD-ROM
platform.

     Hell:  A  Cyberpunk  Thriller.  Hell is a science  fiction  adventure  game
featuring  full motion video and animated  likenesses of Hollywood  stars Dennis
Hopper,  Stephanie  Seymour,  Grace Jones and Geoffrey Holder. Set in 2095, Hell
allows the player to journey through the underworld and battle with demons.  The
player must face a cyberworld  of evil and unlock the secrets of the  underworld
to prove his innocence from charges of treason against the state. Hell was first
released  in  December  1994 and is  designed  to operate on IBM  compatible  PC
CD-ROM, Apple MacIntosh and 3DO Interactive Multiplayer platforms.

     Bureau 13. Bureau 13 is a mystery  adventure  game involving the search for
supernatural entities.  Bureau 13 allows the player to assume the role of leader
of a governmental  investigative  team which sets out to solve a complex mystery
involving paranormal  phenomena.  Bureau 13 was released in February 1995 and is
designed to operate on an IBM compatible PC CD-ROM platform.

     Millennia: Altered Destinies.  Millennia is a science fiction strategy game
which allows the player to travel  through  time and alter  history to save four
civilizations.  Millennia  was  released  in  September  1995 and is designed to
operate on an IBM compatible PC CD-ROM platform.

     Maximum Roadkill.  Maximum Roadkill is a futuristic  motorcycle action game
which  allows the player to take part in a grueling,  fight-to-the-death  Thrash
Race Tournament.  Assuming the role of one of eight characters, the player races
custom-built  cybercycles in an effort to win money,  weapons and fame.  Maximum
Roadkill  was  released  in  February  1996 and is designed to operate on an IBM
compatible PC CD-ROM platform.

     Ripper.  Ripper is a mystery  adventure game featuring full motion video of
Hollywood  stars  Christopher  Walken,  Karen  Allen,  Burgess  Meredith,   John
Rhys-Davis,  Jimmy  Walker and Ossie  Davis and the music of Blue  Oyster  Cult.
Ripper  allows the player to assume the role of crime  reporter Jake Quinlan who
attempts  to track and stop a serial  murderer in the streets of New York in the
year 2040. Ripper was first released in February 1996 and is designed to operate
on IBM compatible PC CD-ROM and Apple MacIntosh platforms.

     Advanced  Dungeons & Dragons:  Iron & Blood. Iron & Blood is a 3-D medieval
battle game based upon TSR,  Inc.'s  Advanced  Dungeons & Dragons  pen-and-paper
role-playing  game  set in  the  "Ravenloft"  fantasy  world.  Twenty  different
customized medieval characters,  ranging from gargoyles,  dwarves and werewolves
to  gladiators,  goblins and  wizards,  do battle with deadly  weapons,  magical
spells and  mysterious  ancient  artifacts.  Iron & Blood was first  released in
October  1996 and is  designed  to operate  on IBM  compatible  PC CD-ROM,  Sony
PlayStation and Sega Saturn platforms.


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<PAGE>



     Battlecruiser  3000 A.D.  Battlecruiser  is a science  fiction  spaceflight
simulation which combines  strategy,  space combat and resource  management in a
vividly detailed game world. The player takes charge of a mega-ship that is part
battleship,  part carrier and part explorer with a crew of 75, four  interceptor
fightercrafts  and an  array of  awesome  weaponry  as the  player  strives  for
galactic conquest. Battlecruiser was released in October 1996 and is designed to
operate on an PC CD-ROM platform.

     JetFighter  III.  JetFighter  III, the third in a series of the popular 3-D
military flight simulation games,  allows the player to pilot the F-22 Lightning
fighter jet,  the most deadly  fighter  craft.  The player leads an elite strike
force in two campaigns  located in real world,  potential  hotspots and features
over 3.5 million  square  miles of satellite  derived  real world 3-D  terrains.
JetFighter  III was  released in November  1996 and is designed to operate on an
IBM compatible PC CD-ROM platform.

     Callahan's Crosstime Saloon. Callahan's is a comedy adventure game based on
the novel written by Spider  Robinson.  The game is set in a friendly  local pub
full of aliens  and  bizarre  creatures.  Through  conversations  with the bar's
patrons,  the  player  embarks  on a series of zany  adventures  ranging  from a
Vampiric confrontation in a Transylvanian castle to a mysterious journey through
a Brazilian rainforest, leading the player to one grand quest. Callahan's blends
state-of-the-art  graphics and hilarious  comedy  puzzles for all levels of game
players.  Callahan's was released in April 1997 and is designed to operate on an
IBM compatible PC CD-ROM platform.

     Jetfighter III Enhanced Campaign CD. Jetfighter III Enhanced Campaign CD is
an add-on disk for  Jetfighter  III that features over 5 million square miles of
real-world  3D  terrain  as well as 30 new  missions.  Jetfighter  III  Enhanced
Campaign CD was released in April 1997.

     Dark Colony.  Dark Colony is a real-time  strategy  game set on Mars in the
year 2026.  Dark Colony,  featuring  multiplayer  support,  pits the player in a
challenging  strategic  battle on a varied  range of  dynamic  terrain  across a
number of  different  scenarios.  Dark Colony was released in August 1997 and is
designed to operate on an IBM compatible PC CD-ROM platform.

     Jetfighter  Platinum.  Jetfighter  Platinum is a  technologically  advanced
upgrade  of  Jetfighter  III  and  the  Jetfighter  III  Enhanced  Campaign  CD.
Jetfighter  Platinum features 30 never before flown missions,  a Mission editor,
and support for 3Dfx based video  cards.  Jetfighter  Platinum  was  released in
October 1997 and is designed to operate on an IBM compatible PC-CD ROM platform.

     Wheel of Fortune.  Wheel of Fortune,  based on the popular  television game
show,  features a fully rendered 3D set, over 4,000 word puzzles,  30 categories
and an  animated  version of Vanna  White who  assists and cheers on the player.
Wheel of Fortune was released in November 1997 and is designed to operate on the
Nintendo 64 video gaming platform.

     The Reap. The Reap is a first person 3D shooter featuring true arcade style
gameplay and continually  changing artificial  intelligence.  Players assume the
role of a mercenary  pilot  attempting  to adapt  Earth to make it suitable  for
alien life forms.  The Reap was released in Europe and Asia in November 1997 and
is designed to operate on an IBM compatible PC CD-ROM platform.

     Monty Python's Complete Waste of Time. Complete Waste of Time is a strategy
adventure game featuring  highlights and sketches from the BBC-TV episodes.  The
player is faced with a series of gaming challenges on the quest to discovery the
"Secret to  Intergalactic  Success."  Complete Waste of Time was  re-released in
Europe in  December  1997 and is  designed  to operate on an IBM  compatible  PC
CD-ROM platform.

     Monty Python and the Quest for the Holy Grail. The Quest for the Holy Grail
is a strategy  adventure game set in England in 932 AD. Featuring original clips
from the movie of the same name, The Quest for the Holy Grail  requires  players
to collect  clues and  hidden  items that will allow them to cross the Bridge of
Death  and find the  coveted  Holy  Grail.  The  Quest  for the Holy  Grail  was
re-released  in Europe in  December  1997 and is  designed  to operate on an IBM
compatible PC CD-ROM platform.


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<PAGE>



     Monty   Python's   The   Meaning  of  Life.   The  Meaning  of  Life  is  a
comedy/strategy  adventure title that features scores of full motion video clips
from the original film,  previously unreleased footage, new dialogue from all of
the Monty Python members,  original Terry Gilliam artwork and a game design that
will appeal to the casual as well as the  hard-core  gamer.  The Meaning of Life
was  released in Europe in January 1998 for use on an IBM  compatible  PC CD-ROM
platform.

     To date, a substantial  portion of the Company's  revenues has been derived
from a limited number of products. For the year ended October 31, 1996, Advanced
Dungeons and Dragons: Iron & Blood and Ripper each sold more than 150,000 copies
and,  with  Battlecruiser  3000 A.D.,  accounted  for  32.0%,  28.7.% and 14.2%,
respectively,  of the Company's  revenues.  For the year ended October 31, 1997,
the  JetFighter  series sold more than  190,000  copies and,  with Dark  Colony,
accounted  for  approximately  41.6% and 11.0%  respectively,  of the  Company's
revenues. For these periods, no other product accounted for more than 10% of the
Company's revenues.  Wheel of Fortune,  Jeopardy! and JetFighter:  Full Burn are
expected to account for a significant  portion of the Company's revenues for the
year ending October 31, 1998.

     The suggested retail prices for the Company's  software products range from
$29.95 to $79.95.


Proposed Products

     The Company proposes to release the following new software products:

     Jeopardy!  Jeopardy!,  based  on the  television  show  of the  same  name,
features 650 different  categories,  over 4,000  answers,  a 3-D rendered  newly
remodeled  set and an animated  version of Alex  Trebek.  The Company  currently
anticipates  that it will  release  Jeopardy!  in  February  1998 for use on the
Nintendo 64 platform.

     JetFighter:    Full   Burn.    JetFighter:    Full   Burn   is   a   flight
simulation/adventure  game that combines the  JetFighter  III flight  simulation
engine with cinematic  sequences.  Set in the year 2026,  JetFighter:  Full Burn
pits the United  States Navy  against the Russian Air Force in the fight for oil
in the Barents  Sea.  Featuring  MMX,  3Dfx and  multiplayer  support,  the game
permits  the  player to play  from  either  side of the  conflict.  The  Company
currently anticipates that it will release JetFighter: Full Burn in January 1998
for use on an IBM compatible PC CD-ROM platform and in May 1998 for use on a DVD
platform.

     Black Dahlia. Black Dahlia is an adventure title that is inspired by actual
events that  occurred in the 1940's.  Featuring  the talent of Dennis Hopper and
Teri  Garr,  Black  Dahlia  carries  the  player  to  over 70  locations  on two
continents in the quest to solve the mystery of the infamous  "Torso  Murderer."
Black  Dahlia  contains  a  meticulously  rendered  3D world  and  more  than 60
challenging  puzzles.  The Company  currently  anticipates  that it will release
Black Dahlia in February 1998 for use on an IBM  compatible  PC CD-ROM  platform
and in April 1998 for use on a DVD platform.

     Lightning.  Lightning  is a fantasy  racing  game that allows the player to
race in three  dimensions  along tracks that make today's most thrilling  roller
coasters  look like  carousels.  Lightning  features a high speed 3D engine that
brings a real time effect to the PC. The Company  currently  anticipates that it
will release  Lightning in October 1998 for use on an IBM  compatible  PC CD-ROM
platform.

     JetFighter  IV.  JetFighter IV is a continuation  of the JetFighter  flight
simulation  series.  The title,  still in the early stages of development,  will
feature a dynamic  plot  enhanced by state of the art photo  textures,  advanced
networking and internet support. The Company currently  anticipates that it will
release  JetFighter IV in September  1999 for use on an IBM compatible PC CD-ROM
platform.

     Dogs of War. From the development  team that produced Dark Colony,  Dogs of
War is a strategy  game that brings the player face to face with the  excitement
and daring of working behind enemy lines. The player, along


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<PAGE>



with a  team,  must  blow up fuel  pumps,  destroy  bridges  and  re-supply  the
resistance.  The Company currently  anticipates that it will release Dogs of War
in September 1999 for use on an IBM compatible PC CD-ROM platform.

     The  development  of  new  software  products  is  lengthy,  expensive  and
uncertain.  Certain of the  Company's  proposed  products are in early stages of
development and the Company will be required to commit considerable time, effort
and resources to complete development of its proposed products.  There can be no
assurance that the Company will be able to successfully develop any new products
on a timely basis or that technical or other problems will not occur which would
result in increased costs or material delays.


Software Licenses and Distribution Rights

     The Company has entered  into  agreements  to license the rights to Maximum
Roadkill,  Battlecruiser  3000  A.D.,  Callahan's  Crosstime  Saloon,  Wheel  of
Fortune, Jeopardy!, the Monty Python series and Lightning and certain properties
incorporated into Advanced  Dungeons & Dragons:  Iron & Blood and the JetFighter
series.  These license agreements  generally require the Company to make advance
payments and pay royalties and satisfy  other  conditions.  Although the Company
devotes  significant efforts to internal product  development,  the Company will
continue to seek to license products or other properties as well as distribution
rights from software developers in the future.

     In December 1994, the Company entered into a ten-year  agreement with Mikto
Ltd.  ("Mikto")  pursuant  to which Mikto  granted  the  Company  the  exclusive
worldwide right to publish, manufacture, market and distribute the PC version of
Maximum  Roadkill.  Mikto is entitled to retain all  copyrights  and  trademarks
relating to the product.  Pursuant to the agreement,  the Company made aggregate
advances to Mikto in the amount of $310,000.  The Company is generally obligated
to pay Mikto a portion of net receipts from product sales ranging from 15%, less
the cost of goods.

     In March 1995,  the Company  entered into a four-year  agreement  with SONY
Computer Entertainment of America ("Sony") granting the Company a non-exclusive,
nontransferable  license in the United States and Canada to develop  software on
CD-ROMs for use on a  PlayStation  platform.  Under the  agreement,  Sony is the
exclusive  manufacturer  of all  units,  packaging  materials  and  inserts  for
PlayStation  products.  The Company is  obligated to pay Sony a royalty of $7.00
for each unit sold.

     In August 1995,  the Company  entered into an agreement  with 3000 AD, Inc.
("3000 AD"),  which was amended in December  1995,  February,  May and September
1996 and March 1997, pursuant to which 3000 AD granted the Company the exclusive
worldwide right to manufacture,  market and distribute  Battlecruiser  3000 A.D.
for all  platforms;  and (ii) a right of first refusal to publish two additional
games based on the engine used in Battlecruiser 3000 A.D. 3000 AD is entitled to
retain all  copyrights  and  trademarks  relating to the product,  including all
enhancements  to the product  which may be made by the Company.  Pursuant to the
agreement,  the Company made advances in the aggregate  amount of  approximately
$618,000,  a  portion  of  which  are  recoupable  against  3000  AD's  share of
distribution  receipts.  The  Company  is  obligated  to pay  3000 AD 18% of net
receipts  on sales of over  70,000  units in the  United  States and on sales in
Europe.

     In May 1996,  the Company  entered into a license  agreement with TSR, Inc.
("TSR"),  pursuant to which TSR granted  the  Company  the  exclusive  worldwide
license to develop,  manufacture and sell products using the artwork,  graphics,
story  lines,  characters  and  logo  trademarks  of TSR's  "Ravenloft"  fantasy
settings.  The  Company  paid  TSR  nonrefundable   advances,   recoupable  from
royalties,  in the  amount of  $175,000.  The  Company is  obligated  to pay TSR
royalties  ranging  from $.54 to $4.86 for each  unit  sold  based on  suggested
retail prices, subject to the payment of minimum royalties.

     In  October  1996,  the  Company  entered  into an  agreement  with  Legend
Entertainment  Inc.  ("Legend"),  as amended in January 1997,  pursuant to which
Legend  granted  the  Company  the  exclusive  worldwide  license  to market and
distribute  by any means the PC  version of  Callahan's  Crosstime  Saloon.  The
Company made advances  under the agreement in the aggregate  amount of $500,000,
which advances are recoupable by the Company against


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Legend's share of receipts. The agreement requires the Company to pay Legend 25%
of net receipts  from product sales in the United States and 50% of net receipts
from  sales in  international  markets.  The  Company  is  entitled  to retain a
reasonable  amount,  not to exceed 15% of  accrued  net  receipts,  as a reserve
against charges, credits or returns. The agreement terminates in May 1999.

     In December 1993, the Company  entered into a letter  agreement under which
it agreed to pay Robert Dinnerman d/b/a RD Technologies  ("RD"),  the developers
of the flight  engine for  JetFighter  III,  15% of gross  revenues  on sales of
JetFighter  III.  The Company also agreed to pay an employee of the Company $.10
per unit for sales of JetFighter  III in excess of 150,000  units,  granted Papa
Tango Limited, a supplier of textures  technology,  the right to receive 1.5% of
net revenues from sales of JetFighter  III and granted  Herskovitz  Enterprises,
L.L.C., a former investor in Mission, the right to receive payments equal to (i)
50% of cash receipts in excess of $700,000 but less than  $1,700,000,  (ii) 3.4%
of cash receipts in excess of $1,700,000 but less than $4,600,000 and (iii) 6.8%
of cash  receipts  in excess of  $4,600,000  from sales of  JetFighter  III.  In
addition, the Company agreed to pay affiliates of Thomas Ptak, Vice President of
Creative Development of the Company, and another employee of the Company,  77.2%
and 2.8%,  respectively,  of the Company's net profit  attributable  to sales of
JetFighter   III  [and   others].   See  "Certain   Relationships   and  Related
Transactions."

     In September  1996,  the Company  entered into a second  agreement  with RD
pursuant to which RD granted the  Company a  non-exclusive  right to exploit the
flight engine  developed by RD for use in  connection  with  JetFighter  IV. The
agreement  provides  that RD owns all  source  code  created  by it and that the
Company retains ownership of the "JetFighter"  names. The agreement requires the
Company to pay RD: (i) nonrefundable advances,  recoupable against RD's share of
distribution  receipts,  in the amount of $10,000 per month,  commencing October
1996, until the earlier of two years or the date of final product shipment; (ii)
17.75% of the Company's  gross receipts from sales of products  manufactured  by
the Company  incorporating such flight engine; and (iii) 22.5% of gross receipts
from sales of licensed products (primarily foreign sales).

     In July 1997, the Company  entered into two  distribution  agreements  with
GameTek pursuant to which GameTek granted to the Company the right to distribute
computer software for use on the Nintendo Gameboy portable console (the "Gameboy
Distribution Agreement") and the Wheel of Fortune and Jeopardy! games for use on
the Nintendo 64 console game system (the "N64 Distribution Agreement").

     Pursuant to the terms of the Gameboy  Distribution  Agreement,  the Company
was  granted  the  exclusive  right to sell and  distribute  Wheel of Fortune --
German  Edition,  Pinball  Deluxe,  Race  Days and  Humans in  certain  European
Economic Community countries for a period commencing on July 29, 1997 and ending
on the third anniversary of the release of the first computer software game, but
in no event later than July 28, 2001.  In  consideration  for such  rights,  the
Company  has  agreed to pay to  GameTek,  (i) the  aggregate  cost to GameTek of
manufacturing,  shipping  and  insuring  the games,  (ii) $.15 per game unit and
(iii) the  aggregate  of all  royalties  payable by GameTek to third  parties in
respect  of  each  such  game.  Upon  expiration  of  the  Gameboy  Distribution
Agreement,  provided such termination was not as a result of a breach or default
by  the  Company,  the  Company  is  permitted  to  continue  to  sell  existing
inventories for a six-month period,  subject to the terms and conditions of such
agreement.

     Pursuant to the terms of the N64  Distribution  Agreement,  the Company was
granted the exclusive  worldwide  right to sell and distribute  Wheel of Fortune
and Jeopardy!  for use on the Nintendo 64 game system for a period commencing on
July 29,  1997 and  ending on the August 31,  1998;  provided  that in the event
GameTek is able to obtain an  extension  of its license for Wheel of Fortune and
Jeopardy!,  then  the  term  shall  extend  through  the  last  day of any  such
extension.  In  consideration  for such  rights,  the  Company  agreed to pay to
GameTek (i) the total cost charged to GameTek by Nintendo for the manufacture of
each game  (plus,  to the  extent not  included  in the  foregoing,  the cost of
insurance and  transportation  charges,  import duties,  custom fees and similar
charges  incurred in shipping the games),  (ii) a per game unit royalty  payment
(the  "GameTek  Share")  and (iii) the  aggregate  of all  royalties  payable by
GameTek to third  parties in respect of each such game.  The Company also agreed
to pay to GameTek a minimum  aggregate  GameTek  Share with respect to the first
two game titles released,  subject to certain reductions and set-offs,  $680,000
of which has been paid to date. Such amounts may be recouped in the


                                       -7-




<PAGE>



event  GameTek  is unable to obtain an  extension  of its  license  for Wheel of
Fortune  and  Jeopardy!  or  the  Company's  incurring  more  than  $150,000  in
advertising,  marketing,  promotion  and  sales  support  for the  software.  In
addition,  in the event the Company  elects to  terminate  the N64  Distribution
Agreement  as a result of GameTek's  breach with  respect to a specific  game or
games, GameTek is required to repay to the Company any unrecouped portion of the
minimum  aggregate  GameTek Share  allocable to such game.  The Company may also
require  GameTek to  purchase  from the  Company any  remaining  inventory  with
respect  to  such  game.  Upon  expiration  of the N64  Distribution  Agreement,
provided  such  termination  was not as a result of a breach or  default  by the
Company,  the Company is permitted to sell existing  inventories for a six-month
period, subject to the terms and conditions of such agreement.

     In August 1997,  TTE entered  into an  arrangement  with  Panasonic/Ripcord
Games  ("Ripcord"),  pursuant to which Ripcord  granted the Company the right to
distribute  Postal,  Space Bunnies Must Die, Forced  Alliance,  Terra Victus and
Hidden Wars in Europe in  consideration  of royalties  equal to 50% of wholesale
prices. The Company has agreed to pay Ripcord (i) cross-recoupable guarantees of
$240,000  for each game  title,  of which  $95,000 is due upon  delivery of each
master and  $95,000 is due within 90 days  thereafter,  and (ii)  $250,000  upon
execution of a definitive  agreement  between the parties.  To date, the Company
has paid Ripcord $95,000 for Postal pursuant to this arrangement.

     In November 1997, the Company entered into a Master Distribution  Agreement
with 7th Level,  pursuant to which 7th Level  granted the Company the  exclusive
worldwide  right to distribute  Monty  Python's  Complete  Waste of Time,  Monty
Python and the Quest for the Holy Grail,  Monty Python's Desktop  Pythonizer and
Monty Python's The Meaning of Life games designed for PC platforms,  and a right
of first refusal to distribute And Now for Something  Completely  Different,  if
and when  developed by 7th Level.  In  consideration  for the rights to existing
products,  the Company agreed to pay 7th Level  $1,480,000,  of which $1,230,000
has been paid to date. In addition, the Company agreed to pay to 7th Level, on a
quarterly  basis,  royalties equal to 33% of amounts in excess of $7 million for
the sale of the products,  as well as the aggregate of all royalties  payable by
7th Level to third  parties.  In  November  1997,  the Company  entered  into an
agreement  with  Panasonic  which  provides for  Panasonic to  distribute  these
products in North America. See "Marketing, Promotion and Distribution."

     In December 1997, TTE entered into an agreement with Carts Entertainment OY
("Carts"),  pursuant to which Carts agreed to develop and deliver  Lightning for
PC  platforms  to TTE. The  agreement  provides  for TTE to pay Carts  aggregate
recoupable advances of (pound)250,000 ($419,000), of which $33,538 has been paid
to date. The agreement  requires TTE to pay Carts  royalties equal to 20% of net
revenues from product sales  (subject to reduction for delays in delivery of the
finished game) or 50% of TTE's  receipts,  less  production  costs, in the event
that TTE sublicenses Lightning to a third party.


Marketing, Promotion and Distribution

     The  Company's  marketing  and  promotional  efforts are intended to obtain
maximum  product  exposure,  broaden  product  distribution,  promote brand name
recognition,  assist  distributors and retailers and properly position,  package
and merchandise the Company's  products.  The Company markets products primarily
by implementing  aggressive  public relations  campaigns using print and on-line
advertising. Advertisements are placed in industry magazines using memorable tag
lines,  visually appealing full color art work and creative concepts to position
and  distinguish  the Company's  products in the  marketplace.  The Company also
employs various other marketing methods designed to promote consumer  awareness,
including   in-store   promotions   and  displays,   direct  mail,   cooperative
advertising,  attendance  at  trade  shows,  as well  as the use of  distinctive
product packaging. The Company targets male consumers between the ages of 14 and
36. The Company's  sales and marketing  staff of 16 persons is  responsible  for
implementing advertising campaigns and establishing marketing relationships with
distributors and retailers.

     The Company  distributes  products  worldwide  pursuant to agreements  with
leading software  distributors and through its wholly-owned  subsidiaries,  TTE,
IMSI and AIM, which currently are engaged primarily in the


                                       -8-




<PAGE>



distribution  of  products  developed  by  third  parties.   Products  are  sold
domestically at retail in computer superstores,  consumer electronics stores and
mall-based  retailers,  such as Best Buy, Comp USA,  Computer  City,  Electronic
Boutique,  Egghead  Discount  Software  and Circuit  City,  and at certain  mass
merchandise stores such as WalMart, Kmart, Sears and Target Stores. For the year
ended  October  31,  1997,  sales by IMSI to  Blockbuster  Video  accounted  for
approximately  12.0%  of the  Company's  revenues.  The  Company  also  licenses
products for  distribution  in  international  markets,  primarily in Europe and
Asia.

     Prior to July 1997,  the  Company  sold  products  primarily  to  wholesale
distributors.  Sales to a  limited  number  of  distributors  have  historically
accounted for a  substantial  portion of the  Company's  revenues.  For the year
ended  October  31,  1996,  sales  of the  Company's  products  through  Acclaim
Entertainment,   Inc.  ("Acclaim")  and  GameTek  UK  (now  TTE)  accounted  for
approximately 58.9% and 13.3%, respectively,  of the Company's revenues. For the
year ended  October 31,  1997,  sales of the  Company's  products  to  Interplay
Productions,  Inc.  ("Interplay")  accounted  for  approximately  40.4%  of  the
Company's revenues. In December 1996, the Company terminated Acclaim's exclusive
right to  distribute  certain  of the  Company's  proposed  products  in certain
territories.  In December  1996 and  February  1997,  the Company  entered  into
agreements with Mindscape, Inc. ("Mindscape") pursuant to which Mindscape agreed
to act as exclusive  distributor for certain of the Company's  proposed PC-based
products and to make advances to the Company in connection  with the development
of JetFighter:  Full Burn and Black Dahlia,  $1,737,000 has been received by the
Company to date. In November  1997, the Company  terminated its agreements  with
Mindscape and agreed to make scheduled  repayments to Mindscape in the aggregate
amount of $1,412,000  ($170,666 of which has been repaid),  as reimbursement for
advances  previously made by Mindscape to the Company for JetFighter:  Full Burn
and Black  Dahlia,  and to pay  Mindscape  15% (10% if the Company makes certain
repayments by March 31, 1998) of revenues from  JetFighter:  Full Burn and Black
Dahlia after the Company  recoups its costs for these  products.  This agreement
was amended in January  1998 to provide  for  Mindscape  to act as an  exclusive
distributor of Jeopardy!  and Wheel of Fortune for certain retail accounts.  The
purchase  price for such  products  will be offset  against  amounts owed by the
Company to Mindscape under the November 1997 agreement.

     Although   the  Company  has   increasingly   emphasized   publishing   and
distribution  operations,  the Company may  continue to enter into  arrangements
with third-party  distributors and will be dependent on the marketing efforts of
such  distributors as well as advances made by distributors to the Company.  The
Company's principal distribution arrangements include the following:

     Interplay.  In December 1993, the Company entered into an arrangement  with
Interplay pursuant to which the Company granted Interplay the exclusive right to
distribute  PC versions of JetFighter  III in the United States and Canada.  The
agreement  provides for  Interplay  to provide the Company with  advances in the
aggregate  amount  of  $250,000,  plus up to an  additional  $250,000,  of which
$450,000  has been  received to date.  Interplay  is  entitled  to recoup  these
advances  from the  Company's  share of  receipts  under the  agreement  and may
withhold 5% of the  wholesale  purchase  price of all  products as a reserve for
product  returns  and  defects,  up to a maximum of  $50,000  per  product.  The
agreement requires Interplay to pay to the Company a percentage of sales ranging
from 80% for the first 100,000  units sold to 85% for sales over 300,001  units;
65% of OEM bundling revenues (after deducting costs of goods); and 80% of direct
sales after costs. The Company has also agreed to price protect all inventory on
hand and to pay the costs of recalls of defective products.  The agreement has a
term of 12 months from the shipment of JetFighter III (November  1996),  subject
to annual renewals.

     In  November  1997,  the  Company  entered  into a  letter  agreement  with
Interplay pursuant to which the Company granted Interplay the exclusive right to
distribute versions of Black Dahlia and JetFighter:  Full Burn developed for use
on PC  CD-ROM  and DVD  platforms  in North  and South  America.  The  agreement
currently obligates Interplay to make scheduled advances in the aggregate amount
of $1,700,000  (which are subject to reduction in the event the Company fails to
deliver gold masters and related  artwork by certain  dates),  of which $550,000
has  been  received  by the  Company  to date.  After  recoupment  of  advances,
Interplay is entitled to receive  royalties  equal to 40% of net receipts  after
deducting  the cost of goods sold and to  withhold 7% of  wholesale  prices as a
reserve  against  returns.  The Company also granted  Interplay a right of first
option with respect to the North American  distribution  rights to all PC CD-ROM
and DVD products scheduled to be released by the Company within


                                       -9-




<PAGE>



two years following the date of the agreement. The agreement terminates upon the
later of (i) five  years  from the date  the  parties  enter  into a  definitive
agreement  or (ii) the time while the  products  are  marketed and sold plus six
months.  The Company and  Interplay  agreed to negotiate a definitive  agreement
with respect to these products.

     Dimensional  Services.  In  January  1994,  the  Company  entered  into  an
arrangement with Dimensional  Services,  Limited ("DSL"),  pursuant to which the
Company granted DSL the exclusive  license to distribute  CD-ROM and floppy disk
versions  of  JetFighter  III in Europe,  the Middle  East and  Africa.  DSL has
sublicensed  this  title to select  distributors  in  certain  territories.  The
agreement provides for DSL to make aggregate advances of $200,000,  all of which
has been  received,  recoupable  out of royalties  owed to the Company  based on
product  sales.  DSL is obligated to pay the Company 30% of the wholesale  price
for  JetFighter  III. The  agreement  terminates  in May 1998  (eighteen  months
following the receipt by DSL of a shippable master of such product).

     Panasonic.  In November  1997,  the Company  entered into an agreement with
Panasonic to distribute  Monty Python series  products in North  America.  Under
this agreement,  Panasonic made aggregate advances of $1,100,000 to the Company.
Panasonic  is entitled to receive  royalties  equal to 30% of gross  profits (as
defined) after recoupment of advances.  The agreement provides that the products
are to be  marketed  under  the  Panasonic  name and  identify  7th Level as the
product developer.

     The distribution channels through which consumer software products are sold
have been characterized by rapid change,  including consolidations and financial
difficulties  of certain  distributors  and the  emergence  of new  channels for
distribution of consumer software products such as mass  merchandisers and other
retail outlets. In addition, there are an increasing number of companies and new
market  entrants  competing  for  access  to these  channels.  Retailers  of the
Company's products typically have limited shelf space and promotional resources,
and  competition  is  intense  among an  increasing  number of newly  introduced
entertainment software titles for adequate levels of shelf space and promotional
support.  Competitors with extensive product lines and popular titles frequently
have greater bargaining power with distributors and retailers and,  accordingly,
the  Company  may not be able to achieve  the levels of support  and shelf space
that such competitors receive. See "Competition."


Software Development and Technology

     The  Company's  production  process is  designed  to enable the  Company to
manage and control  development and production budgets and timetables,  identify
and  address  possible  production  and  technical  issues  and  coordinate  and
implement marketing strategies in a creative  environment.  The Company utilizes
an integrated  scheduling and production process and software development tools,
which include  capabilities to produce cinematic  quality movie sequences,  full
motion digital video and enhanced "real-time" 3-D graphics. The Company believes
that its production capabilities permit it to produce high quality products on a
timely and cost-effective basis.

     The Company has developed  computer  technologies such as LS3D, an advanced
Sony   PlayStation  3-D  engine  designed  to  provide   realistic  and  natural
interaction  between  animated  characters;  AGES, an adventure  game engine and
scripter  designed to permit simple  production of adventure games; M4 System, a
multimedia  movie magic maker designed to produce high quality  cinematic  movie
sequences by permitting a sound  sequence to incorporate  voice,  sound effects,
stereo  audio  effects and 3-D sounds in  cinematic  scenes;  and various  other
software  development  tools,  including  video  compositing  tools  designed to
produce  full  motion  digital  video,  a  3-D  PC  engine  designed  to  render
realistically lighted 3-D scenes, and 3-D graphic simulation techniques designed
to allow  real  life  satellite  information  and data to be  incorporated  into
software to produce realistic terrain features without warping or distortion.

     For the years  ended  October  31,  1996 and  1997,  the  Company  incurred
$718,089 and $1,248,258,  respectively,  on research and development relating to
the Company's software products, including the salaries of programmers,  artists
and other personnel.


                                      -10-



<PAGE>



     The  production of an  interactive  software title begins with a script and
culminates  with a CD-ROM  master.  Game  concepts are subject to a  preliminary
development  process  during  which six persons in the  Company's  creative  and
technical  staff  make  determinations  as  to  technical  feasibility,   costs,
scheduling and commercial  viability of a proposed product, and develop a budget
and production schedule. The Company supplements its core creative and technical
staff  with  actors,  musicians,  set  designers,  writers,  artists  and  audio
engineers  on a  freelance  basis.  Once  technological  feasibility  is reached
through the completion of a detailed  program  design,  the  production  process
involves creating game graphics,  shooting full motion video, if necessary,  and
the composition and recording of music, sound effects and dialogue.  The Company
engages in extensive testing of game elements  throughout the production process
to insure product quality.  Software development typically requires 18 months to
complete from the time a new concept is approved.


Manufacturing

     The production of the Company's software includes CD-ROM pressing, assembly
of product  components,  printing  of product  packaging  and user  manuals  and
shipping  of  finished  goods,  which is  performed  by  third-party  vendors in
accordance with the Company's specifications and forecasts. The Company believes
that there are alternative  sources for these services that could be implemented
without  delay.  The Company  will be  dependent  on the  ability of  Interplay,
Nintendo and other  vendors to provide  adequate  supplies of high quality disks
and video game cartridges on a timely basis and on favorable terms. To date, the
Company  has  not  experienced  any  material  difficulties  or  delays  in  the
manufacture  of its  products or  material  delays due to product  defects.  The
Company's software products carry a 90-day limited warranty.


Competition

     The  Company  faces  intense  competition  for a finite  amount of consumer
discretionary  spending from numerous other businesses in the consumer  software
industry,  including certain of its  distributors,  ranging from small companies
with limited resources to large companies with substantially  greater financial,
technical,  marketing and other resources than those of the Company. The Company
competes  primarily  on the basis of product  quality and  features,  production
capabilities,  access to distribution  channels and price. The Company considers
its primary  competitors in the entertainment  software market to be Activision,
Inc.,  Electronic Arts,  Inc., GT Interactive,  Inc., CUC  International,  Inc.,
Maxis, Inc. and Sony Entertainment  Corporation of America,  Inc., among others.
These and other companies with  significantly  greater financial  resources than
the  Company  may be able to carry  larger  inventories,  adopt more  aggressive
pricing policies, make higher offers to high profile Hollywood talent, licensors
and  developers  for  commercially   desirable  properties  and  implement  more
extensive  advertising  campaigns,  both generally and in response to efforts by
additional  competitors  seeking  to  enter  into new  markets  and  market  new
products.  In addition,  new  competitors,  including large software  companies,
media companies and film studios,  are increasing their focus on the interactive
entertainment  software  market.  Competition  for  the  Company's  products  is
influenced by the timing of competitive  product  releases and the similarity of
such  products to those of the Company,  which may result in  significant  price
competition,  reduced operating  margins,  loss of shelf space or a reduction in
sell-through of the Company's  products at retail stores. The Company's products
also compete with numerous  other  products and services  which provide  similar
entertainment  value,  such as motion  pictures,  television and audio and video
cassettes featuring similar themes,  on-line computer programs and various other
forms of  entertainment  which may be less expensive or provide other advantages
to consumers.


Intellectual Property

     The Company  regards  certain of its software and production  techniques as
proprietary  and  attempts  to  protect  such  software  and  techniques   under
copyright,  trademark  and  trade  secret  laws as well as  through  contractual
restrictions on disclosure,  copying and distribution. The Company does not hold
any patents or  registered  copyrights.  Software  products are  susceptible  to
unauthorized copying. It may be possible for unauthorized third


                                      -11-



<PAGE>



parties to copy or to reverse engineer the Company's  products to obtain and use
programming or production techniques that the Company regards as proprietary. In
addition,  there can be no assurance  that the  Company's  competitors  will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. As the number of interactive software products in
the market increases and the  functionality of these products further  overlaps,
the Company  believes that  interactive  software will  increasingly  become the
subject of claims that such  software  infringes  the  copyrights  or patents of
others.  Although the Company  believes that its products and  technology do not
and will not infringe or violate  proprietary  rights of others,  it is possible
that  infringement  of proprietary  rights of others may occur.  The Company has
received correspondence from the holder of a patent relating to the animation of
living beings in computer graphics alleging that the Company's products infringe
such  patent.  The  Company is aware that the holder of such  patent has claimed
that other companies  involved in the entertainment  software industry have also
infringed such patent.  There can be no assurance that the holder of such patent
will not  institute  an action  against the Company.  Any such  claims,  with or
without merit, can be time consuming and difficult to defend and, if successful,
could have a material adverse effect on the Company.

     The Company  currently holds United States trademark  registrations for the
"Take-Two  Interactive Software" and "Mission Studios" names. The Company is not
aware of any claims or infringement or other  challenges to the Company's rights
in these marks.  The Company has filed  trademark  applications  with the United
States Patent and Trademark Office for the marks  "JetFighter III," "Ripper" and
"Black Dahlia."


Employees

     As of December 31, 1997, the Company had 96 full-time employees,  including
5  executive  officers,  49  engaged  in  product  development,  16 in sales and
marketing, and 26 in operations.  None of the Company's employees are subject to
a collective  bargaining  agreement.  The Company  considers its relations  with
employees to be good.



I
tem 2. Properties.

     The Company's principal  executive and administrative  office is located at
575 Broadway,  New York,  New York, in 3,500 square feet of office space under a
lease with 575 Broadway Corporation, a company controlled by Peter M. Brant, the
father of Ryan A.  Brant,  Chief  Executive  Officer of the  Company.  The lease
extends  through April 2000,  under which the Company  currently pays $8,774 per
month, subject to annual consumer price index adjustments.  The Company believes
that the terms of the lease are no less  favorable  than  those  that would have
been obtained from an unaffiliated  third party. See "Certain  Relationships and
Related Transactions."

     The Company's main production facility is located in Latrobe,  Pennsylvania
in 11,500 square feet of leased office space.  Pursuant to leases  covering such
space, the Company currently pays rent of $9,567 per month. The Company's leases
expire in December  1998,  with an option to renew for an  additional  five-year
period.

     Mission leases approximately 1,500 square feet in Inverness, Illinois, from
an  unaffiliated  third  party.  The lease  expires  in  December  1997,  with a
year-to-year renewal option. Such lease provides for a monthly rent of $1,726.

     The  Company  leases  5,000  square  feet of  office  space  in  Youngwood,
Pennsylvania,  which is currently vacant.  The Company currently pays $2,710 per
month under the lease,  which  extends  through  November  1999.  The Company is
seeking to sublet such office space.

     TTE leases office space in Windsor,  United Kingdom. The lease provides for
a current annual rent of (pound)100,000 ($168,000) and expires in August 2006.


                                      -12-



<PAGE>



     AIM leases office and storage space in College  Point,  New York. The lease
provides for monthly rent of $3,000,  plus any  increases in real estate  taxes,
and expires in July 2001.

     AIM  contracts  for storage and shipping  services in 10,000 square feet of
warehouse  space in Union City, New Jersey pursuant to a letter  agreement.  The
agreement requires AIM to pay $43,168 per month, plus 1.6% of AIM's net revenues
over  $28,000,000  and certain  freight  charges,  and is scheduled to expire in
January 1999, if not renewed.

     ART leases  approximately  2,500  square feet of office  space in Oakville,
Ontario,  Canada.  ART  currently  pays $2,378 per month under the lease,  which
expires in January 1998.

     IMSI leases  approximately  600 square feet of office space in  Midlothian,
Virginia on a month-to-month  basis from an entity controlled by Terry Phillips,
a stockholder  of the Company and a consultant to IMSI,  for a fee of $1,000 per
month.

     IMSI leases  approximately 10,000 square feet of office and warehouse space
in Richmond, Virginia. The lease provides for IMSI to pay monthly rent of $4,356
until October 1998,  subject to certain  increases  thereafter,  plus a pro rata
share of increases in property taxes and insurance, and expires in October 2000.

     IMSI also leases  approximately  3,500  square feet of  warehouse  space in
Richmond, Virginia on a month-to-month basis for a fee of $1,490 per month.



Item 3. Legal Proceedings.

     In January 1997, Navarre  Corporation filed a lawsuit in the District Court
of Hennepin  County,  Minnesota  against the Company  alleging  that the Company
breached a distribution agreement by failing to remit monies for product returns
and marketing charges. The Plaintiff is seeking $317,209 in damages. The Company
filed an answer denying such allegations and has moved to dismiss the complaint.
While the Company  believes that it has meritorious  defenses to such action and
intends to vigorously  defend this lawsuit,  there can be no assurance that such
action will be resolved in a manner favorable to the Company.


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

     Not Applicable.


                                      -13-



<PAGE>




                                     PART II



Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

     Market Information. The Common Stock has traded since April 14, 1997 on the
NASDAQ  SmallCap Market under the symbol "TTWO." The following table sets forth,
for the  periods  indicated,  the range of the high and low bid  prices  for the
Common Stock as reported by NASDAQ. Such prices reflect inter-dealer quotations,
without  retail  mark-up,  mark-down  or  commission  and  may  not  necessarily
represent actual transactions.

                                                           High             Low
                                                           ----             ---
Fiscal Year Ended October 31, 1997
- ----------------------------------

Second Quarter
(commencing April 14, 1997) ....................           7 5/8           5 1/8

Third Quarter ..................................           9               7

Fourth Quarter .................................           8 3/8           6 5/8

Fiscal Year Ended October 31, 1998
- ----------------------------------

First Quarter
(through January 26, 1998)......................           7               4 1/2

     On January 26,  1998,  the last sale price for the Common Stock as reported
by NASDAQ was $6 1/4 per share.  The number of record  holders of the  Company's
Common Stock was  approximately  45 as of January 26, 1998. The Company believes
that there are in excess of 400 beneficial owners of its Common Stock.

     Dividend  Policy.  To date,  the Company has not  declared or paid any cash
dividends on its Common Stock.  The payment of dividends,  if any, in the future
is within the  discretion  of the Board of  Directors  and will  depend upon the
Company's earnings,  its capital  requirements and financial condition and other
relevant  factors.  The  Company  presently  intends to retain all  earnings  to
finance the Company's  continued growth and development of its business and does
not expect to declare or pay any cash dividends in the foreseeable future.

     Recent Sales of Unregistered Securities.  Pursuant to a Securities Purchase
Agreement,  dated October 14, 1997, the Company issued and sold to the Funds (i)
10% secured convertible notes (the "Notes") in the aggregate principal amount of
$4,200,000;  (ii) 50,000 shares of Common  Stock,  par value $.01 per share (the
"Grant  Shares");  and (iii)  five-year  warrants (the  "Warrants")  to purchase
250,000 shares of Common Stock (the "Warrant Shares")  exercisable at a price of
$6.46 per share.  The net  proceeds to the  Company  from the sale of the Notes,
Grant Shares and Warrants was $4,007,000. In addition, the Company paid $168,000
and issued (i) 5,000 shares of Common Stock and (ii) Warrants to purchase 20,000
shares of Common  Stock to Whale  Securities  Co.,  L.P.  ("Whale") as a fee for
services  rendered  in  connection  with the  transactions  contemplated  by the
Securities Purchase Agreement.  The Notes are convertible,  at the option of the
holder,  at any time  commencing  February 28, 1998, into shares of Common Stock
(the  "Note  Conversion  Shares"),  having  a value of 75% of the  lowest  daily
weighted average sales price of the Common Stock during a period of fifteen (15)
days prior to conversion, subject to a conversion limit (the "Conversion Limit")
of 19.9% of the then  issued  and  outstanding  shares  of  Common  Stock of the
Company. In the event that aggregate Note Conversion Shares and other securities
issuable under the Securities  Purchase  Agreement exceed the Conversion  Limit,
the  Company  will have 60 days  following  notice  by the  Funds to (i)  obtain
shareholder  approval  of the  issuance  of such  securities  or (ii)  repay the
balance of the Notes.  The Company has agreed to issue  additional  Grant Shares
(the  "Additional  Grant Shares") to the Funds in the event that the closing bid
price of the Common Stock during the period  ending thirty days from the date of
effectiveness  of a registration  statement  covering the Grant Shares (adjusted
for certain events specified in the agreement) does


                                      -14-




<PAGE>



not equal $7.75. In the event that any Additional  Grant Shares are issued,  the
exercise  price  of the  Warrants  will be  adjusted  so that  the  value of the
Warrants  (using a  Black-Scholes  or  similar  model)  equals  the value of the
Warrants as of the closing date. In connection with the above  transaction,  the
Company  relied on Section 4(2) under the  Securities  Act of 1933,  as amended.
Each of the Funds is an "accredited investor."

     Registration  Rights. The Company granted to the Funds registration  rights
covering the Note Conversion Shares, Grant Shares, Warrant Shares and Additional
Grant Shares (collectively,  the "Securities") pursuant to a Registration Rights
Agreement. Under such agreement, the Company is obligated to file a registration
statement  covering the sale of the Securities on or prior to April 14, 1998 and
use its best efforts to cause such registration statement to become effective by
June 30, 1998. Subject to certain  limitations and exclusions,  the Company also
agreed to include  406,553 shares of Common Stock issued in connection  with the
acquisition of TTE and ART in a  Registration  Statement on Form S-3 to be filed
under the Securities Act of 1993, as amended, in April 1998, and granted certain
"piggyback"  registration  rights with respect to such Common Stock. The Company
also entered into a Registration  Rights Agreement with the former  stockholders
of IMSI and CAG  pursuant  to which  the  Company  granted  certain  "piggyback"
registration  rights with  respect to 250,000  shares,  and has granted to Whale
certain demand and "piggyback"  registration rights with respect to an aggregate
of 320,000 shares  underlying  warrants  issued in connection with the Company's
initial public offering.

     Use of Proceeds.  In April 1997, the Company  consummated an initial public
offering of 1,600,000 shares of Common Stock and Warrants to purchase  1,840,000
shares of Common Stock  (including  warrants to purchase  240,000  shares issued
pursuant to the exercise of an over-allotment  option) and received net proceeds
of  $6,415,237,  after payment of  underwriting  discounts and  commissions  and
offering expenses of $1,768,764.  In May 1997, the underwriter purchased 240,000
shares of Common  Stock  pursuant  to an  over-allotment  option,  resulting  in
additional net proceeds of $1,002,924,  after payment of underwriting  discounts
and commissions and offering expenses of $197,076. Since July 15, 1997 (the date
of the  Company's  initial  Report on Form SR)  through  October 31,  1997,  the
Company used  $803,933 of the net proceeds for product  development;  $1,042,818
for product acquisition; $347,025 for sales and marketing; $56,468 for expansion
of production capacity;  $750,000 for repayment of indebtedness to an affiliate;
and  $793,695  for working  capital and general  corporate  purposes  (including
$40,315 of rent paid to an affiliate).  See "Certain  Relationships  and Related
Transactions."


                                      -15-



<PAGE>




Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.


     Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained herein which are not historical facts are forward
looking  statements  that involve  risks and  uncertainties,  including  but not
limited to, risks  associated  with the  Company's  future  growth and operating
results, the ability of the Company to successfully integrate the businesses and
personnel of newly acquired entities into its operations,  the shift in business
focus from software development to distribution, changes in consumer preferences
and  demographics,  technological  change,  competitive  factors and unfavorable
general economic  conditions.  Actual results may vary  significantly  from such
forward looking statements.


Overview

     The markets  for  interactive  software  games are  characterized  by short
product lifecycles and frequent  introduction of new products,  most of which do
not achieve sustained market acceptance. Substantially all sales of new products
occur within the first three  months  following  their  release.  The  Company's
success  depends upon its ability to  continually  develop  and/or  acquire new,
commercially  successful  products and to replace  revenues from products at the
later stages of their lifecycles. Any competitive, technological or other factor
adversely  affecting  the  acquisition,  development,  introduction  or  sale of
software  products could have a material  adverse effect on the Company's future
operating results.

     The Company's  independent auditors have included an explanatory  paragraph
in their report  stating  that the  Company's  working  capital  deficiency  and
recurring  negative cash flow from operations raise  substantial doubt about the
Company's  ability  to  continue  as a going  concern.  See  Note 2 to  Notes to
Consolidated Financial Statements.

     The Company generates revenue from software product sales. Revenue from the
sale of  software  products  pursuant  to domestic  distribution  agreements  is
recognized  when sales by  distributors  occur,  less an allowance  for returns.
Software  license  revenue is derived  primarily  under  agreements with foreign
distributors  and is  recognized  in the  period  in which a  product  master is
delivered to the  distributor.  Advances under such  agreements are deferred and
recognized  as income when earned or when  software is  delivered.  Distribution
revenue is recognized upon product shipment. See Note 2 to Notes to Consolidated
Financial Statements.

     The Company's products are subject to return if not sold to consumers.  The
Company  accepts  product  returns  for stock  balancing,  price  protection  or
defective  products.  At the time of product  sales,  the Company  establishes a
reserve for future returns based primarily on its return policies and historical
return rates and  recognizes  revenues net of product  returns.  The Company has
historically  experienced a product  return rate of  approximately  10% of gross
revenues.  Product  returns which  significantly  exceed the Company's  reserves
would materially adversely affect the Company's operating results. See Note 2 to
Notes to Consolidated Financial Statements.

     Research  and  development  costs  (consisting  primarily  of salaries  and
related costs)  incurred prior to  establishing  technological  feasibility  are
expensed  in  accordance  with  Financial   Accounting  Standards  Board  (FASB)
Statement No. 86. In accordance with FASB 86, the Company  capitalizes  software
development   costs   subsequent  to  establishing   technological   feasibility
(completion of a detailed  program design) which is amortized  (included in cost
of sales) based on the greater of the  proportion of current year sales to total
estimated  sales  commencing  with the  product's  release or the straight  line
method. At October 31, 1997, the Company had capitalized  $4,315,728 of software
development  costs.  The Company  evaluates the  recoverability  of  capitalized
software costs which may be reduced materially in future periods.  See Note 2 to
Notes to Consolidated Financial Statements.

     In September 1996, the Company  consummated a private placement pursuant to
which it issued (i) $2,088,539  principal  amount of promissory notes (the "1996
Notes") and (ii) five-year warrants to purchase 417,234


                                      -16-




<PAGE>



shares of Common  Stock at an  exercise  price of $.01 per  share.  The  Company
recorded  the 1996 Notes at a discount of $750,197 to reflect an  allocation  of
the proceeds to the  estimated  value of the  warrants,  of which  approximately
$600,000  has been  expensed in the year ended  October 31,  1997.  See "Certain
Relationships  and Related  Transactions"  and Note 7e to Notes to  Consolidated
Financial Statements.

     In September  1996,  the Company  acquired all of the  outstanding  capital
stock of Mission, a software developer,  in consideration of $1,674,478 in cash,
the  issuance of 182,923  shares of Common Stock  (valued at  $440,000)  and two
promissory notes in the aggregate principal amount of $667,750.  The acquisition
was accounted for as a purchase and,  accordingly,  the results of operations of
Mission are included in the Company's  consolidated  financial  statements as of
date of  acquisition.  Mission's only product at the time of the acquisition was
JetFighter III, which was released for commercial distribution by the Company in
November 1996. See "Certain  Relationships and Related  Transactions" and Note 3
to Notes to Consolidated Financial Statements.

     In October 1997,  the Company  issued (i) the Notes,  (ii) the Grant Shares
and (iii)  the  Warrants  to the  Funds.  The  Company  recorded  the Notes at a
discount of $993,800 to reflect an  allocation  of the proceeds to the estimated
value of the  Warrants,  Grant  Shares  and  fees  paid to the  Funds,  of which
$110,422  has been  expensed in the year ended  October 31,  1997.  In addition,
deferred financing costs of $276,980 were recorded to reflect the amount paid to
Whale  as a fee for  services  rendered  in  connection  with  the  transactions
contemplated  by the  Securities  Purchase  Agreement in cash,  shares of Common
Stock and Warrants, of which $30,776 has been expensed in the year ended October
31,  1997.  The  Company  anticipates  that  it will  expense  an  aggregate  of
approximately  $847,185 of discount and deferred  financing costs related to the
Notes during the three months  ended  January 31, 1998.  See Note 7a to Notes to
Consolidated Financial Statements.


Recent Acquisitions

     The Company has expanded its operations  through  acquisitions  which could
place a  significant  strain  on its  management,  administrative,  operational,
financial and other resources.  The Company has released  additional products on
new platforms,  expanded its publishing and distribution  operations,  increased
its development and product manufacturing expenditures,  expanded its work force
and expanded its presence in international  markets.  To successfully manage its
growth,  the Company will be required to continue to  implement  and improve its
information and operating  systems,  hire, train and manage an increasing number
of  management  and  other  personnel  and  monitor  its  operations  (including
controlling  costs and maintaining  effective  inventory and quality  controls).
There can be no assurance that the Company will be able to  successfully  manage
its expanded operations.

     In July 1997, the Company acquired all of the outstanding  capital stock of
TTE and ART  from  GameTek  FL.  The  cost of the  acquisition  was  $3,848,162,
consisting of (i) the payment of $100,000 in cash,  (ii) the issuance of 406,553
restricted  shares of Common Stock of the Company (valued at $3,000,000),  (iii)
the issuance of an  unsecured  promissory  note of the Company in the  principal
amount of $500,000 to GameTek  FL's  secured  creditor,  (iv) the  issuance of a
promissory  note in the  principal  amount of  $200,000  payable  to  GameTek FL
together  with accrued  interest  which was repaid on September 15, 1997 and (v)
direct  transaction  costs of $48,162.  The  acquisition  was accounted for as a
purchase and, accordingly, the results of operations of TTE and ART are included
in  the  Company's   consolidated   financial  statements  as  of  the  date  of
acquisition. See Note 3 to Notes to Consolidated Financial Statements.

     In July 1997, the Company acquired all of the outstanding  capital stock of
IMSI and CAG. Pursuant to Agreements and Plans of Merger, all of the outstanding
shares of common stock of each of IMSI and CAG were  converted into an aggregate
of 900,000 shares of restricted Common Stock of the Company. The acquisition has
been  accounted for as a pooling of interests  and,  accordingly,  the Company's
consolidated  financial  statements have been restated to include the results of
operations  and  financial  position of IMSI and CAG for all periods  presented.
Prior to July 31,  1997,  IMSI and CAG  were S  corporations.  Distributions  of
$202,092 were made to the shareholders of IMSI and CAG prior to the acquisition.
See Note 2 to Notes to Consolidated Financial Statements.


                                      -17-




<PAGE>



     In December 1997,  pursuant to an Agreement and Plan of Merger,  all of the
outstanding  shares of the capital  stock of  Alliance  were  converted  into an
aggregate  of 500,000  shares of  restricted  Common  Stock of the  Company  and
Alliance was merged into AIM and became a  wholly-owned  subsidiary  of IMSI. As
additional consideration for the merger, the Company made a capital contribution
to Alliance  in the amount of $1.5  million  and  granted  five-year  options to
purchase an aggregate  of 76,000  shares of Common Stock at a price of $2.00 per
share.  The  Company  intends to account  for the  acquisition  of Alliance as a
purchase.  For the year ended December 31, 1996,  Alliance generated revenues of
$27,552,133  and  achieved  net  income  of  $101,190.  See  Note 14 to Notes to
Consolidated Financial Statements.

     The Company  effected recent  acquisitions  with the expectation  that such
acquisitions will result in significant  beneficial  synergistic effects for the
combined  companies,  particularly with respect to new distribution  operations,
which the Company  believes  may provide a steady  revenue  stream and  minimize
periodic cash flow shortfalls.  The Company (including through its subsidiaries,
Mission  and ART) has  historically  devoted  its  principal  efforts to product
development.  The Company anticipates that, as a result of recent  acquisitions,
publishing and  distribution  activities by the Company,  TTE, IMSI and AIM will
account for an increasing portion of future revenues.

     The Company recently  acquired the rights to distribute  products  designed
for  operation on the  Nintendo 64 video gaming  platform.  In  connection  with
marketing  products  for new and  emerging  hardware  platforms,  the  Company's
operations will be increasingly  subject to product and platform lifecycles as a
result  of  rapid  technological  change  and  evolving  consumer   preferences.
Accordingly,  the  Company's  success  will be  dependent  upon its  ability  to
anticipate  and  respond to such  changes in  acquiring  and/or  developing  new
products for  distribution.  There can be no assurance  that the Company will be
able to successfully identify, acquire or market products designed to operate on
a  variety  of  platforms  which  will  achieve  initial  or  continued   market
acceptance.


Results of Operations

         The following table sets forth for the periods indicated the percentage
of net sales  represented by certain items reflected in the Company's  statement
of operations:

                                                               Years Ended
                                                               October 31,
                                                           1996           1997
                                                           ----           ----
Net sales .......................................         100.0%         100.0%
Cost of sales ...................................          49.8           65.5
Research and development costs ..................           5.7            6.7
Selling and marketing ...........................          21.7           22.1
General and administrative ......................          14.2           17.8
Depreciation and amortization ...................           2.2            4.4
Interest expense ................................           1.8            5.3
Income taxes ....................................           0.2            0.1
Net income (loss) ...............................           4.4          (21.9)


Years Ended October 31, 1997 and 1996

     Net sales  increased by  $6,484,955,  or 51.8%,  from  $12,529,128  for the
fiscal year ended October 31, 1996 ("fiscal 1996") to $19,014,083 for the fiscal
year ended  October  31,  1997  ("fiscal  1997").  The  increase  was  primarily
attributable to the acquisition of TTE which released various Gameboy titles and
Dark Colony,  accounting  for  $4,112,329  of the  increase,  and an increase in
IMSI's net sales due to the  distribution  of N64 products,  which have a higher
wholesale  price per unit. The increase was also  attributable to the release of
JetFighter  III in  November  1996,  which has sold in excess of  190,000  units
worldwide. Domestic and foreign sales were


                                      -18-



            


<PAGE>



approximately  $15,857,979  and  $3,156,104,  respectively,  or 83.4% and 16.6%,
respectively, of the Company's net sales for fiscal 1997.

     Cost of sales increased by $6,222,486, or 99.8%, from $6,236,703 for fiscal
1996 to  $12,459,189  for fiscal  1997.  The  increase in  absolute  dollars was
primarily a result of the  increase in net sales.  Cost of sales as a percentage
of net sales increased to 65.5% for fiscal 1997 from 49.8% for fiscal 1996. This
increase was primarily due to royalties  incurred from the release of JetFighter
III, IMSI's lower margin distribution  operations,  the write-off of $560,500 of
capitalized  software  costs  and  prepaid  royalties  in  excess  of their  net
realizable value. In future periods, costs of sales may be adversely affected by
manufacturing  and other costs,  price  competition and by changes in the mix of
products and distribution channels.

     Research  and  development  costs  increased by  $530,169,  or 73.8%,  from
$718,089  for fiscal  1996 to  $1,248,258  for fiscal  1997.  This  increase  is
primarily  attributable  to the acquisition of software  developers  (Mission in
September 1996 and ART in July 1997) and increased staffing and related expenses
associated  with  the  development  of  software   technologies.   Research  and
development  costs as a percentage of sales  increased from 5.7% for fiscal 1996
to 6.7% for fiscal  1997.  This  increase  is  attributable  to the  increase in
absolute dollars of research and development costs.

     Selling and marketing  expenses  increased by  $1,485,906,  or 54.7%,  from
$2,718,078 for fiscal 1996 to $4,203,984 for fiscal 1997.  Selling and marketing
costs as a percentage of net sales increased from 21.7% for fiscal 1996 to 22.1%
for fiscal 1997.  The  increases in absolute  dollars and as a percentage of net
sales were  primarily due to  distribution  fees paid to Interplay and marketing
expenses  incurred in connection with JetFighter III and the acquisition of TTE.
The Company anticipates that future selling and marketing expenses will increase
as a result of the newly acquired operations of TTE and AIM.

     General and administrative  expenses increased by $1,609,530 or 90.6%, from
$1,775,951  for  fiscal  1996  to  $3,385,481  for  fiscal  1997.   General  and
administrative  expenses as a percentage of net sales  increased  from 14.2% for
fiscal 1996 to 17.8% for fiscal 1997. The increases in both absolute dollars and
as a percentage of net sales were  primarily  due to the  Company's  increase in
salaries,  rent,  insurance  premiums and professional  fees associated with the
Company's expanded operations.

     Depreciation and  amortization  expense  increased by $574,698,  or 213.2%,
from  $269,523 for fiscal 1996 to $844,221 for fiscal  1997.  This  increase was
attributable  to the  amortization  of intangible  assets that resulted from the
Mission and TTE acquisitions. The Company expects that amortization expense will
continue  to  increase  as a result  of the  amortization  of  intangibles  that
resulted from the TTE and AIM acquisitions.

     Interest expense increased by $784,517, or 338.0%, from $232,095 for fiscal
1996 to $1,016,612  for fiscal 1997.  The increase  resulted  primarily from the
issuance of the 1996 Notes, offset by interest income from the investment of the
proceeds of the Company's initial public offering.

     Income taxes decreased  $10,628,  or 36.6%, from $29,049 for fiscal 1996 to
$18,421 for fiscal 1997. This decrease was primarily attributable to reduced net
sales from foreign  licensing and the resulting  decrease in withholdings  under
such foreign licensing agreements.

     As a result of the foregoing, the Company incurred a net loss of $4,162,083
for fiscal 1997, as compared to net income of $549,640 for fiscal 1996.


Liquidity and Capital Resources

     The Company's  primary capital  requirements have been and will continue to
be to fund the acquisition,  development,  manufacture and  commercialization of
its software  products.  The Company has  historically  financed its  operations
through  advances  made  by  distributors,  the  issuance  of  debt  and  equity
securities and bank


                                      -19-




<PAGE>



borrowings.  At October 31,  1997,  the Company had working  capital  deficit of
$1,442,974,  as compared to a working capital deficit of $731,641 at October 31,
1996.

     Net cash used in operating  activities  for fiscal 1997 was  $7,725,705  as
compared to $630,925 for fiscal 1996. The increase was primarily attributable to
an increase in accounts  receivable,  capitalized software development costs and
prepaid and other  current  assets,  offset by an increase in accounts  payable,
accrued  expenses and  advances  from  distributors.  Net cash used in investing
activities  for fiscal 1997 was  $1,036,044 as compared to $1,062,073 for fiscal
1996. The increase was primarily attributable to a reduction in the amount spent
on fixed assets.  Net cash provided by financing  activities for fiscal 1997 was
$10,083,008  as  compared  to  $1,849,158  for fiscal  1996.  The  increase  was
primarily the result of the proceeds from the Company's  initial public offering
and the issuance of Notes under the Securities Purchase Agreement.

     In May 1995, the Company consummated a private placement, pursuant to which
it  issued  994,018  shares  of  Common  Stock at a price of $2.41 per share and
received net proceeds of approximately $2,300,000.

     In September 1996, the Company  consummated a private placement pursuant to
which it issued  (i)  $2,088,539  principal  amount  of the 1996  Notes and (ii)
five-year  warrants to purchase  417,234  shares of Common  Stock at an exercise
price of $.01 per share. Of such indebtedness,  $523,320 principal amount of the
1996  Notes  bears  interest  at an  annual  rate of 2%  above  the  prime  rate
established  from time to time by Chase  Manhattan  Bank N.A. and was payable on
June 30,  1997.  As of  October  31,  1997,  $149,748  principal  amount of such
indebtedness  was  outstanding.   The  $1,565,180   principal  balance  of  such
indebtedness  bore  interest at the rate of 14% per annum and was payable on May
14, 1998. In August 1997, the Company repaid $750,000  principal  amount of such
indebtedness  and in September 1997 obtained bank financing to repay the balance
of $815,180  principal amount of such indebtedness.  See "Certain  Relationships
and Related Transactions."

     In December 1995, the Company  entered into a loan agreement with Citibank,
N.A. ("Citibank") which provides for borrowings under a revolving line of credit
of up to $250,000. Interest accrues on advances at 9.5% per annum and is payable
monthly.   The  line  of  credit  is  repayable  in  twenty-four  equal  monthly
installments  in the event  Citibank  terminates  the Company's  right to obtain
future loans. At October 31, 1997,  $246,997 was  outstanding  under the line of
credit.  Substantially  all of the  Company's  assets are pledged to Citibank as
collateral  and the  repayment of advances is  personally  guaranteed by Ryan A.
Brant,  Chief Executive Officer of the Company.  See "Certain  Relationships and
Related Transactions."

     In connection with the Mission acquisition, the Company issued a promissory
note in the principal  amount of $337,750 bearing interest at the rate of 6% per
annum,  payable in equal monthly installments of $10,224 through September 1999.
The Company also issued a promissory  note in the principal  amount of $330,000,
of which $130,000 has been paid to date.  Repayment of the remaining $200,000 is
contingent  upon the  inclusion  of a specific  software  engine in shipments of
JetFighter  IV. The Company has pledged the Mission stock as collateral  for the
repayment of such notes. See "Certain Relationships and Related Transactions."

     In connection with the purchase of TTE, ART and certain software games, the
Company issued an unsecured  promissory note to GameTek FL's secured creditor in
the amount of $500,000  payable in two equal annual  installments of $250,000 on
July 28,  1998 and July 29,  1999,  bearing  interest at a rate of 8% per annum,
payable  quarterly.  In addition,  the Company  issued a promissory  note in the
amount of $200,000 to GameTek FL which was repaid on September 15, 1997.

     In December 1996,  TTE entered into a line of credit  agreement (as amended
in September  1997) with  Barclay's  Bank which provides for borrowings of up to
approximately (pound)400,000 ($670,000).  Advances under the line of credit bear
interest  at the  rate of 2% over  Barclay's  base  rate per  annum  (9.0% as of
October 31, 1997),  payable  quarterly.  Borrowings are  collateralized by TTE's
receivables which must at all times be at least twice the amount  outstanding on
the line of credit  and are  guaranteed  by the  Company.  The line of credit is
cancellable and repayable upon demand.  The available credit under this facility
is approximately (pound)96,000 ($160,000) at October 31, 1997.


                                      -20-




<PAGE>




     In February 1997, IMSI entered into a line of credit agreement with Crestar
Bank which provides for borrowings of up to $250,000. Advances under the line of
credit  bear  interest  at  Crestar's  prime rate plus a margin of .5% per annum
(9.0% as of October 31,  1997).  At October  31,  1997,  there was no  borrowing
availability  under  the line of  credit.  The line of  credit  was  repaid  and
terminated in December 1997.

     In  September  1997,  the  Company  entered  into a Credit  Agreement  with
National  Bank of  Canada,  pursuant  to which  the  Company  borrowed  $800,000
evidenced  by a  promissory  note  bearing  interest at the rate of 2% per annum
above the prime rate  established by the bank from time to time and repayable in
nine equal monthly  payments of $30,000 with a $530,000  payment due on June 30,
1998.  Repayment of the loan is secured by  substantially  all of the  Company's
assets and is personally guaranteed by Ryan A. Brant, Chief Executive Officer of
the Company,  and Peter M. Brant,  Ryan Brant's  father.  The loan was repaid in
full in January 1998. See "Certain Relationships and Related Transactions."

     Pursuant to a Securities  Purchase  Agreement,  dated October 14, 1997, the
Company issued and sold to the Funds 10% secured convertible notes (the "Notes")
in the  aggregate  principal  amount of  $4,200,000.  The Notes are secured by a
first  priority  security  interest  in letters  of credit  issued in respect of
purchase  orders  for Wheel of  Fortune  and  Jeopardy!  products  designed  for
Nintendo 64 platform (the  "Products").  The Notes mature on September 30, 1999.
The  Company is required  to repay the Notes  prior to  maturity  under  certain
circumstances,  including in the event of a change of control, a transfer of all
or substantially  all of the Company's  assets, a merger or consolidation of the
Company,   the  issuance  of  securities  exceeding  the  Conversion  Limit  (if
shareholder  approval  has not been  obtained)  or the failure of the Company to
fulfill certain securities registration obligations. Notes repaid after February
28, 1998 are  repayable at a premium.  In  addition,  the Company is required to
prepay the Notes through payments and collections (including draws under letters
of credit) from the sale of the Products  received by the Company after December
31, 1997. The Company also agreed to certain covenants, including limitations on
the  issuance  of   securities,   mergers  and   acquisitions,   incurrence   of
indebtedness,  liens, the payment of dividends, capital expenditures and minimum
levels of net worth.

     In  December  1997,  IMSI and AIM entered  into a revolving  line of credit
agreement  with  NationsBank,  N.A.  which  provides  for  borrowings  of  up to
$5,000,000.  Advances under the line of credit are based on a borrowing  formula
equal  to the  lesser  of (i)  $5,000,000  or  (ii)  80%  of  eligible  accounts
receivable plus 50% of eligible inventory.  Interest accrues on such advances at
a rate of .75% over NationsBank's prime rate and is payable monthly.  Borrowings
under  the line of credit  are  secured  by a lien on  accounts  receivable  and
inventory of IMSI and AIM and are guaranteed by the Company.  The loan agreement
limits or prohibits IMSI and AIM, subject to certain exceptions,  from declaring
or paying cash dividends,  merging or  consolidating  with another  corporation,
selling assets (other than in the ordinary  course of business),  creating liens
and incurring additional indebtedness.  The available credit under this facility
is approximately $80,000 at December 31, 1997. The line of credit expires on May
31, 1998. AIM also has an arrangement with Nationscredit  Commercial Corporation
of America, an affiliate of NationsBank ("Nationscredit"), whereby Nationscredit
advances funds for the purchase of Nintendo  hardware and software  products and
then  bills  AIM  for  amounts  owed.  A  security  agreement  between  AIM  and
Nationscredit  grants Nationscredit a security interest in certain inventory and
requires AIM to maintain a minimum working  capital and tangible net worth.  The
Company has guaranteed the payment of amounts owed to Nationscredit.

     The Company's accounts  receivable at October 31, 1997 were $4,666,862.  Of
such  accounts  receivable,  $571,000  (or 12.3%)  and  $2,288,328  (or  49.0%),
respectively,   were  due  from  Interplay  and  Blockbuster  Video.  Delays  in
collection or uncollectibility of accounts receivable could adversely affect the
Company's  working  capital  position.  The Company is subject to credit  risks,
particularly  in the  event  that any of its  receivables  represent  sales to a
limited  number of  retailers or  distributors  or are  concentrated  in foreign
markets.

     The Company has no material commitments for capital  expenditures.  For the
year ended October 31, 1996,  the Company had capital  expenditures  of $159,029
related to additional  computer  equipment used primarily in connection with the
development of software titles for video game console platforms. In May and June
1997, the


                                      -21-




<PAGE>



Company leased additional equipment and software. The leases extend through June
2000 and obligate the Company to pay $209,556 per annum. 

     Pursuant to its agreement  with  Mindscape,  the Company has agreed to make
scheduled  repayments  to  Mindscape  in  the  aggregate  amount  of  $1,412,000
($170,666 of which has been  repaid) as  reimbursement  for advances  previously
made by Mindscape. See Note 5a to Notes to Consolidated Financial Statements.

     Based on plans and  assumptions  relating  to its  operations,  the Company
believes that projected  cash flow from  operations and available cash resources
will be  sufficient  to  satisfy  its  contemplated  cash  requirements  for the
reasonably  foreseeable future.  Nonrenewal of the Company's line of credit with
NationsBank could adversely affect the Company's financial condition and require
the Company to seek to obtain  additional  financing.  There can be no assurance
that projected  cash flow from  operations and available cash will be sufficient
to fund the Company's  operations or that additional financing will be available
to the Company, if required.

Fluctuations in Operating Results and Seasonality

     The Company's operating results vary significantly from period to period as
a result of  purchasing  patterns  of  potential  customers,  the  timing of new
product  introductions  by the Company  and its  competitors,  product  returns,
marketing and research and development  expenditures  and pricing.  Sales of the
Company's products are seasonal, with peak product shipments typically occurring
in the fourth calendar quarter (the Company's first fiscal  quarter),  depending
upon the  timing of  product  releases,  as a result  of  increased  demand  for
products during the year-end holiday season.

International Trade

     Product sales in  international  markets,  primarily in the United Kingdom,
other  countries in Europe and the Pacific Rim, have accounted for a significant
portion of the  Company's  revenues.  For the years  ended  October 31, 1996 and
1997, sales of products in  international  markets  accounted for  approximately
24.2% and 16.6%, respectively, of the Company's revenues. The Company is subject
to  risks  inherent  in  foreign  trade,   including   increased  credit  risks,
fluctuations  in  foreign   currency   exchange   rates,   shipping  delays  and
international  political,  regulatory  and economic  developments,  all of which
could have a significant  impact on the Company.  Product sales by TTE in France
and Germany are made in local currencies. The Company does not engage in foreign
currency  hedging  transactions.  See Note 2 to Notes to Consolidated  Financial
Statements.

Year 2000 Issue

     The Company has assessed the potential  issues  associated with programming
codes in its existing  computer  systems with respect to a two-digit  year value
for the year 2000 and  believes  that  addressing  such issues is not a material
event or uncertainty that would cause reported  financial  information not to be
indicative of future operating  results or financial  condition.  The Company is
currently upgrading its accounting software.

Inflation

     Inflation  has  historically  not had a  material  effect on the  Company's
operations.



I
tem 7. Financial Statements.

     The  financial  statements  appear in a  separate  section  of this  report
following Part III.



Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

     None.


                                      -22-




<PAGE>




                                    PART III



Item 9. Directors and Executive Officers of the Registrant.

     The directors and executive officers of the Company are as follows:


Name                                      Age     Position
- ----                                      ---     --------

Ryan A. Brant..........................   26      Chief  Executive  Officer and 
                                                  Director

Mark E. Seremet........................   32      President, Chief Operating
                                                  Officer and Director

Thomas Ptak............................   44      Vice President of Creative 
                                                  Development

Barbara A. Ras.........................   35      Controller

James W. Bartolomei, Jr................   35      Vice President of Sales

Oliver R. Grace, Jr....................   44      Director

Neil S. Hirsch.........................   50      Director

David P. Clark.........................   29      Director

Kelly Sumner...........................   36      Director



     Ryan A.  Brant has been  Chief  Executive  Officer  and a  director  of the
Company since its inception.  Prior to founding the Company, Mr. Brant served as
Chief Operating  Officer of Stewart,  Tabori & Chang,  Inc., an illustrated book
publisher,  from May 1991 to August 1993.  Mr. Brant  received a B.S.  degree in
Economics  from the University of  Pennsylvania's  Wharton School of Business in
May 1992.

     Mark E. Seremet has been President,  Chief Operating Officer and a director
of the Company since November 1993.  From 1985 to July 1992, Mr. Seremet was the
co-founder  and  President  of Paragon  Software  Corporation  ("Paragon"),  the
publisher of  entertainment  titles,  including the  best-selling  Marvel Comics
series featuring Spider Man, Captain America and The Punisher.  Paragon was sold
to MicroProse  Software,  Inc.  ("MicroProse")  in 1992.  Mr.  Seremet served as
Executive Director of the multimedia  division of MicroProse from August 1992 to
October  1993 and was  responsible  for several  successful  interactive  CD-ROM
titles, including F15 Strike Eagle III and Mantis. Mr. Seremet was the recipient
of the Small Business  Administration's  Young Entrepreneur of the Year Award in
1989. Mr. Seremet  received a B.S. degree in Business  Computer Systems Analysis
from Saint Vincent College in 1986.

     Thomas Ptak has been Vice President of Creative  Development of the Company
since September 1996. Mr. Ptak was the President of Mission from October 1992 to
September 1996.  Prior to joining  Mission,  Mr. Ptak served as the President of
Velocity  Development  Corporation,  a  software  developer,  from  June 1988 to
September 1992.

     Barbara  A. Ras,  CPA has served as the  Controller  of the  Company  since
October  1994.  Prior to joining  the  Company,  Ms. Ras was  employed  as a tax
accountant with Peter J. Murphy, CPAs from September 1992 to September 1994, and
as an internal  auditor with The New York Times  Company from March 1988 to June
1991. Ms. Ras holds a B.S. degree in Accounting from St. John's University,  and
a Masters  degree in Taxation  from the State  University of New York at Albany,
which she received in August 1992.

     James W.  Bartolomei,  Jr. has been Vice  President of Sales of the Company
since July 1995. Prior to joining the Company, Mr. Bartolomei was Regional Sales
Manager at Mindscape from November 1993 to June 1995, and Regional Sales Manager
at Proxima,  Inc., a computer peripherals company,  from May 1992 to April 1993.
Mr. Bartolomei received a B.A. degree from Colgate University in 1984.


                                      -23-




<PAGE>



     Oliver R. Grace,  Jr. has been a director of the Company  since April 1997.
Mr. Grace,  a private  investor,  has been the Chairman of the Board of Andersen
Group,  Inc., a dental products and video broadcasting  equipment  manufacturing
company,  since 1990. Mr. Grace has also been a director of Republic  Automotive
Parts, Inc., a distributor of replacement parts for the automotive  aftermarket,
since 1982.  Mr. Grace is a general  partner of Anglo  American  Security  Fund,
L.P., a private investment fund.

     Neil S.  Hirsch  has been a director  of the  Company  since May 1995.  Mr.
Hirsch has been the President  and Chief  Executive  Officer of Loanet,  Inc., a
worldwide  communications  network managing  securities lending  transactions of
banks and  brokerage  firms  since March 1994.  From 1969 to January  1990,  Mr.
Hirsch was Chairman,  Chief Executive Officer and President of Telerate, Inc., a
financial information  provider,  which was acquired by Dow Jones & Co. Inc. Mr.
Hirsch served as a consultant to Telerate, Inc. until September 1993. Mr. Hirsch
served on the Board of Directors of Dow Jones & Co. Inc.  from 1990 to May 1993.
Mr. Hirsch was elected to the Information Industry Hall of Fame in 1985.

     David P. Clark has been a director of the Company since  December 1997. Mr.
Clark has been President of IMSI since January 1997.  Prior to joining IMSI, Mr.
Clark was employed as a Sales Manager at Acclaim  Entertainment  from  September
1994 to December  1996.  From  December  1992 to August  1994,  Mr.  Clark was a
Regional Sales Manager for Sony Imagesoft.

     Kelly Sumner has been a director of the Company since  December  1997.  Mr.
Sumner has been President of TTE since July 1997. Prior thereto, from April 1993
to July 1997, Mr. Sumner was President and Chief  Operating  Officer of Gametek,
Inc. From June 1979 to April 1993,  Mr.  Sumner was Managing  Director of the UK
subsidiary of Commodore Business Machines.

     All directors hold office until the next annual meeting of stockholders and
the  election  and  qualification  of their  successors.  Officers  are  elected
annually by the Board of Directors and serve at the discretion of the Board.

     The Company  intends to establish  an Audit  Committee  and a  Compensation
Committee of the Board of Directors.

     The Company has agreed,  until April 2000,  if so requested  by Whale,  the
underwriter of the Company's  initial public  offering,  to nominate and use its
best  efforts to elect a designee  of Whale as a director  of the Company or, at
Whale's option, as a non-voting adviser to the Company's Board of Directors. The
Company's  officers,  directors and principal  stockholders  have agreed to vote
their  shares  of  Common  Stock in favor of such  designee.  Whale  has not yet
exercised its right to designate such a person.



                                      -24-




<PAGE>




Item 10. Executive Compensation.


     The following  table sets forth the cash  compensation  paid by the Company
during the fiscal  years  ended  October  31,  1995,  1996 and 1997 to its Chief
Executive  Officer  and to each of its  executive  officers  whose  compensation
exceeded $100,000 (the "Named Executives"): 


<TABLE>
<CAPTION>
                                                     Summary Compensation Table

                                                                                                                   Long-Term
                                                                                                                  Compensation
                                                                 Annual Compensation                                 Award
                                         ----------------------------------------------------------------          -----------
                                                                                                                   Securities
                                         Year Ended                                          Other Annual          Underlying
Name and Principal Position              October 31,       Salary($)        Bonus($)       Compensation(1)         Options(#)
- ---------------------------              -----------       ---------        --------       ---------------         -----------
<S>                                        <C>             <C>               <C>                   <C>             <C>      
Ryan A. Brant
Chief Executive Officer.............       1997             125,000              --                --              50,000(2)
                                           1996             119,319              --                --                  --
                                           1995             116,100              --                --                  --
                                                                       
Mark E. Seremet                                                        
President...........................       1997             175,000          150,000               --              50,000(2)
                                           1996             141,158           42,350               --              58,203(3)
                                           1995             132,996           68,850               --                  --
                                                                       
James W. Bartolomei, Jr.                                               
Vice President of Sales.............       1997             104,800           10,500               --                  --
                                           1996             104,800            6,000               --              41,573
                                           1995              32,750              --                --                  --
                                                                       
Barbara A. Ras                             1997             100,000           10,000               --              25,000(2)
Controller..........................       1996              82,333              ---               --                  --
                                           1995              56,250            2,000               --              40,243(3)
                                                                       
Thomas Ptak                                                            
Vice President of Creative                                             
 Development........................       1997            140,000(4)            --                --              15,000(2)
                                           1996              11,667              --                --                  -- 
                                           1995                 --               --                --                  -- 
</TABLE>


- ----------

(1)  The  aggregate  value of benefits to be  reported  under the "Other  Annual
     Compensation"  column  did not  exceed  the lesser of $50,000 or 10% of the
     total of annual salary and bonus reported for the Named Executive.

(2)  Represents  stock options  granted  under the  Company's  1997 Stock Option
     Plan.

(3)  Represents  stock options  granted  under the  Company's  1994 Stock Option
     Plan.

(4)  Does not include  royalties of $458,482 paid to Mr. Ptak and his affiliates
     in connection with the sale of JetFighter products.


                                      -25-

            


<PAGE>




     The following table sets forth information concerning stock options granted
in the year ended October 31, 1997 to the Named Executives:


<TABLE>
<CAPTION>
                                         Option Grants in Fiscal Year Ended October 31, 1997

                                                  Individual Grants
                                       ----------------------------------------------
                            Number of                                                                  Potential Realizable
                            Securities          Percent of Total                                       Value at Assumed
                            Underlying          Options Granted         Exercise                       Annual Rates of Stock
                            Options             to Employees in         Price          Expiration      Price Appreciation for
Name                        Granted (#)         Fiscal Year(%)          ($/Sh)            Date         Option Term (1)
- ----                        -----------         ----------------        --------       ----------      ----------------------
<S>                          <C>                     <C>                  <C>           <C>            <C>            <C>    
                                                                                                       5%($)          10%($)
                                                                                                       -----          ------
Ryan A. Brant                50,000(2)               12.8                 5.50          4/17/2002      44,000         127,500
                                                                                                                   
                                                                                                                   
Mark E. Seremet              50,000(2)               12.8                 5.00          4/17/2002      69,000         152,500
                                                                                                                   
                                                                                                                   
James W. Bartolomei                --                 --                   --                 --         --             -- 
                                                                                                                   
                                                                                                                   
Barbara A. Ras               25,000(2)                6.4                 5.00          4/17/2002      34,500         76,250
                                                                                                                   
                                                                                                                   
Thomas Ptak                  15,000(3)                3.9                 5.00          4/17/2002      20,700         45,750
</TABLE>

                                                                             

- ----------

(1) The potential  realizable value columns of the table illustrate  values that
might be  realized  upon  exercise  of the  options  immediately  prior to their
expiration,  assuming the Company's  Common Stock  appreciates at the compounded
rates  specified  over the term of the options.  These  numbers do not take into
account  provisions of certain  options  providing for termination of the option
following  termination of employment or nontransferability of the options and do
not make any provision for taxes associated with exercise.  Because actual gains
will depend upon,  among other things,  future  performance of the Common Stock,
there can be no  assurance  that the  amounts  reflected  in this  table will be
achieved.

(2)  Represents  five-year  options  exercisable  as to  one-fifth of the shares
covered thereby in each year commencing on the date of grant.

(3)  Represents  five-year  options  exercisable  as to  one-third of the shares
covered thereby in each year commencing on the date of grant.


                                      -26-



<PAGE>



     The following table sets forth information  concerning the value of options
exercised  during the year ended  October 31, 1997 and the value of  unexercised
stock options held by the Named Executives as of October 31, 1997:


<TABLE>
<CAPTION>
                                           Aggregated Option Exercises and Year End Values

                                                                    Number of Securities
                                                                         Underlying                         Value of Unexercised
                                                                     Unexercised Options                    In-the-Money Options
                                                                   at October 31, 1997 (#)                at October 31, 1997 ($)*
                                                              -------------------------------         -----------------------------
                              Shares            Value
                            Acquired on        Realized
Name                       Exercise (#)          ($)          Exercisable        Unexercisable        Exercisable     Unexercisable
- ----                       ------------        --------       -----------        -------------        -----------     -------------
<S>                          <C>               <C>              <C>                 <C>                <C>                <C>   
Ryan A. Brant                15,000            113,700          493,880             40,000             2,833,520          50,000
                                                                                               
Mark E. Seremet                 --                 --           357,553             40,000             2,034,388          70,000
                                                                                               
James W. Bartolomei             --                 --            27,715             13,858               154,927          77,466
                                                                                               
Barbara A. Ras                  --                 --            45,243             20,000               183,405          35,000
                                                                                               
Thomas Ptak                     --                 --             5,000             10,000                 8,750          17,500
</TABLE>

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

* Year-end values for unexercised  in-the-money  options  represent the positive
spread between the exercise price of such options and the fiscal year-end market
value of the Common Stock, which was $6.75 on October 31, 1997.

Director Compensation

     Non-employee  directors  currently receive no cash compensation for serving
on Board of Directors other than  reimbursement of reasonable  expenses incurred
in attending meetings.

Employment Agreements

     Each of Ryan A. Brant and Mark E.  Seremet has entered  into an  employment
agreement  with the Company for a four-year  term  commencing  November 1, 1996.
Pursuant to the employment agreements,  Messrs. Brant and Seremet have agreed to
devote  their full time to the  business of the  Company as its Chief  Executive
Officer  and its  President  and  Chief  Operating  Officer,  respectively.  The
employment  agreements  provide that  Messrs.  Brant and Seremet are entitled to
receive a base salary of $125,000 and $175,000, respectively, subject to cost of
living increases and annual cash bonuses equal to 3% of earnings before interest
and taxes in the event the Company  achieves  certain  earnings  levels.  In the
event the employment  agreements  are  terminated by the Company  without cause,
Messrs.  Brant and Seremet will be entitled to receive their base salary through
the remaining term of the agreement. The employment agreements contain covenants
restricting the executive from engaging in any activities  competitive  with the
business of the Company during the term of the agreement and for a period of one
year thereafter.

     In connection  with the Mission  acquisition,  the Company  entered into an
employment agreement with Thomas Ptak for a term expiring on September 30, 2000.
Pursuant  to  the   employment   agreement,   Mr.  Ptak  has  agreed  to  devote
substantially  all of his  business  and  professional  time and  efforts to the
business  of the Company as its Vice  President  of  Creative  Development.  The
employment  agreement  provides  that Mr.  Ptak is entitled to receive an annual
base  salary of $140,000  and a monthly  bonus equal to 19.30% of the Net Profit
(as defined) from sales of CD-ROM and electronic  and  derivative  entertainment
product lines other than  JetFighter III developed  after  September 17, 1996 by
staff  supervised by Mr. Ptak and sales of products  ancillary to JetFighter III
which are published  more than 18 months after the date on which  JetFighter III
was first shipped.  In the event the  employment  agreement is terminated by the
Company without cause, Mr. Ptak will be entitled to continue to receive


                                      -27-




<PAGE>



his bonuses under the employment  agreement and his base salary.  The employment
agreement  also  contains  a  covenant  prohibiting  Mr.  Ptak  from  disclosing
confidential information regarding the Company.

     Effective  July 1, 1995, the Company  entered into an employment  agreement
with James W. Bartolomei, Jr., pursuant to which Mr. Bartolomei agreed to devote
substantially  all of his  business  and  professional  time and  efforts to the
business of the Company as its Vice President of Sales. The employment agreement
provides that Mr. Bartolomei shall receive a base salary of $100,000,  and shall
be  entitled to receive an annual  cash bonus  based on the  achievement  by the
Company  of its  business  plan.  In  the  event  the  employment  agreement  is
terminated,  Mr.  Bartolomei shall be entitled to receive severance equal to one
month's salary.

     TTE  has  entered  into an  employment  agreement  with  Kelly  Sumner,  an
executive  officer of TTE and a director of the  Company,  pursuant to which Mr.
Sumner agreed to continue his employment with TTE as President/Managing Director
for a three-year term. The agreement  provides that Mr. Sumner is entitled to an
annual salary of (pound)100,000  ($168,000),  plus an annual bonus equal to 7.5%
of the net pre-tax  profits of TTE. Mr.  Sumner also agreed not to engage in any
business which is a competitor of TTE in either England or Wales during the term
of the employment  agreement and for a period of six months after termination of
his employment with TTE (or an affiliate or subsidiary of TTE).

     IMSI has  entered  into a  three-year  employment  agreement  with David P.
Clark,  a director of the  Company,  and entered  into a  three-year  consulting
agreement  with Terry  Phillips.  Pursuant to such  agreements,  each of Messrs.
Clark and Phillips are  entitled to receive 6% of earnings  before  interest and
taxes  generated by IMSI up to $500,000 and 9% of earnings  before  interest and
income taxes in excess of $500,000. Mr. Clark is also entitled to receive a base
salary of $120,000 per annum pursuant to his employment agreement.  Mr. Phillips
received commissions of approximately $19,000 on IMSI sales for the period ended
October 31, 1997.

     AIM entered into a four-year  employment  agreement with each of Jay Gelman
and Larry Muller,  the former  stockholders of AIM. Such agreements provide that
each of Messrs.  Gelman and Muller is  entitled  to receive an annual  salary of
$183,500 and incentive  compensation  equal to 5% of Alliance's  earnings before
taxes. In addition,  each of Messrs. Gelman and Muller are entitled to receive a
bonus  equal to .125% of the  first $20  million  in  combined  sales of AIM and
Take-Two during each year.

Stock Options Plans

     1994 Stock Option Plan. In February 1994, the  stockholders  of the Company
approved the Company's 1994 Qualified Incentive Stock Option Plan, as adopted by
the Company's Board of Directors (the "1994 Plan"), and as amended in April 1995
and January 1996, pursuant to which key employees of the Company are eligible to
receive incentive stock options to purchase up to an aggregate of 896,654 shares
of Common  Stock.  There are currently  outstanding  under the 1994 Stock Option
Plan  stock  options  for an  aggregate  of  879,991  shares of Common  Stock at
exercise  prices  ranging from $.45 to $2.41 per share,  and expiring at various
times  from 1999  through  2005.  The  exercise  prices  applicable  under  such
outstanding  stock options represent not less than 100% of the fair market value
of the underlying Common Stock as of the date that such options were granted, as
determined  by the  Board of  Directors  of the  Company  on the date  that such
options were granted.  Of such options:  (i) options to purchase  498,880 shares
were  granted  to Ryan A. Brant in 1994 at an  exercise  price of $.92 per share
(15,000 of which were exercised in July 1997);  (ii) options to purchase 349,216
shares were granted to Mark E. Seremet,  including  166,293  options  granted in
1994 at an exercise price of $.45 per share,  124,720 options granted in 1994 at
an  exercise  price of $.92 and 58,203  options  granted in 1996 at an  exercise
price of $2.41;  and (iii)  options to purchase  40,243  shares were  granted to
Barbara A. Ras in 1995 at an exercise price of $2.41 per share.

     1997 Stock Option Plan. In January 1997,  the  stockholders  of the Company
approved the Company's 1997 Stock Option Plan, as adopted by the Company's Board
of Directors (the "1997 Plan"), pursuant to which officers, directors, employees
and  consultants of the Company are eligible to receive  incentive stock options
and non-qualified stock options to purchase up to an aggregate of 400,000 shares
of the  Company's  Common  Stock.  To date,  the Company has granted  options to
purchase 390,000 shares under the 1997 Plan. In April 1997, the Company granted


                                      -28-




<PAGE>



options  under  the Plan to Ryan A.  Brant  (50,000  options),  Mark E.  Seremet
(50,000  options),  Barbara A. Ras  (25,000  options)  and Thomas  Ptak  (15,000
options),  entitling  them to purchase an aggregate of 140,000  shares of Common
Stock,  all of which  provide  for an  exercise  price  equal to $5.00 per share
(except  that  Mr.  Brant's  options  have an  exercise  price  of  $5.50),  are
exercisable  at the rate of 20% of the  number  of  options  granted  in each of
calendar 1997 through 2001, inclusive, commencing in April 1997 (except that Mr.
Ptak's  options  are  exercisable  at the rate of 33.3% of the number of options
granted in each of calendar 1997 through  1999) and,  unless  exercised,  expire
five years from the date of grant  (subject to prior  termination  in accordance
with the applicable stock option  agreements).  The exercise price applicable to
all outstanding  stock options  represents not less than 100% of the fair market
value of the  underlying  Common  Stock as of the date  that such  options  were
granted.

     With respect to incentive  stock options,  both stock option plans provides
that the  exercise  price of each such  option must be at least equal to 100% of
the fair  market  value of the  Common  Stock on the date  that  such  option is
granted (and 110% of fair market value in the case of  stockholders  who, at the
time the option is granted,  own more than 10% of the total  outstanding  Common
Stock), and require that all such options have an expiration date not later than
that date which is one day before the tenth anniversary of the date of the grant
of such  options (or the fifth  anniversary  of the date of grant in the case of
10% stockholders).  However, with certain limited exceptions,  in the event that
the option holder  ceases to be associated  with the Company or engages in or is
involved with any business similar to that of the Company,  such option holder's
incentive  options  immediately  terminate.  Pursuant to the  provisions  of the
plans,  the aggregate fair market value,  determined as of the date(s) of grant,
for which  incentive  stock  options are first  exercisable  by an option holder
during any one calendar year cannot exceed $100,000.

     With respect to  non-qualified  stock  options,  the Plan requires that the
exercise  price of all such options be at least equal to 100% of the fair market
value of the Common  Stock on the date such  option is  granted,  provided  that
non-qualified  options may be issued at a lower  exercise price (but in no event
less than 85% of fair market value) if the net pre-tax  income of the Company in
the full fiscal year immediately  preceding the date of the grant of such option
(the "Prior Year")  exceeded 125% of the mean annual  average net pre-tax income
of the Company for the three fiscal years immediately preceding such Prior Year.
Non-qualified  options  must have an  expiration  date not later  than that date
which is the day before the eighth  anniversary  of the date of the grant of the
subject option. However, with certain limited exceptions,  in the event that the
option holder ceases to be associated  with the Company or engages in or becomes
involved with any business similar to that of the Company,  such option holder's
non-qualified options immediately terminate.


                                      -29-




<PAGE>




Item 11. Security Ownership of Certain Beneficial Owners and Management.


     The following table sets forth certain  information as of January 26, 1998,
relating  to the  beneficial  ownership  of shares  of Common  Stock by (i) each
person or entity who is known by the Company to own  beneficially  5% or more of
the outstanding Common Stock, (ii) each of the Company's  directors,  (iii) each
of the Named  Executives,  and (iv) all directors and executive  officers of the
Company as a group.


<TABLE>
<CAPTION>
                                                        Number of Shares             Percentage of Outstanding
                                                         of Common Stock                    Common Stock
Name and Address of Beneficial Owner(1)               Beneficially Owned(2)              Beneficially Owned
- ---------------------------------------               ---------------------              ------------------
<S>                                                         <C>                                <C>  
Ryan A. Brant(3) .................................          4,441,928                          42.0%
                                                                                             
Mark E. Seremet(4) ...............................            359,216                           3.6
                                                                                             
Thomas Ptak(5) ...................................            187,923                           1.9
                                                                                             
Barbara A. Ras(6) ................................             45,243                             *
                                                                                             
James W. Bartolomei, Jr.(7) ......................             27,715                             *
                                                                                             
Oliver R. Grace, Jr.(8) ..........................            781,338                           7.9
                                                                                             
Neil S. Hirsch(9) ................................          3,948,048                          39.2
                                                                                             
Ira Shapiro(10) ..................................            682,494                           7.0
                                                                                             
Bridgehampton Investors, L.P.(11) ................          3,948,048                          39.2
                                                                                             
Anglo American Security Fund, L.P.(12) ...........            754,786                           7.7
                                                                                             
David P. Clark(13) ...............................            425,000                           4.4
                                                                                             
Kelly Sumner(14) .................................             33,000                             *
                                                                                             
All directors and executive officers as a                                                    
group (nine persons) .............................          6,301,363(15)                      56.8%
</TABLE>

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

*    Less than 1%.

(1)  Unless  otherwise  indicated,  the address of each beneficial  owner is 575
     Broadway,  New York, New York 10012. The address of Anglo American Security
     Fund, L.P. is 55 Brookville Road, Glen Head, New York 11545. The address of
     Ira Shapiro is P.O. Box 155, Litchfield, Connecticut 06759.

(2)  Unless otherwise indicated,  the Company believes that all persons named in
     the table have sole voting and investment  power with respect to all shares
     of Common  Stock  beneficially  owned by them. A person is deemed to be the
     beneficial  owner of securities which may be acquired by such person within
     60 days from the date of this report upon the exercise of options, warrants
     or convertible securities.  Each beneficial owner's percentage ownership is
     determined  by assuming  that options that are held by such person (but not
     those held by any other person) and which are exercisable within 60 days of
     the date of this report, have been exercised.

(3)  Includes  (i)  3,948,048  shares  of  Common  Stock  held by  Bridgehampton
     Investors,  L.P., a Connecticut limited partnership  ("Bridgehampton"),  of
     which Mr. Brant is a general partner and shares voting and investment power
     with an entity  controlled  by Neil S. Hirsch with  respect to such shares,
     (ii) 483,880


                                      -30-




<PAGE>



     shares of Common Stock issuable upon the exercise of options  granted under
     the 1994 Plan,  and (iii) 10,000  shares of Common Stock  issuable upon the
     exercise  of  options  granted  under the 1997  Plan,  which are  currently
     exercisable.

(4)  Includes (i) 347,553  shares of Common Stock  issuable upon the exercise of
     options granted under the 1994 Plan, and (ii) 10,000 shares of Common Stock
     issuable upon the exercise of options  granted  under the 1997 Plan,  which
     are currently exercisable.

(5)  Includes 5,000 shares of Common Stock issuable upon the exercise of options
     granted under the 1997 Plan.

(6)  Includes (i) 40,243  shares of Common Stock  issuable  upon the exercise of
     options  granted under the 1994 Plan, and (ii) 5,000 shares of Common Stock
     issuable upon the exercise of options  granted  under the 1997 Plan,  which
     are currently exercisable.

(7)  Represents shares of Common Stock issuable upon the exercise of options.

(8)  Includes: (i) 689,440 shares of Common Stock owned of record by Anglo
     American Security Fund, L.P. ("Anglo American"), of which Mr. Grace is a
     general partner, (ii) 42,387 shares of Common Stock issuable upon the
     exercise of warrants owned by Anglo American, (iii) 17,959 shares of Common
     Stock issuable upon the exercise of options owned by Anglo American, (iv)
     5,765 shares of Common Stock issuable upon the exercise of warrants owned
     by an affiliated entity and (v) 20,787 shares of Common Stock issuable upon
     the exercise of options owned by Mr. Grace.
          
(9)  Represents 3,948,048 shares of Common Stock held by Bridgehampton, of which
     an entity  controlled by Mr. Hirsch is a general  partner and shares voting
     and investment power with Ryan A. Brant with respect to such shares.

(10) Includes  21,618  shares  of  Common  Stock  held  by Mr.  Shapiro's  minor
     children.

(11) The  general  partners  of  Bridgehampton  are  Ryan A.  Brant,  the  Chief
     Executive  Officer  of the  Company,  and an entity  controlled  by Neil S.
     Hirsch, a director of the Company.  Messrs.  Brant and Hirsch together have
     sole voting and investment power with respect to the shares of Common Stock
     held by Bridgehampton.  Messrs.  Brant and Hirsch beneficially own 1.9% and
     5.6%,   respectively,   of   Bridgehampton.   The   limited   partners   of
     Bridgehampton,  who have no voting or investment  power with respect to the
     shares of Common Stock held by  Bridgehampton,  include Peter M. Brant, the
     father of Ryan A. Brant, who owns 40.7% of Bridgehampton, and the Incentive
     Profit-Sharing  Plan of a  corporation  of which  Mr.  Brant's  father is a
     trustee,  which  owns  49.2%  of  Bridgehampton.  Pursuant  to the  limited
     partnership  agreement  of  Bridgehampton,  such  partnership  may  not  be
     terminated,  and its voting and investment powers may not be amended, until
     January 2002.

(12) Includes (i) 42,387 shares of Common Stock issuable upon the exercise of
     warrants and (ii) 17,959 shares of Common Stock issuable upon the exercise
     of options.

(13) Includes  187,500  shares held by Mr.  Clark's  wife.  Mr. Clark  disclaims
     beneficial ownership of the shares held by his wife.

(14) Includes  8,000  shares of  Common  Stock  issuable  upon the  exercise  of
     options.

(15) Includes  currently   exercisable  options  and  warrants  to  purchase  an
     aggregate of 1,351,041 shares of Common Stock.



                                      -31-



<PAGE>




Item 12. Certain Relationships and Related Transactions.

     In connection with a private  financing in September 1996,  Peter M. Brant,
the  father of Ryan A.  Brant,  Chief  Executive  Officer of the  Company,  Neil
Hirsch,  a director of the Company,  Ira Shapiro,  a principal  stockholder  and
former  director  of the  Company,  and  Anglo  American  purchased  $1,565,180,
$72,228, $65,500 and $212,867, respectively, of the principal amount of the 1996
Notes and received  five-year warrants to purchase 312,339,  14,413,  13,071 and
42,387 shares,  respectively,  at an exercise price of $.01 per share.  In April
1997,  the Company  repaid  $65,500 and  $212,867  principal  amount of the 1996
Notes,  respectively,  to Mr. Shapiro and Anglo American. In January 1997, Peter
M. Brant  agreed to extend the  repayment of his portion of the 1996 Notes until
May 14, 1998. In consideration for such extension, the interest rate on the 1996
Notes held by Mr.  Brant was  increased to 14% per annum.  In August  1997,  the
Company repaid $750,000  principal amount of such indebtedness to Mr. Brant and,
in  September  1997,  obtained  bank  financing to repay the balance of $815,180
principal amount of such indebtedness.

     In February 1994, the Company entered into a five-year consulting agreement
with Mr.  Shapiro under which the Company  agreed to pay to Mr. Shapiro a fee of
$75,000 per annum (payable  quarterly) in consideration  of business  consulting
services.  In September 1996, the Company issued to Mr. Shapiro 42,496 shares of
Common Stock and a  promissory  note in the  principal  amount of $65,500 on the
same  terms and  conditions  as the 1996 Notes in lieu of  $167,000  owed to Mr.
Shapiro under the  consulting  agreement.  At October 31, 1997, the Company owed
Mr. Shapiro $61,000 pursuant to the consulting agreement.

     In  connection  with Mission  acquisition  in September  1996,  the Company
issued a promissory note in the principal amount of $337,750,  payable to Thomas
Ptak,  Vice President of Creative  Development of the Company,  in equal monthly
installments  of $10,224  through  September  1999, and a promissory note in the
principal amount of $330,000,  of which $200,000 is currently outstanding and is
payable in the event that the  Company  includes a specific  software  engine in
shipments of JetFighter IV. The repayment of such indebtedness is secured by the
Mission stock held by the Company.  In addition,  the Company  agreed to pay Mr.
Ptak and his  affiliates  77.2%  of net  cash  receipts  derived  from  sales of
JetFighter III, and agreed to pay royalties of 19.3% derived from sales of other
products   developed  under  his  supervision   (including   JetFighter  IV  and
JetFighter:  Full Burn) pursuant to his  employment  agreement with the Company.
The Company  also  assumed an  obligation  to repay a $15,000  principal  amount
promissory  note issued to Mr. Ptak's  sister.  Such note bears  interest at the
rate of 12% per annum and is payable on demand.

     The  Company  leases  its  office  space  in New  York  from  575  Broadway
Corporation, a corporation controlled by Ryan A. Brant's father.

     All of the Company's  indebtedness to the Citibank is personally guaranteed
by Ryan A. Brant. Messrs. Ryan A. Brant and Peter M. Brant personally guaranteed
the  Company's  Credit  Agreement  with the National  Bank of Canada,  which was
repaid in January 1998.

     In February 1997, Anglo American, of which Oliver R. Grace, Jr., a director
of the  Company,  is a general  partner,  agreed to  convert  shares of Series B
Convertible  Preferred  Stock  into  409,791  shares  of  Common  Stock.  As  an
inducement to enter into such  agreement,  the Company  issued to Anglo American
options to purchase  38,746 shares of Common Stock at an exercise price of $2.41
per share.  In  addition,  the  Company  entered  into a  three-year  consulting
agreement with an affiliate of Anglo American,  pursuant to which such affiliate
agreed to provide management consulting services to the Company in consideration
of the payment of $100,000 over the term of the agreement,  of which $33,333 was
paid in April 1997. The Company also paid $35,000 to Anglo American in dividends
on the Series B Preferred Stock.

     During  the  years  ended  October  31,  1996 and  1997,  IMSI  paid  sales
commissions  of $33,000 and $18,603,  respectively,  to a company  controlled by
Terry  Phillips,  a  stockholder  of the Company and a consultant to IMSI. As of
October 31,  1997,  there was $39,633 and $3,346,  respectively,  due from David
Clark,  a director of the Company,  and Mr.  Phillips  relating to advances made
prior to the IMSI acquisition.

     The Company believes that all of such  transactions  and arrangements  were
advantageous  to the Company and were on terms no less  favorable to the Company
than could have been obtained from unaffiliated third parties.


                                      -32-




<PAGE>




Item 13. Exhibits and Reports on Form 8-K.

(a)  Exhibits

3.1       Form of Restated Certificate of Incorporation of the Company.+

3.2       By-Laws of the Company.+

10.1      Amended and  Restated  Employment  Agreement,  dated as of November 1,
          1996, between the Company and Ryan A. Brant, as amended.+

10.2      Amended and  Restated  Employment  Agreement,  dated as of November 1,
          1996, between the Company and Mark E. Seremet, as amended.+

10.3      Employment  Agreement,  dated September 17, 1996,  between the Company
          and Thomas Ptak.+

10.4      Employment Letter,  dated June 20, 1994, between the Company and Jamie
          Bartolomei.+

10.5      1994 Stock Option Plan of the Company.+

10.6      1997 Stock Option Plan of the Company.+

10.7      Distribution  Agreement,  dated as of December 27,  1996,  between the
          Company and Mindscape, Inc.+

10.8      Distribution  Agreement,  dated as of January  19,  1996,  between the
          Company and Acclaim Entertainment, Inc., as amended on August 23, 1996
          and December 16, 1996.+

10.9      Distribution  Agreement,  dated as of August  23,  1996,  between  the
          Company and Acclaim Entertainment, Inc.+

10.10     License  Agreement,  dated as of August 23, 1996,  between the Company
          and Acclaim Entertainment, Inc.+

10.11     Distribution  Agreement,  dated as of December 16,  1993,  between the
          Company and Interplay Productions, Inc.+

10.12     License Agreement,  dated as of May 3, 1996, between TSR, Inc. and the
          Company.+

10.13     License Agreement,  dated as of May 6, 1996, between TSR, Inc. and the
          Company.+

10.14     License  Agreement,  dated as of October 3, 1996,  between the Company
          and Legend Entertainment Inc., as amended on January 28, 1997.+

10.15     Letter, dated December 3, 1993, with agreement between RD Technologies
          and Mission Studios.+

10.16     Consulting Agreement,  dated February 9, 1994, between Ira Shapiro and
          Interoptica Holdings Ltd. (assumed by the Company).+

10.17     Agreement, dated December 1994, between the Company and Mikto Ltd.+


                                      -33-




<PAGE>



10.18     Sony PlayStation License Agreement,  dated March 3, 1995, between Sony
          Computer Entertainment of America and the Company.+

10.19     Development  Tool Agreement,  dated as of March 3, 1995,  between Sony
          Computer Entertainment of America and the Company.+

10.20     Form  of  Shareholders'  Agreement  executed  in May  1995  among  the
          stockholders of the Company listed therein.+

10.21     Software Development  Agreement,  dated as of August 14, 1995, between
          the Company and 3000 AD, Inc., as amended.+

10.22     Form of Series "A" Note,  Note  Amendment  and  Warrant of the Company
          executed in September 1996.+

10.23     Term Sheet for  JetFighter  IV  Project,  dated  September  16,  1996,
          between Mission Studios Corp. and RD Technologies.+

10.24     Letter  Agreement,  dated  February 7, 1997,  between  Anglo  American
          Security Fund L.P. and the Company.+

10.25     Distribution  Agreement,  dated February 7, 1997,  between  Mindscape,
          Inc. and the Company.+

10.26     Asset and Stock  Purchase  Agreement  dated July 29, 1997 by and among
          the Company, TTE, ART and GameTek (FL).++

10.27     Promissory  Note  dated  July  29,  1997 in the  principal  amount  of
          $500,000.++

10.28     Promissory  Note  dated  July  29,  1997 in the  principal  amount  of
          $200,000.++

10.29     Employment Agreement between TTE and Kelly Sumner.++

10.30     Gameboy Distribution Agreement.++

10.31     N64 Distribution Agreement.++

10.32     Agreement  and Plan of  Merger  dated  July 10,  1997 by and among the
          Company,  IMSI,  David Clark,  Karen Clark,  Terry  Phillips and Cathy
          Phillips.++

10.32     Agreement  and Plan of  Merger  dated  July 31,  1997 by and among the
          Company, CAG, David Clark, Terry Phillips and Russell Howard.++

10.33     Employment Agreement between IMSI and David Clark.++

10.34     Consulting Agreement between IMSI and Terry Phillips.++

10.35     Registration  Rights Agreement by and among the Company,  David Clark,
          Karen Clark, Terry Phillips, Cathy Phillips and Russell Howard.++

10.36     Registration  Rights  Agreement  by and among the Company and GameTek,
          Inc.++


                                      -34-




<PAGE>



10.37     Securities  Purchase  Agreement,  dated October 14, 1997, by and among
          the Company and the Funds.+++

10.38     Convertible  Note No. 1, dated  October 14, 1997, in favor of Infinity
          Investors Limited.+++

10.39     Convertible  Note No. 2, dated  October 14 1997,  in favor of Infinity
          Emerging Opportunities Limited.+++

10.40     Convertible  Note No. 3, dated  October 14, 1997,  in favor of Glacier
          Capital Limited.+++

10.41     Common Stock  Purchase  Warrant,  dated  October 14, 1997, in favor of
          Infinity Investors Limited.+++

10.42     Common Stock  Purchase  Warrant,  dated  October 14, 1997, in favor of
          Infinity Emerging Opportunities Limited.+++

10.43     Common Stock  Purchase  Warrant,  Dated  October 14, 1997, in favor of
          Glacier Capital Limited.+++

10.44     Registration  Rights  Agreement,  dated October 14, 1997, by and among
          the Company and the Funds.+++

10.45     Security Agreement, dated October 14, 1997, by and between the Company
          and  HW  Partners,  L.P.,  as  agent  for  and  representative  of the
          Funds.+++

10.46     Security  Agreement,  dated October 14, 1997, by and between Inventory
          Management  Systems,  Inc.  and HW  Partners,  L.P.,  as agent for and
          representative of the Funds.+++

10.47     Transfer  Agent  Agreement,  dated  October 14, 1997, by and among the
          Company,  the Funds and American Stock  Transfer & Trust  Company,  as
          transfer agent.+++

10.48     Agreement  and Plan of Merger  dated as of  December  22,  1997 by and
          among the Company,  IMSI, AIM, Alliance,  Jay Gelman, Larry Muller and
          Andre Muller.++++

10.49     Employment Agreement between AIM and Jay Gelman.++++

10.50     Employment Agreement between AIM and Larry Muller.++++

10.51     Loan  Documents  by and among  NationsBank,  N.A.,  IMSI,  AIM and the
          Company, as guarantor.++++

10.52     Summary of Terms,  dated as of November  6, 1997,  between the Company
          and Panasonic Interactive Media.

10.53     Term Sheets, dated as of November 11, 1997 and January 28, 1998,
          between the Company and Mindscape, Inc.

10.54     Term  Sheet,  dated as of November  13, 1997,  between the Company and
          Interplay Productions.

11.1      Statement re: Computation of Per Share Earnings.


                                      -35-



            


<PAGE>




22.1      Subsidiaries of the Company.

27.1      Financial Data Schedule (SEC use only).

- ----------

+         Incorporated by reference to the applicable  exhibit  contained in the
          Company's Registration Statement on Form SB-2 (file no. 333-6414).

++        Incorporated by reference to the applicable  exhibit  contained in the
          Company's Current Report on Form 8-K dated July 29, 1997.

+++       Incorporated by reference to the applicable  exhibit  contained in the
          Company's Current Report on Form 8-K dated October 24, 1997.

++++      Incorporated by reference to the applicable  exhibit  contained in the
          Company's Current Report on Form 8-K dated December 24, 1997.


(b)  Reports on Form 8-K filed during the quarter ended October 31, 1997:

     Form 8-K dated July 29, 1997 relating to the  acquisitions  of TTE, ART and
     IMSI. Form 8-K dated October 24, 1997 relating to the issuance of the Notes
     to the Funds.


                                      -36-




<PAGE>




Report of Independent Accountants

To the Stockholders of
Take-Two Interactive Software, Inc. and Subsidiaries:

We  have  audited  the  accompanying  consolidated  balance  sheet  of  TAKE-TWO
INTERACTIVE  SOFTWARE,  INC. and  SUBSIDIARIES  as of October 31, 1997,  and the
related consolidated  statements of operations,  stockholders' equity , and cash
flows for each of the two years in the period  ended  October  31,  1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the financial statement referred to above present fairly, in all
material respects,  the consolidated  financial position of Take-Two Interactive
Software,  Inc. and  Subsidiaries  as of October 31, 1997, and the  consolidated
results  of their  operations  and their cash flows for each of the two years in
the period  ended  October 31,  1997,  in  conformity  with  generally  accepted
accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements, the Company has a working capital deficiency, has incurred
recurring  negative  cash  flow  from  operations,  and may  require  additional
financing  to fund its  operations,  which  raise  substantial  doubt  about its
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.



                                   COOPERS & LYBRAND L.L.P.


New York, New York
January 21, 1998




<PAGE>


Item 1.

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Balance Sheet
As of October 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                              ASSETS (Note 7):                                   October 31, 1997
                                                                                 ----------------
<S>                                                                                <C>         
Current assets:
        Cash and cash equivalents                                                  $  1,882,915
        Accounts receivable, net                                                      4,666,862
        Inventories                                                                   1,149,590
        Prepaid royalties                                                             1,023,750
        Prepaid expenses and other current assets
           (including inventory advances of $3,145,272)                               4,175,000
                                                                                   ------------
               Total current assets                                                  12,898,117

Fixed assets, net                                                                     1,207,614
Prepaid royalties                                                                       167,500
Capitalized software development costs, net                                           4,315,728
Intangibles, net                                                                      6,255,037
Other assets, net                                                                       246,204
                                                                                   ------------
               Total assets                                                        $ 25,090,200
                                                                                   ============

                      LIABILITIES and STOCKHOLDERS' EQUITY:

Current liabilities:
        Current portion of notes payable, net of discount                          $  4,306,622
        Current portion of notes payable due to related parties, net of discount        255,513
        Current portion of capital lease obligation                                     158,030
        Lines of credit, current portion                                                904,843
        Accounts payable                                                              5,272,903
        Accrued expenses                                                              2,030,895
        Due to related parties                                                          164,516
        Advances to principally distributors                                          1,247,769
                                                                                   ------------
               Total current liabilities                                             14,341,091

Note payable, net of current portion                                                    250,000
Line of credit                                                                          123,498
Notes payable due to related parties, net of discount                                   106,906

Capital lease obligation, net of current portion                                        299,474
Other liabilities                                                                        87,343
                                                                                   ------------
               Total liabilities                                                     15,208,312
                                                                                   ------------

Commitments and contingencies
Redeemable preferred stock - Class A; $1.00 par value; 317 shares authorized,
           issued and outstanding                                                           317

Stockholders' equity:
        Common stock, par value $.01 per share; 15,000,000 shares authorized;
           9,250,043 shares issued and outstanding                                       92,500
        Additional paid-in capital                                                   15,587,334
        Deferred compensation                                                           (17,250)
        Accumulated deficit                                                          (5,650,307)
        Foreign currency translation adjustment                                        (130,706)
                                                                                   ------------
               Total stockholders' equity                                             9,881,888
                                                                                   ------------
               Total liabilities and stockholders' equity                          $ 25,090,200
                                                                                   ============
</TABLE>



         The accompanying notes are an integral part of the consolidated
                              financial statements.



<PAGE>



TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Operations
For the years ended October 31, 1996 and 1997
- --------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                               Year Ended October 31,
                                                            ----------------------------
                                                                1996            1997
                                                            ------------    ------------
<S>                                                         <C>             <C>         
Net sales                                                   $ 12,529,128    $ 19,014,083
Cost of sales                                                  6,236,703      12,459,189
                                                            ------------    ------------
           Gross profit                                        6,292,425       6,554,894
                                                            ------------    ------------

Operating expenses:
     Research and development costs                              718,089       1,248,258
     Selling and marketing                                     2,718,078       4,203,984
     General and administrative                                1,775,951       3,385,481
     Depreciation and amortization                               269,523         844,221
                                                            ------------    ------------
           Total operating expenses                            5,481,641       9,681,944
                                                            ------------    ------------
           Income (loss) from operations                         810,784      (3,127,050)
Interest expense (income)                                        232,095       1,016,612
                                                            ------------    ------------
           Income (loss) before foreign withholding taxes        578,689      (4,143,662)
Provision for income taxes                                        29,049          18,421
                                                            ------------    ------------
           Net income (loss)                                     549,640      (4,162,083)
Preferred dividends                                              (17,532)       (135,416)
Distributions paid to S corporation shareholders
     prior to acquisition                                       (183,034)       (202,092)
                                                            ------------    ------------
           Net income (loss) attributable to common
             stockholders'                                  $    349,074    $ (4,499,591)
                                                            ============    ============

Per share data:
     Primary:
           Weighted average common shares outstanding          7,671,064       8,339,429
                                                            ============    ============
           Net income (loss) per share                      $        .05    $       (.54)
                                                            ============    ============
     Fully diluted:
           Weighted average common shares outstanding          7,671,064       8,345,178
                                                            ============    ============
           Net income (loss) per share                      $        .05     $      (.54)
                                                            ============    ============
</TABLE>



         The accompanying notes are an integral part of the consolidated
                              financial statements.



<PAGE>


TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended October 31, 1996 and 1997
- --------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                                         Years Ended October 31,
                                                                                                      -----------------------------
                                                                                                          1996             1997
                                                                                                      ------------     ------------
<S>                                                                                                   <C>              <C>          
Cash flows from operating activities:
     Net income (loss)                                                                                $    549,640     $ (4,162,083)
     Adjustment to reconcile net income (loss) to net cash used in operating activities:
        Depreciation and amortization                                                                      269,523          844,221
        Provision for bad debts and return allowances                                                       72,632
        Non-cash revenue                                                                                  (150,000)
        Amortization of deferred compensation                                                               17,250           17,250
        Amortization of loan discounts                                                                     150,039          720,994
        Amortization of deferred financing costs                                                                             30,776
        Issuance of compensatory stock                                                                      15,000
        Changes  in  operating  assets  and  liabilities, net  of  effects  of acquisitions:
            Decrease (increase) in accounts receivable                                                    (136,760)      (3,666,805)
            Decrease (increase) in capitalized software development costs                                  320,374       (1,033,618)
            Decrease (increase) in prepaid royalties                                                      (285,000)        (906,250)
            Decrease (increase) in prepaid expenses and other current assets                               (80,252)      (4,099,484)
            Decrease (increase) in inventories                                                            (142,790)        (785,275)
            Decrease (increase) in due from related affiliate                                                               113,000
            Increase (decrease) in accounts payable                                                        247,769        2,861,665
            Increase (decrease) in accrued expenses                                                        (22,517)       1,610,552
            Increase (decrease) in advances-principally distributors                                    (1,481,582)         441,932
            Increase (decrease) in due to/from stockholders                                                 25,749          200,077
            Increase (decrease) in other liabilities                                                                         87,343
                                                                                                      ------------     ------------
                Net cash used in operating activities                                                     (630,925)      (7,725,705)
                                                                                                      ============     ============

Cash flows from investing activities:
     Purchase of fixed assets                                                                             (162,073)        (121,566)
     Acquisition, net cash paid                                                                           (900,000)        (100,000)
     Additional royalty payment in connection with the Mission Acquisition                                     --          (814,478)
                                                                                                      ------------     ------------
                Net cash used in investing activities                                                   (1,062,073)      (1,036,044)
                                                                                                      ------------     ------------

Cash flows from financing activities:
     Issuance of stock in connection with a private placement, net of stock
        issuance costs of $60,000                                                                          192,000
     Costs associated with proposed initial public offering                                                (45,608)
     Issuance of stock and warrants in connection with an IPO,
        net of stock issuance costs of $1,920,232                                                                         7,463,769
     Proceeds from Security Purchase Agreement - convertible notes                                                        4,200,000
     Costs associated with Security Purchase Agreement                                                                     (361,000)
     Proceeds (Repayments) under line of credit                                                            (26,303)         590,944
     Proceeds (Repayments) under 1996 Financing                                                          2,006,039       (1,938,791)
     Proceeds from short-term notes payable                                                                                 800,000
     Repayments of short-term notes payable                                                                                (260,000)
     Proceeds from issuance of common stock                                                                 45,000
     Proceeds from exercise of stock options                                                                   750              156
     Principal payments on note payable                                                                    (20,634)        (104,310)
     Loans to stockholders                                                                                (280,669)
     Repayment of capital lease obligation                                                                                  (70,668)
     Payment from stockholders                                                                             161,617
     Distributions to stockholders                                                                        (183,034)        (237,092)
                                                                                                      ------------     ------------
                Net cash provided by financing activities                                                1,849,158       10,083,008
                                                                                                      ------------     ------------

Effect of foreign exchange rates                                                                               --          (130,706)
                                                                                                      ------------     ------------

                Net increase in cash for the year                                                          156,160        1,190,553
Cash and cash equivalents, beginning of the year                                                           536,202          692,362
                                                                                                      ------------     ------------
Cash and cash equivalents, end of the year                                                            $    692,362     $  1,882,915
                                                                                                      ============     ============



The  Company  declared  dividends  to the holder of the  cumulative  convertible
     preferred  stock - Class B and the full  amount  was  converted  into notes
     payable in connection with the 1996 financing                                                    $    17,500
                                                                                                      ===========

Certain amounts owed to a stockholder and director of the Company under a consulting
     agreement were converted into common stock                                                       $   102,221
                                                                                                      ===========

Certain amounts owed to a stockholder and director of the Company under a consulting
     agreement were converted into short-term notes payable in connection with the 1996
     financing                                                                                        $    65,500
                                                                                                      ===========

Issuance of warrants in lieu of dividends                                                                              $    100,352
                                                                                                                       ============
                                                                                                                         
Issuance of common stock in connection with IMSI and CAG acquisition                                                   $      1,000
                                                                                                                       ============
                                                                                                                         
Supplemental information on business acquired:                                                                           
     Fair value of assets acquired                                                                    $ 2,693,928      $  4,948,654
        Less, liabilities assumed                                                                      (1,293,928)       (1,100,492)
            Stock issued                                                                                 (440,000)       (3,000,000)
            Note payable                                                                                      --           (700,000)
            Direct transaction costs                                                                          --            (48,162)
                                                                                                      -----------      ------------
Cash paid                                                                                                 960,000           100,000
     Less, cash acquired                                                                                  (60,000)              --
                                                                                                      -----------      ------------
Net cash paid                                                                                         $   900,000      $    100,000
                                                                                                      ===========      ============
                                                                                                                         
Cash paid during the year for interest                                                                $    39,052      $    453,163
                                                                                                      ===========      ============
                                                                                                                         
Cash paid during the year for taxes                                                                   $    30,938      $     18,421
                                                                                                      ===========      ============
                                                                                                                         
Equipment acquired under capital lease                                                                $    17,040      $    505,088
                                                                                                      ===========      ============
</TABLE>
                                                                   
                                                                     

         The accompanying notes are an integral part of the consolidated
                              financial statements.



<PAGE>



         TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
           Consolidated Statements of Stockholders' Equity
            For the years ended October 31, 1996 and 1997
- --------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                        Convertible                                 
                                                           Preferred Stock            Preferred Stock               Common Stock    
                                                        Shares        Amount        Shares        Amount        Shares       Amount
                                                        ------        ------        ------        ------        ------       ------
<S>                                                        <C>        <C>          <C>       <C>             <C>           <C>   
Balance, October 31, 1995                                  317        $  317       17,500    $   249,987     5,345,638     $  53,456

Issuance of common stock                                                                                         24,944          249

Issuance of compensatory stock options                                                                                              
                                                                                                                                    
Amortization of deferred compensation                                                                                               

Issuance  of common stock in connection with
     Mission Studios acquisition                                                                                182,923        1,829

Issuance of warrants in connection with
      '96 private placement                                                                                                         

Declaration of dividends to preferred stockholders                                                                                  

Distributions paid to S corporation shareholders                                                                                    

Conversion of consulting payments due into
     common stock                                                                                                42,496          425

Exercise of stock options                                                                                         1,663           17

Net income                                                                                                                          
                                                       -------        ------        ------    -----------     ---------    ---------

Balance, October 31, 1996                                  317           317        17,500        249,987     5,597,664       55,976
                                                                                                                                    
Conversion of preferred stock                                                      (17,500)      (249,987)      409,791        4,098
                                                                                                                                    
Issuance of warrants in lieu of dividends                                                                                           
                                                                                                                                    
Issuance of common stock and warrants
     in connection with a  public offering,
     net of issuance costs                                                                                    1,840,000       18,400

Issuance of common stock and warrants in
     connection with  1997 placement of debt                                                                     55,000          550

Conversion  of warrants issued in connection with
     1996 private placement into common stock                                                                    26,035          260

Issuance of common stock in connection with
     IMSI and CAG acquisition                                                                                   900,000        9,000

Issuance of common stock in connection with
     TTE and ART acquisition                                                                                    406,553        4,066

Exercise of stock options                                                                                        15,000          150

Declaration of dividends to preferred stockholders                                                                                  

Distributions paid to S corporation shareholders                                                                                    

Amortization of deferred compensation                                                                                               

Foreign currency translation adjustment                                                                                             

Net loss                                                                                                                            
                                                       -------        ------        ------    -----------   -----------    ---------

Balance, October 31, 1997                                  317        $  317           --     $      --     $ 9,250,043    $  92,500
                                                       =======        ======        ======    ===========   ===========    =========


<CAPTION>
                                                         Additional                                         Foreign                
                                                          Paid-in-        Deferred         Accumulated      Currency               
                                                          capital       Compensation         Deficit       Translation     Total
                                                         ----------     ------------       -----------     -----------     -----
<S>                                                     <C>              <C>              <C>               <C>          <C>       
Balance, October 31, 1995                               $ 2,528,225      $      --        $(1,499,790)      $     --    $ 1,332,195

Issuance of common stock                                     59,751                                                          60,000

Issuance of compensatory stock options                       51,750         (51,750)
                                                                                                          
Amortization of deferred compensation                                        17,250                                          17,250

Issuance  of common stock in connection with
     Mission Studios acquisition                            438,171                                                         440,000

Issuance of warrants in connection with
      '96 private placement                                 750,197                                                         750,197

Declaration of dividends to preferred stockholders                                            (17,532)                      (17,532)

Distributions paid to S corporation shareholders                                             (183,034)                     (183,034)

Conversion of consulting payments due into
     common stock                                           101,796                                                         102,221

Exercise of stock options                                       733                                                             750

Net income                                                                                    549,640                       549,640
                                                        -----------      ----------       -----------       -----------  ----------

Balance, October 31, 1996                                 3,930,623         (34,500)       (1,150,716)              --    3,051,687
                                                                                                         
Conversion of preferred stock                               245,889                                                             --

Issuance of warrants in lieu of dividends                   100,352                          (100,352)                          --

Issuance of common stock and warrants
     in connection with a  public offering,
     net of issuance costs                                7,399,761                                                       7,418,161

Issuance of common stock and warrants in
     connection with  1997 placement of debt                909,229                                                         909,779

Conversion  of warrants issued in connection with
     1996 private placement into common stock                  (104)                                                            156

Issuance of common stock in connection with
     IMSI and CAG acquisition                                (8,000)                                                          1,000

Issuance of common stock in connection with
     TTE and ART acquisition                              2,995,934                                                       3,000,000

Exercise of stock options                                    13,650                                                          13,800

Declaration of dividends to preferred stockholders                                            (35,064)                      (35,064)

Distributions paid to S corporation shareholders                                             (202,092)                     (202,092)

Amortization of deferred compensation                                        17,250                                          17,250

Foreign currency translation adjustment                                                                        (130,706)   (130,706)

Net loss                                                                                   (4,162,083)              --   (4,162,083)
                                                        -----------      ----------       -----------       -----------  ----------

Balance, October 31, 1997                               $15,587,334      $  (17,250)      $(5,650,307)      $  (130,706) $9,881,888
                                                        ===========      ==========       ===========       ===========  ==========
</TABLE>




         The accompanying notes are an integral part of the consolidated
                              financial statements.




<PAGE>


              TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
                   Notes to Consolidated Financial Statements


1.   Organization:

Take-Two Interactive  Software,  Inc. ("Take-Two") was incorporated in the State
of Delaware on September 30, 1993.  Take-Two and its wholly owned  subsidiaries,
Mission  Studios  Corporation,  Take-Two  Interactive  Software  Europe Limited,
Alternative  Reality  Technologies,   Inventory  Management  Systems,  Inc.  and
Creative Alliance Group Inc. (the "Company") design,  develop,  publish,  market
and  distribute  interactive  software  games  for  use on  multimedia  personal
computer and video game console platforms.  The Company's  interactive  software
games are sold  primarily  in the United  States,  Europe and Asia.  The Company
delivers game titles to consumers  primarily through  distribution and licensing
arrangements.


2.   Significant Accounting Policies and Transactions:

Basis of Presentation

The  consolidated  financial  statements  include the  financial  statements  of
Take-Two  and its wholly  owned  subsidiaries.  All  intercompany  balances  and
transactions have been eliminated.

On July 31, 1997, the Company  acquired all the  outstanding  stock of Inventory
Management  Systems,  Inc.  ("IMSI") and Creative  Alliance Group, Inc. ("CAG").
IMSI and CAG are engaged in the wholesale  distribution of interactive  software
games. To effect the acquisition,  all of the outstanding shares of common stock
of each of IMSI and CAG were exchanged for 900,000  shares of restricted  common
stock of the Company.  The  acquisition  has been  accounted for as a pooling of
interests  in  accordance  with APB No.  16 and  accordingly,  the  accompanying
financial statements have been restated to include the results of operations and
financial  position  of IMSI  and CAG for all  periods  presented  prior  to the
business combination.

The accompanying  financial  statements have been prepared  assuming the Company
will continue as a going concern.  The Company has incurred  negative cash flows
from  operations  since  inception  and  has a  working  capital  deficiency  of
$1,442,974 as of October 31, 1997. Continuance of the Company as a going concern
is dependent  upon,  among other things,  the Company's  ability to complete new
commercially  successful  entertainment  software  products,  the restoration of
profitable  operations,  and/or obtaining additional  financing,  the outcome of
which cannot  presently be determined.  The financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.


Risk and Uncertainties

For the  years  ended  October  31,  1996 and 1997,  approximately  61% and 53%,
respectively  of the  Company's  net  sales has been  attributable  to a limited
number of products.  The process of  developing  software  games,  such as those
offered by the  Company,  is  extremely  complex  and is expected to become more
complex  and  expensive  in the future as new  platforms  and  technologies  are
introduced.  The Company's  continued  success in the interactive  entertainment
software business depends on the timely  introduction of successful new software
titles or sequels to existing software titles to replace declining revenues from
older titles.  If sales from new software titles or sequels to existing software
titles failed to  materialize  the  Company's  business,  operating  results and
financial   condition  could  be  adversely  affected  in  the  near  term.  


                                                                               4

<PAGE>



The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and liabilities at the dates of the financial  statements and
the reported amounts of revenues and expenses during the reporting periods.  The
most  significant  estimates and  assumptions  relate to the  recoverability  of
capitalized software development costs and goodwill,  allowances for returns and
income taxes. Actual amounts could differ from those estimates.

Concentration of Credit Risk

A  significant  portion of cash  balances  are  maintained  with  several  major
financial   institutions  with  satisfactory  standing  and  at  times,  exceeds
insurable amounts.

If the financial  condition and  operations  of the  Company's  distributors  or
retailers deteriorate, the risk of collection could increase substantially.  For
the years ended  October 31, 1996 and 1997,  the Company  recorded  net sales of
$7,369,562 and $7,679,401,  respectively from their largest distributors.  As of
October 31,  1997,  the  receivable  balance  from the largest  distributor  and
retailer  amounted  to  approximately  12.3%  and  49.0%,  respectively,  of the
Company's net accounts receivable balance.

Revenue Recognition

Revenues from software license fees (generally fixed fee arrangements)  amounted
to $2,140,442 and $1,059,448 in 1996 and 1997, respectively,  and are recognized
in the periods in which the product masters are delivered (in the absence of any
uncertainty   as  to  continuing   obligations  or  customer   acceptance)   and
collectibility of the resulting receivables is assured.  Royalty income amounted
to  $1,663,269  in  1996  and is  recognized  when  earned.  Revenues  from  the
distribution of interactive software games amounted to $1,374,419 and $6,210,369
in 1996 and 1997, respectively,  and is recognized upon the shipment of product.
Revenue  from the sale of  multiple  copies of  software  products  amounted  to
$7,313,953  and  $11,732,244 in 1996 and 1997,  respectively,  and is recognized
upon shipment of the products by distributors  to retailers.  Retailers have the
right to return  copies  not sold.  Accordingly,  an  allowance  for  returns is
established when sales by distributors occur based upon the higher of historical
patterns or negotiated terms. Other income which amounted to $37,045 and $12,022
in 1996 and 1997, respectively, consists primarily of revenue from the Company's
customer service line and is recognized when earned.  In connection with certain
distribution  and licensing  agreements,  the Company  receives advance payments
which are deferred and recognized as income when earned.

For the years  ended  October  31,  1996 and 1997,  the  Company's  net sales in
domestic and international  markets accounted for approximately  75.8% and 83.4%
and 24.2% and 16.6%, respectively.

Advertising

The Company expenses advertising costs as incurred.  Advertising expense for the
years  ended  October  31, 1996 and 1997  amounted  to  $203,609  and  $372,563,
respectively.

Cash and Cash Equivalents

The Company  considers all highly  liquid  instruments  purchased  with original
maturities of three months or less to be cash equivalents.


                                                                               5

<PAGE>




Inventory

Inventories  are  stated at the lower of cost  (first-in,  first-out  method) or
market. Inventories consist of:

                                                   October 31, 1997
                                                   ----------------
                        Parts and supplies            $  185,793
                        Finished products                963,797
                                                      ----------
                                                      $1,149,590
                                                      ==========
                                                   

Fixed Assets

Depreciation of computer equipment,  office equipment and furniture and fixtures
is provided for by the  straight-line  method over their estimated lives ranging
from five to seven years. Amortization of leasehold improvements is provided for
over the lesser of the term of the related lease or estimated  useful lives. The
cost of additions and  betterments is  capitalized,  and repairs and maintenance
costs are charged to operations in the periods incurred. When depreciable assets
are  retired or sold,  the cost and  related  allowances  for  depreciation  are
removed from the accounts and the gain or loss is recognized.

Prepaid Royalties

Prepaid royalties represent  prepayments made to independent software developers
under development agreements.  Prepaid royalties are expensed at the contractual
royalty  rate as cost of goods sold based on actual net product  sales.  Prepaid
royalties are classified as current and non-current  assets based upon estimated
net product  sales  within the next year.  Prepaid  royalties  were written down
$350,000 in the fourth quarter of 1997 to net realizable value.

Prepaid Expenses and Other Current Assets

Prepaid  expenses  and other  current  assets  consist  primarily  of  inventory
advances  made to a vendor for the costs of  manufacturing  a  Nintendo  64 game
title that was released subsequent to year-end.  At October 31, 1997, $3,145,272
was recorded as a prepayment of these costs.

Capitalized Software Development Costs (Including Film Production Costs)

Costs  associated  with  research  and  development  are  expensed as  incurred.
Software  development  costs incurred  subsequent to establishing  technological
feasibility are capitalized.  Technological  feasibility is established upon the
completion of a detailed  program design (in the absence of any high risk issues
or  uncertainties).  Amortization  commences upon the general  release of a game
title and is  recognized  as a component of cost of sales by the greater of: (a)
the straight-line method over the remaining estimated life of three years or (b)
the ratio  that  current  gross  revenues  for a  product  bears to the total of
current and anticipated  future gross revenues for that product.  Due to a short
product life cycle, film production costs are generally  amortized over a period
less than one year. It is reasonably  possible that the estimate of  anticipated
future gross revenues,  the remaining estimated economic life of the product, or
both will be reduced significantly in the near term and that the amortization of
the capitalized  software costs may be accelerated  materially in the near term.
Capitalized  software costs are compared,  by game title,  to the net realizable
value of the product and capitalized  amounts in excess of net realizable value,
if any, are  immediately  written off.  Capitalized  software costs were written


                                                                               6


<PAGE>



down  by  $210,500  in the  fourth  quarter  of 1997  to net  realizable  value.
Amortization of capitalized software costs amounted to $2,964,684 and $2,222,725
during 1996 and 1997, respectively.

Intangible Assets

Intangible  assets consist of trademarks and the remaining excess purchase price
paid over identified  intangible and tangible net assets of acquired  companies.
Intangible assets are amortized under the  straight-line  method over the period
of expected  benefit of seven years for the Mission Studios  acquisition and ten
years for the  Take-Two  Europe  ("TTE")  acquisition  (See Note 3). The Company
assesses the recoverability of its intangible assets by determining  whether the
amortization of the unamortized balance over its remaining life can be recovered
through  estimated  future cash flows.  If estimated  future cash flows indicate
that the unamortized  amounts will not be recovered,  an adjustment will be made
to reduce the net amounts to an amount  consistent  with  estimated  future cash
flows  discounted  at  the  Company's  incremental  borrowing  rate.  Cash  flow
estimates  are  based on  trends  of  historical  performance  and  management's
estimate of future performance, giving consideration to existing and anticipated
competitive  and  economic  conditions.  Accumulated  amortization  amounted  to
$39,000 and $496,187 at October 31, 1996 and 1997, respectively.

Income Taxes

The Company  recognizes  deferred taxes under the asset and liability  method of
accounting  for income  taxes.  Under the asset and liability  method,  deferred
income taxes are recognized for differences  between the financial statement and
tax bases of assets and liabilities at currently enacted statutory tax rates for
the years in which the  differences  are  expected  to  reverse.  The  effect on
deferred  taxes of a change in tax rates is  recognized  in income in the period
that  includes  the  enactment  date.  In  addition,  valuation  allowances  are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

Net Income (Loss) per Share

Net income  (loss) per share has been  computed in  accordance  with  Accounting
Principles  Board Opinion (APB) No. 15 and is based on the net income (loss) for
the period divided by the weighted  average number of shares of common stock and
common stock equivalents  outstanding (using the treasury stock method). APB No.
15 requires that the weighted average number of shares  outstanding  exclude the
number of common shares  issuable upon the exercise of  outstanding  options and
warrants  and the  conversion  of  preferred  stock if such  inclusion  would be
anti-dilutive.  For periods prior to the initial  public  offering,  pursuant to
Securities  and Exchange  Commission  Staff  Accounting  Bulletin No. 83, equity
securities,  including  options and warrants,  issued at prices below the public
offering  price of $5.00 during the 12-month  period prior to the offering  have
been included in the  calculation  as if they were  outstanding  for all periods
presented,  including years that have losses where the impact of the incremental
shares is anti-dilutive.

In February 1997, the conversion of Class B Preferred  Stock into 409,791 shares
of common  stock did not have a  material  effect on the net  income  (loss) per
share calculation.

Foreign Currency Translation

The functional  currency for the Company's foreign  operations is the applicable
local currency.  Accounts of foreign operations are translated into U.S. dollars
using  quarter or  year-end  exchange  rates for assets and  liabilities  at the
balance  sheet date and  average  prevailing  exchange  rates for the period for
revenue  and  expense  accounts.  Adjustments  resulting  from  translation  are
included as a separate component of stockholders' equity.


                                                                               7


<PAGE>



Recently Issued Accounting Pronouncements

In October 1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and is effective for the Company's 1997 fiscal year.
The statement allows companies to measure  compensation costs in connection with
employee  stock  option  plans using a fair value based method or to continue to
use an intrinsic-value based method under APB 25 "Accounting for Stock Issued to
Employees",  which generally does not result in compensation  costs. The Company
has continued to apply the intrinsic-value based method. See Note 13 for related
disclosure.

In March 1997,  FASB issued SFAS No. 128,  "Earnings  per Share".  The statement
establishes  standards for computing and  presenting  earnings per share ("EPS")
and is  effective  for  financial  statements  issued for periods  ending  after
December 15, 1997. This statement will eliminate the presentation of primary EPS
and will require the  presentation of basic EPS (the principal  difference being
that common stock equivalents will not be considered in the computation of basic
EPS).  It will also  require  the  presentation  of diluted  EPS which will give
effect to all dilutive  potential common shares that were outstanding during the
period.

In February 1997,  FASB issued SFAS No. 129,  "Disclosure  of Information  About
Capital Structure". Under SFAS No. 129, an entity shall explain, in summary form
within the  financial  statements,  the pertinent  rights and  privileges of the
various  securities  outstanding.  This  standard  is  effective  for  financial
statement periods ending after December 15, 1997.


3. Business Acquisitions

On September 17, 1996, the Company acquired all the outstanding stock of Mission
Studios  Corporation  ("Mission").   The  total  cost  of  the  acquisition  was
$2,560,428,  consisting  of a cash  payment of  $1,674,478,  a note  payable of,
$315,950, net of discount of $22,000, a promissory note of $130,000, issuance of
182,923  shares of common  stock  valued at  $440,000  ($2.41  per  share).  The
promissory  note includes an additional  payment of $200,000 which is contingent
upon the inclusion of a specific  software engine in shipments of Jetfighter IV.
If it is subsequently  determined that payment is probable, the $200,000 will be
recorded as additional compensation expense.

On July 29, 1997, the Company acquired all the outstanding stock of GameTek (UK)
Limited,  now known as Take-Two Interactive Software Europe Limited ("TTE"), and
Alternative  Reality  Technologies,  Inc.  ("ART"),  and certain  software games
including  Dark Colony,  The Quivering  and The Reap.  TTE is in the business of
distributing  computer software games in Europe and other international  markets
and ART is a  developer  of  computer  software  games.  The  total  cost of the
acquisition was $3,848,162, consisting of a cash payment of $100,000, promissory
notes in the amount of $700,000, issuance of 406,553 restricted shares of common
stock valued at $3,000,000, and direct transaction costs of $48,162. The cost of
the acquisition  was allocated to the assets  acquired and  liabilities  assumed
based upon their estimated fair values as follows:

                         Working Capital   $(1,160,278)
                         Equipment              59,786
                         Software titles     1,175,000
                         Intangibles         3,773,654
                                           -----------
                                           $ 3,848,162
                                           ===========


                                                                               8


<PAGE>


The acquisitions described above has been accounted for as purchase transactions
in accordance  with APB No. 16 and  accordingly,  the results of operations  and
financial position of the acquisitions is included in the Company's consolidated
financial statements from their respective date of acquisition.

On July 31, 1997, the Company  acquired all the  outstanding  stock of Inventory
Management  Systems,  Inc.  ("IMSI") and Creative  Alliance Group, Inc. ("CAG").
IMSI and CAG are engaged in the wholesale  distribution of interactive  software
games. To effect the acquisition,  all of the outstanding shares of common stock
of each of IMSI and CAG were exchanged for 900,000  shares of restricted  common
stock of the Company.  The  acquisition  has been  accounted for as a pooling of
interests  in  accordance  with APB No.  16 and  accordingly,  the  accompanying
financial statements have been restated to include the results of operations and
financial  position  of IMSI  and CAG for all  periods  presented  prior  to the
merger.  Prior  to  their  acquisition  on July  31,  1997,  IMSI and CAG were S
corporations.   Distributions  of  $202,092  were  paid  to  the  S  corporation
shareholders prior to the acquisition.

The unaudited pro forma data below for the years ended October 31, 1996 and 1997
is presented as if these  acquisitions  had been made as of November 1, 1995 and
1996,  respectively.  The unaudited pro forma financial  information is based on
management's  estimates  and  assumptions  and does not purport to represent the
results that actually would have occurred if the acquisitions had, in fact, been
completed on the dates assumed, or which may result in the future.

                                                    October 31,     October 31,
                                                       1996            1997
                                                   ------------    ------------
Total Revenues:
  Take-Two                                         $ 11,154,709    $  8,691,385
  Take-Two inclusive of IMSI and CAG                 12,529,128      14,901,754
  Take-Two inclusive of all acquired businesses      20,525,390      19,970,430


Net income (loss)
  Take-Two                                         $    519,401    $ (4,446,305)
  Take-Two inclusive of IMSI and CAG                    549,640      (4,236,130)
  Take-Two inclusive of all acquired businesses      (2,127,737)     (9,150,069)

  Net loss per share inclusive of all acquired     $      (0.27)   $      (1.06)
  businesses


4. Distribution Agreements

a.   In July 1997, the Company  entered into two  distribution  agreements  with
     GameTek,  Inc.,  which  granted  to the  Company  the  right to  distribute
     computer  software  and  related  imagery for use on the  Nintendo  Gameboy
     portable  console  ("Gameboy  Distribution  Agreement")  and the  Wheel  of
     Fortune(R)  and  Jeopardy!(R)  games for use on the N64 console game system
     ("Jeopardy Distribution Agreement").

     Pursuant  to the  distribution  agreements,  the  Company  was  granted the
     exclusive  right to sell and  distribute  products for a three year period,
     ending no later than July 28, 2001 with respect to the Gameboy Distribution
     Agreement  and August 31, 1998 with  respect to the  Jeopardy  Distribution
     Agreement.  In consideration for such rights, the Company has agreed to pay
     to GameTek,  Inc.  the cost of  manufacturing,  shipping  and  insuring the
     games, a per game unit royalty and all royalties  payable by GameTek,  Inc.
     to third parties in respect of each such game.


                                                                               9


<PAGE>



     The Company also agreed to pay to GameTek, Inc. a minimum aggregate advance
     with  respect  to the first two game  titles  released,  subject to certain
     reductions and set-offs, $680,000 has been paid to date. Such amount may be
     recouped in the event GameTek, Inc. is unable to obtain an extension of its
     license for Wheel of Fortune and Jeopardy!  or the Company's incurring more
     than $150,000 in  advertising,  marketing,  promotion and sales support for
     the software.

b.   In August  1997,  TTE entered into an  arrangement  to acquire the European
     publishing and distribution rights to six upcoming Ripcord Games titles for
     personal computers. The games include Postal, Forced Alliance, Hidden Wars,
     Space  Bunnies  Must Die, and Terra  Victus.  The Company has agreed to pay
     advances in the  aggregate  amount of  $1,200,000,  or $240,000  per title,
     $95,000 of which has been paid to date.


5.   Advances from Distributors

a.   In February 1997, the Company  entered into an agreement  pursuant to which
     the Company granted  Mindscape,  Inc., a distributor the exclusive right to
     sell PC  versions  of Black  Dahlia  and  JetFighter  Full Burn in  Europe,
     Iceland,  the  countries  of the former USSR,  the Middle East,  Africa and
     India. The distributor has agreed to pay the Company aggregate  advances of
     approximately $1,240,000, of which $512,000 has been received as of January
     19, 1998.

     Also,  in  December  1996,  the  Company  entered  into an  agreement  with
     Mindscape,  Inc.  (which was amended in July 1997) for the  distribution of
     certain of the  Company's  products in the United  States and  Canada.  The
     agreement obligates the distributor to provide the Company with advances in
     the aggregate amount of $2,625,000,  subject to the completion of specified
     stages of product development,  of which $1,225,000 has been received as of
     January 19, 1998.

     Both of these distribution agreements with Mindscape,  Inc. were amended in
     November  1997.  Pursuant  to this  agreement,  Mindscape  will not owe the
     Company any further advances and the distribution  rights of certain of the
     Company's  products will revert back to the Company on the  condition  that
     the  $512,000 in  advances  paid by  Mindscape  to  Take-Two  for  European
     distribution  rights are repaid as follows:  $170,666 on or before December
     15,  1997,  which has been paid,  $170,667 on or before May 15,  1998,  and
     $170,667 on or before  September  15, 1998.  In addition,  the Company must
     repay  Mindscape  $900,000  in  advances  for the United  States and Canada
     distribution  rights as follows:  $500,000 no later than 3 months after the
     publication of JetFighter Full Burn,  $300,000 no later than 3 months after
     the  publication of Black Dahlia and $100,000 no later than March 31, 1998.
     Subject to the terms  outlined  above,  the  Company is free to solicit and
     market these titles to third parties.

b.   In November  1997,  the Company  entered into an agreement  with  Interplay
     pursuant to which the Company granted Interplay the exclusive right to sell
     PC versions of Black Dahlia and  JetFighter  Full Burn in North America and
     South  America.  The  distributor  has agreed to pay the Company  aggregate
     advances of approximately  $1,700,000,  of which $550,000 has been received
     as of January 19, 1998.


                                                                              10


<PAGE>


6.   Fixed Assets

Fixed assets consist of the following:

                                                    October 31, 
                                                       1997
                                                    -----------

               Computer equipment                   $ 1,536,152
               Office equipment                         273,232
               Furniture and fixtures                    50,816
               Leasehold improvements                    87,716
                                                    -----------
                                                      1,947,916
               Less, accumulated depreciation and
                   amortization                        (740,302)
                                                    -----------
                                                    $ 1,207,614
                                                    ===========

Depreciation  expense for the years ended  October 31, 1996 and 1997 amounted to
$230,558 and $348,034, respectively.


7.   Notes Payable

a.   Securities Purchase Agreement-Convertible Notes

     Pursuant to a Securities  Purchase  Agreement,  dated October 14, 1997, the
     Company issued and sold to Infinity  Investors  Limited,  Infinity Emerging
     Opportunities  Limited  and  Glacier  Capital  Limited  (collectively,  the
     "Funds")  (i) 10%  collateralized  convertible  notes (the  "Notes") in the
     aggregate  principal  amount of  $4,200,000;  (ii) 50,000  shares of Common
     Stock, par value $.01 per share (the "Grant  Shares");  and (iii) five-year
     warrants (the  "Warrants") to purchase  250,000 shares of Common Stock (the
     "Warrant  Shares")  exercisable  at a price of  $6.46  per  share.  The net
     proceeds  to the  Company  from the sale of the  Notes,  Grant  Shares  and
     Warrants  was  $4,007,000.  In  addition,  the  Company  paid a third party
     $168,000, and issued it 5,000 shares of Common Stock and 20,000 warrants to
     acquire Common Stock; as a fee for services rendered in connection with the
     transactions.

     The Company has  recorded the notes at a discount of $993,800 to reflect an
     allocation  of the  proceeds to the  estimated  value of the  warrants  and
     common stock.  The discount is being amortized into interest  expense using
     the "interest  method" over the term of the financing.  The estimated value
     of the  warrants  were  based on the  Company's  application  of a commonly
     recognized  pricing model. In the event of early payment of the notes,  the
     remaining  unamortized  discount  will be  expensed  by the  ratio  of such
     payment to the  outstanding  note  balance.  $110,422 of such  discount was
     included in interest expense for the year ended October 31, 1997.  Interest
     is payable  quarterly  until  maturity.  As of October 31,  1997,  interest
     payable of $17,500 was included in accrued expenses.

     In addition, the Company has recorded $276,980 as deferred financing costs.
     These  costs  are  being  amortized  over  the term of the  financing.  The
     unamortized  balance of $246,204 is included in other non current assets at
     October 31, 1997.

     Interest  accrues on the  outstanding  principal  amount of the Convertible
     Notes at the rate of 10% per annum and is payable quarterly.


                                                                              11


<PAGE>


     The  Notes are  collaterlized  by a first  priority  security  interest  in
     letters of credit issued in respect of purchase orders for Wheel of Fortune
     (R) and  Jeopardy!(R)  products  designed  for  Nintendo 64  platform  (the
     "Products"),  and are convertible, at the option of the holder, at any time
     commencing  February  28,  1998  into  shares of Common  Stock  (the  "Note
     Conversion  Shares"),  having a value of 75% of the average  sales price of
     the Company's Common Stock, as defined, subject to a conversion limit.

     The Notes mature on September 30, 1999 and may be accelerated under certain
     circumstances.  Notes  repaid after  February  28, 1998 are  repayable at a
     premium, as defined in the agreement.

     The Funds were granted  registration  rights and under such agreement,  the
     Company is obligated to file a registration  statement covering the sale of
     the  Securities  on or prior to April 14, 1998 and use its best  efforts to
     cause such registration statement to become effective by June 30, 1998.

     Pursuant to the  Securities  Purchase  Agreement,  the  Company  will issue
     additional  shares to the Funds in the event that the  closing bid price of
     the  Company's  Common Stock  during the  effectiveness  of a  registration
     statement, as defined, does not equal $7.75.

     The Company also agreed to certain covenants,  including limitations on the
     issuance  of   securities,   mergers   and   acquisition,   incurrence   of
     indebtedness,  liens,  the payment of dividends,  capital  expenditures and
     minimum levels of net worth.

b.   In  connection  with the  purchase  of Mission  (See Note 3),  the  Company
     entered into a purchase money note in the amount of $337,750  payable in 36
     monthly installments of $10,224, at an annual interest rate of 6%. The note
     was recorded net of a discount of approximately $22,000 using the Company's
     incremental  borrowing  rate at the  date of  acquisition  of  10.25%.  The
     discount is being  amortized  over the term of the note using the "interest
     method".  As of  October  31,  1997,  the  remaining  unamortized  discount
     amounted to approximately  $9,000. The note is collateralized by the issued
     and outstanding stock of Mission. Principal payments under the note payable
     for the years  ending  October 31, 1998,  1999 are  $112,449 and  $107,307,
     respectively.

c.   In connection with the purchase of TTE, ART and certain software games (See
     Note 3), the Company issued an unsecured  promissory  note in the amount of
     $500,000  payable in two equal annual  installments of $250,000 on July 29,
     1998 and July 29,  1999,  and  bears  interest  at a rate of 8% per  annum,
     payable quarterly.

d.   In September 1997, Take-Two entered into a promissory note agreement with a
     bank in the amount of $800,000 payable in 9 monthly installments of $30,000
     and the  balance  of  $530,000  payable  on June 30,  1998.  The note bears
     interest at prime plus 2% per annum (10.5% as of October 31, 1997), payable
     monthly.  The note is  personally  guaranteed  by  related  parties  and is
     collateralized by substantially all the assets of the Company.  The Company
     must at all times maintain certain financial ratios and maintain on deposit
     at the  bank a cash  balance  of the  lesser  of (i)  $500,000  or (ii) the
     aggregate amount  outstanding  under the promissory note which was $740,000
     as of October 31,  1997.  As of October 31,  1997,  the cash balance at the
     bank was $933,496.

e.   Notes Payable to Related Parties

In September 1996, a group of related parties loaned the Company an aggregate of
$2,088,539 in exchange for promissory  notes that bear interest at prime plus 2%
per annum (10.5% as of October 31, 1997). The prime rate 


                                                                              12


<PAGE>


is defined as the Chase Manhattan Bank, N.A.'s prime rate during the term of the
loan.  The related  parties also  received  warrants to purchase an aggregate of
417,234  shares of common  stock at an exercise  price of less than one cent per
share.  The  warrants  expire on August 12,  2001.  The Company has recorded the
notes at a discount of $750,197 to reflect an  allocation of the proceeds to the
estimated  value of the warrants and is being  amortized  into interest  expense
using the "interest method" over the term of the financing.  The estimated value
of the warrants were based on the Company's application of a commonly recognized
pricing model.

In  January  1997,  one  noteholder  agreed  that his  portion  of the  notes of
$1,565,180  ($1,115,062,  net of discount of $450,118)  would be repaid upon the
earlier of thirteen  months from the  consummation of an initial public offering
or June 30, 1998. In  consideration  for this  extension,  the interest rate was
increased  to 14% per  annum.  In  August  1997,  the  Company  repaid  $750,000
principal amount of such  indebtedness.  In September 1997, the Company obtained
bank  financing  to repay the balance of $815,180  in  principal  amount of such
indebtedness (See Note 7d).

Approximately  $150,000  and  $600,000 of the  discount was included as interest
expense for the years  ended  October  31,  1996 and 1997,  respectively.  As of
October 31,  1997,  $149,748  of  principal  and  $18,266 of  interest  remained
outstanding.

In connection  with the acquisition of Mission (see Note 3), the Company assumed
debt of $15,000 in the form of a promissory  note,  bearing  interest at 12% per
year to a related party.  The principal  balance and any accrued interest is due
in six months  upon  demand by the  related  party,  or if no demand is made the
obligation is due on December 31, 1998. Interest expense was $200 and $3,567 for
the years ended October 31, 1996 and 1997.


8.   Lines of Credit

a.   In December 1995, the Company entered into a line-of-credit  agreement with
     a bank which  provides  for up to $250,000 of  short-term  financing at the
     rate  of  prime  plus  1%  per  annum  (9.5%  as  of  October  31,   1997).
     Substantially  all the Company's  assets are pledged as collateral  and the
     repayment of advances is personally guaranteed by a shareholder and officer
     of the Company. In addition,  the Company is required to maintain a minimum
     balance of $50,000 at all times. The line of credit is due and payable only
     if the  lender  terminates  the right to obtain  future  loans  under  such
     facility.  Upon  this  event,  the  Company  is  required  to pay the  then
     outstanding amounts in 24 equal installments. The Company has classified 12
     monthly  payments as current.  The available  credit under this facility is
     approximately $3,000.

b.   In September 1997, TTE amended its line of credit  agreement to provide for
     up to 400,000 pounds sterling (approximately  $670,000) at an interest rate
     of 2% above  Barclays Bank base rate per annum (9% as of October 31, 1997).
     Interest is payable  quarterly.  Borrowings  under the  line-of-credit  are
     collateralized by the accounts  receivable of TTE and are guaranteed by the
     Company.  TTE's accounts  receivable balances must at all times be at least
     twice the amount outstanding on the  line-of-credit.  The line-of-credit is
     cancelable and repayable upon demand.  The available  financing  under this
     facility was approximately $160,000 at October 31, 1997.

c.   In February  1997,  IMSI  entered  into a  line-of-credit  agreement  which
     provides for up to $250,000 of short-term  financing at the prime rate plus
     .5% per annum (9.0% as of October 31, 1997).  Borrowings under the line are
     collateralized  by the assets of IMSI.  The  agreement is cancelable at any
     time.  There was no  available  credit  under this  facility at October 31,
     1997.  In  December  1997,  IMSI  repaid  the  principal   amount  of  such
     indebtedness and entered into a line-of-credit agreement which provides for
     up to $5,000,000 of short-term financing with another bank (See Note 14).


                                                                              13


<PAGE>


9.   Commitments and Contingencies

Employment Agreements

a.   The  Company has  entered  into two  employment  agreements  commencing  on
     November  1,  1996,  expiring  in  four  years,  with  key  employees.  The
     agreements  provide  for annual  salaries  of  $125,000  and  $175,000.  In
     addition,  these agreements  provide for performance based bonuses and base
     salary increases, as defined. Each employee was granted options to purchase
     50,000 shares of Common Stock under the 1997 Stock Option Plan.

b.   In connection with the acquisition of Mission,  the Company entered into an
     employment  agreement  with the former  shareholder  of Mission  for a term
     expiring on September 30, 2000.  The  employment  agreement  provides for a
     fixed base  salary at an annual  rate of  $140,000,  and a monthly  payment
     equal to 19.30% of the Net Profit (as defined) of certain products.

c.   In connection with the acquisition of TTE and ART (See Note 3), the Company
     entered into an employment agreement with an executive officer of TTE for a
     term expiring July 29, 2000. The employment  agreement provides for a fixed
     base salary of 100,000 pounds sterling  (approximately  $168,000),  plus an
     annual bonus equal to 7.5% of the net pre-tax profits of TTE.

d.   In  connection  with the  acquisition  of IMSI and CAG  (See  Note 2),  the
     Company entered into an employment  agreement with a former  shareholder of
     IMSI and CAG and a consulting  agreement with another former shareholder of
     IMSI  and CAG  for a term  expiring  on July  31,  2000.  Pursuant  to such
     agreements,  the  former  shareholders  are  entitled  to receive 6% of the
     subsidiary's first $500,000 of earnings before interest and taxes and 9% of
     earnings before interest and taxes in excess of $500,000. Costs incurred in
     connection with these  agreements will be recorded as compensation  expense
     in the period  that they are earned.  For the years ended  October 31, 1996
     and 1997,  there was no  compensation  expense  recorded in connection with
     these  agreements.  In addition,  the employment  agreement  provides for a
     fixed base salary at an annual rate of $120,000.


Capital Leases

The Company leases equipment under capital lease agreements which extend through
fiscal year 2000.  Future  minimum lease  payments  under these capital  leases,
together  with the present  value of such  payments as of October 31, 1997 is as
follows:

                                       Year ending October 31:
                                       -----------------------
                                                 1998                 $  217,420
                                                 1999                    216,047
                                                 2000                    128,082
                                                 ----                 ----------

Total Minimum lease payments                                            561,549

     Less, amounts representing interest                               (104,045)
                                                                      ----------
Present value of minimum obligations under capital leases             $ 457,504
                                                                      =========


                                                                              14


<PAGE>


Lease Commitments

The Company  occupies six office  facilities  and one  warehouse  facility.  The
corporate  headquarters  is under a  noncancelable  operating lease with related
parties and  expires in April 2000.  Rent  expense and certain  utility  expense
under this lease  amounted to $88,631 and $111,400  for the years ended  October
31,  1996 and 1997,  respectively.  The other  offices  are under  noncancelable
operating leases which expire in December 1998 and April 2000. In addition,  the
Company has leased certain equipment under noncancelable  operating leases which
expire through November 1999.

In October  1997,  IMSI  entered  into a lease for  warehouse  space  located in
Richmond,  Virginia.  Pursuant to the lease,  IMSI pays rent of $4,356 per month
plus  its  pro-rata  share  of  any  increases  in  property-related  taxes  and
insurance.  IMSI's lease expires October 31, 2000. In addition, IMSI also leases
office space under a month to month lease with an  affiliate  of a  stockholder.
Rent  expense  under this lease  amounted  to $12,000  and $12,000 for the years
ended October 31, 1996 and October 31, 1997.

Future minimum rentals required as of October 31, 1997 are as follows:

                                    Year ending October 31:
                                    -----------------------
                                            1998                      $  414,012
                                            1999                         350,238
                                            2000                         289,463
                                            2001                         186,523
                                            ----                      ----------

Total Minimum Lease Payments                                          $1,240,236
                                                                      ==========

Rent expense  amounted to $192,305 and $568,820 for the years ended  October 31,
1996 and 1997, respectively.

Legal Proceedings

In January 1997,  Navarre  Corporation  filed a lawsuit in the District Court of
Hennepin  County,  Minnesota  against  the  Company  alleging  that the  Company
breached a distribution agreement by failing to remit monies for product returns
and marketing charges. The Plaintiff is seeking $317,209 in damages. The Company
has served an answer  denying such  allegations  and  requesting  that the court
dismiss  the  complaint.  While the  Company  believes  that it has  meritorious
defenses to such action and intends to vigorously defend this lawsuit, there can
be no assurance  that such action will be resolved in a manner  favorable to the
Company.

The Company has received  correspondence  in which a holder of a patent relating
to the animation of living beings in computer graphics is alleging the Company's
products  infringe  such  patent.  The  Company is aware that the holder of such
patent has claimed that other companies  involved in the entertainment  software
industry have also  infringed  such patent.  There can be no assurance  that the
holder of such patent will not institute an action against the Company. Any such
claims, with or without merit, can be time consuming and difficult to defend and
if successful, could have a material adverse effect on the Company.

Other Commitments

On  September  16,  1996,  the  Company   entered  into  an  agreement  with  RD
Technologies  to develop  Jetfighter IV. Under the agreement,  the Company is to
advance RD Technologies $10,000 per month, for twenty four months, commencing on
October 1, 1996.  The Company has paid  advances of $130,000,  as of October 31,


                                                                              15


<PAGE>


1997.  The  advances  are  non-refundable  and may be  recouped  against  future
royalties due RD Technologies as defined in the agreement.


10.  Related-Party Transactions

In February  1994,  the  Company  entered  into a  consulting  agreement  with a
shareholder.  The agreement provides for an annual consulting fee of $75,000 and
expires in February 1999.  During 1996,  this  individual  agreed to convert the
then  outstanding  obligation  of $167,221  into 42,496  shares of the Company's
common  stock at $4 per share and a note  payable in the amount of $65,500.  The
note  payable was issued with the same terms and  conditions  as the other notes
payable to related  parties (see Note 7e) and was paid in May 1997.  The Company
owes  approximately  $61,000  under the  consulting  agreement as of October 31,
1997.

During the years ended October 31, 1996 and 1997, IMSI paid sales commissions of
$33,000  and  $18,603,  respectively,  to  an  affiliate  of a  stockholder.  In
addition,  as of October 31, 1997,  there was $42,978 due from  related  parties
relating to  advances  made prior to the  acquisition.  These  advances  have no
repayment terms.


11.  Employee Savings Plans

In January 1995, the Company  established a 401(k) profit sharing plan and trust
(the "Plan"). The Plan is offered to all eligible employees and participants may
make voluntary  contributions to the Plan up to 15% of their salary. The Company
does not match employee contributions.

12.  Income Taxes

The Company is subject to foreign  withholding  taxes in certain countries where
it does business.

As of October  31,  1997,  the  Company  had  cumulative  federal  and state net
operating loss  carryforwards of approximately  $5,600,000,  which if not offset
against future taxable income,  will expire in fiscal year 2011. Unused research
and experimental  credits as of October 31, 1997 will expire in the fiscal years
2010 through 2011. The foreign tax credits expire in years 2000 and 2001.

Income tax expense is as follow:

                                                   Years ended October 31,
                                               --------------------------------
                                                  1996                  1997
                                               -----------          -----------
    Current                       
        Federal                                $      --            $      --
        State and local                               --                   --
        Foreign                                     29,049               18,421
    Deferred                                       269,289            1,728,577
    Increase (decrease) in        
      valuation allowance                         (269,289)          (1,728,577)
                                               -----------          -----------
        Total                                  $    29,049          $    18,421
                                               ===========          ===========
                               

                                                                              16


<PAGE>


A  reconciliation  of the  federal  statutory  income tax rate to the  effective
income tax rate is as follows:

                                                             1996          1997
                                                             ----          ----
Effective tax rate reconciliation:
    Statutory federal tax rate (benefit)                     34.0%       (34.0)%
    State taxes, net of federal benefit                       4.5%        (4.6)%
    Foreign taxes                                             5.3%          .2%
    Effect of valuation allowance                           (49.1)%       41.2%
    Goodwill amortization                                     6.4%         3.3%
    Other                                                     4.2%        (5.9)%
                                                             ----         ----
                                                              5.3%          .2%
                                                             ====         ====

The components of the net deferred tax assets as of October 31, 1997 consists of
the following:

Deferred revenue                                                    $   596,242
Net operating loss carryforward                                       2,315,915
Research and experimental credit carryforward                           185,509
Foreign tax credit carryforward                                         125,788
Capitalized software                                                   (681,994)
Depreciation and amortization                                          (105,910)
Other                                                                     2,100
                                                                    -----------
        Net deferred tax asset                                        2,437,650
    Less, valuation allowance                                        (2,437,650)
                                                                    -----------
        Deferred tax asset                                          $      --
                                                                    ===========


The net deferred tax asset has been fully reserved due to the uncertainty of the
company's ability to realize this asset in the future.

The net operating loss carryforwards may be subject to limitations under Section
382 of the Internal Revenue Code, although the Company believes there will be no
such limitation.


13.  Stockholders' Equity

As of October 31, 1997, the total number of authorized  shares of all classes of
stock is  20,000,317  consisting  of (i)  15,000,000  shares of $.01 par  common
stock,  (ii) 317 shares of redeemable  non-voting  preferred  stock having a par
value of $1.00 per share ("Class A Preferred  Stock") and (iii) 5,000,000 shares
of preferred stock which can be issued in one or more series.

Class A Preferred Stock

In November 1997, the Company redeemed the 317 shares of Class A Preferred Stock
at the redemption price of $1.00 per share.

Class B Preferred Stock

In February 1997,  the holder of Class B Preferred  Stock elected to convert all
outstanding  shares  into  409,791  shares of  common  stock.  Accordingly,  all
dividends in arrears became due upon conversion.  As an inducement 


                                                                              17


<PAGE>


to enter into such  agreement,  in February  1997, the Company issued options to
purchase  38,746 shares of Common Stock at an exercise price of $2.41 per share.
Approximately,  $100,000 has been recorded as an additional dividend as a result
of the issuance of these options for the fiscal year ended October 31, 1997, and
is  reflected  in the  earnings  per  share  computations  for such  period.  In
addition, the Company entered into a three-year consulting agreement pursuant to
which the Stockholder  agreed to provide management  consulting  services to the
Company  in  consideration  of the  payment  of  $100,000  over  the term of the
agreement.

Common Stock

In May 1996, 24,944 shares of common stock were issued at a discount for $45,000
($1.80 per share).  The  difference  of $15,000  between the issue price and the
fair market  value of the stock has been  recorded as expense and is included in
the statement of operations for the year ended October 31, 1996.

In April 1997, the Company  consummated an initial public  offering of 1,600,000
shares of common stock and 1,840,000 common stock purchase  warrants  (including
240,000 warrants exercised pursuant to an over-allotment  option).  The proceeds
from the offering were $6,415,237, net of discounts and commissions and offering
expenses of $1,768,764.

In May 1997, the Underwriter  purchased  240,000 shares of common stock pursuant
to an over-allotment option. The proceeds were $1,002,924,  net of discounts and
commissions and offering expenses of $197,076.

In July 1997,  the Company  issued  406,553 shares of Common Stock in connection
with the acquisition of TTE and ART and issued 900,000 shares of Common Stock in
connection with the acquisition of IMSI and CAG (See Notes 2 and 3).

In July 1997, the Company issued 26,035 shares of Common Stock upon the exercise
of warrants issued in connection with the Company's 1996 private placement.  The
warrants had an exercise price of less than $.01 per share (See Note 7e).

In  August  1997,  the  Company  issued  15,000  shares  of  Common  Stock  to a
shareholder  and officer of the Company upon the  exercise of options  issued in
connection with the Company's 1994 Stock Option Plan.

In October 1997,  the Company issued 55,000 shares of Common Stock in connection
with the securities purchase agreement for convertible notes (See Note 7a).

As of October 31, 1997,  there are  currently  outstanding  stock options for an
aggregate of 1,371,099  shares of the Company's  Common Stock at prices  ranging
$.45 and $5.50 per share expiring at various times from 1999 to 2006.

As of October 31, 1997,  there are currently  outstanding  stock warrants for an
aggregate of 2,821,199 shares of the Company's Common Stock.


1994 Stock Option Plan

In August 1994, the Company adopted the 1994 Stock Plan, (the "Plan"),  pursuant
to which  qualified  options to acquire an aggregate of 896,654 shares of common
stock, may be granted to key employees,  consultants,  officers and directors of
the Company.  The Plan authorizes the Board to issue incentive  options ("ISO"),
as  defined  in Section  422 of the  Internal  Revenue  Code (the  "Code").  The
exercise price of each ISO may not be 


                                                                              18


<PAGE>


less  than  100% of the fair  market  value of the  common  stock at the time of
grant,  except that in the case of a grant to an employee  who owns  (within the
meaning of Code Section 422) 10% or more of the outstanding stock of the Company
(a "10%  Stockholder"),  the exercise  price shall not be less than 110% of such
fair  market  value.  Each  option  is to  expire  at such  date as the Board of
Directors  determines.  Options may not be exercised prior to one month from the
day on which such option is granted, or on or after the tenth anniversary (fifth
anniversary in the case of an ISO granted to a 10%  Stockholder) of their grant.
Options may not be transferred during the lifetime of an option holder.

As of October 31, 1997,  there are  currently  outstanding  stock options for an
aggregate of 879,991 shares of the Company's Common Stock at prices ranging from
$.45 and $2.41 per share expiring at various times from 1999 to 2005.

1997 Stock Option Plan

In January 1997,  the  stockholders  of the Company  approved the Company's 1997
Stock Option Plan,  as previously  adopted by the  Company's  Board of Directors
(the "Plan"), pursuant to which officers, directors, and/or key employees and/or
consultants of the Company can receive incentive stock options to purchase up to
an aggregate of 400,000 shares of the Company's Common Stock.

The Plans are administered by the Board of Directors.  Subject to the provisions
of the Plans, the Board of Directors or any Committee  appointed by the Board of
Directors,  has the  authority to determine  the  individuals  to whom the stock
options  are to be granted,  the number of shares to be covered by each  option,
the option price, the type of option, the option period,  restrictions,  if any,
on the exercise of the option, the terms for the payment of the option price and
other terms and  conditions.  Payment by the option  holders upon exercise of an
option  may be made  (as  determined)  in cash or  other  such  form of  payment
acceptable to the Board of Directors.

As of October 31, 1997,  there are  currently  outstanding  stock options for an
aggregate of 390,000 shares of the Company's Common Stock at prices ranging from
$5.00 to $5.50 per share vesting at various times from 1997 to 2001 and expiring
in 2002.

Non-Qualified Stock Options

In February 1996, the Board of Directors of the Company  authorized the issuance
of non-qualified  stock options to purchase up to 80,320 shares of the Company's
Common  Stock.  In July 1995,  41,574  stock  options were issued at an exercise
price of  $1.16.  The stock  options  vest  over a period  of three  years.  The
difference  between the exercise  price and the fair value of the options at the
measurement  date is being  amortized  over the  vesting  period.  Approximately
$17,000 has been recorded as compensation expense for the year ended October 31,
1997.

In February 1997, 38,746 stock options were issued at an exercise price of $2.41
per share to a holder of Class B  Preferred  Stock as an  inducement  to convert
these shares into common stock.

In February 1997, 20,788 stock options were issued at an exercise price of $2.41
per share to an  employee  of Mission  Studios.  The stock  options  vest over a
period of three years.

As of October 31, 1997,  there are  currently  outstanding  stock options for an
aggregate  of 101,108  shares of Common  Stock at prices  ranging  from $1.16 to
$2.41 expiring at various times from 1999 to 2006.


                                                                              19


<PAGE>


The following table summarizes the activity in options under the plans inclusive
of non-qualified options:

                                                      Shares      Exercise Price
                                                    ---------     --------------
Options outstanding - October 31, 1994                789,894     $0.45 - $0.92
Granted                                                40,243     $1.16 - $2.41
                                                    ---------
Options outstanding - October 31, 1995                830,137
Granted                                               108,091     $1.16 - $2.41
Exercised                                              (1,663)            $0.45
                                                    ---------
Options outstanding - October 31, 1996                936,565     $0.45 - $2.41
Granted                                               449,534     $2.41 - $5.50
Exercised                                             (15,000)            $0.92
                                                    ---------
Options outstanding - October 31, 1997              1,371,099
Options exercisable - October 31, 1997              1,073,957     $0.45 - $5.50
                                                    =========


The Company applies APB No. 25,  "Accounting for Stock Issued to Employees," and
related   interpretations   in  accounting  for  its  plans.   Accordingly,   no
compensation  cost has been  recognized for the stock option plans.  The Company
has adopted the  disclosure-only  provision  of SFAS No.  123,  "Accounting  for
Stock-Based  Compensation"  ("SFAS  No.  123").  Had  compensation  cost for the
Company' stock option plan been determined  based on the fair value at the grant
date for awards in 1996 and 1997 consistent with the provisions of SFAS No. 123,
the  Company's  income  (loss) and  earnings  (loss)  per share  would have been
reduced to the pro-forma amounts indicated below.

                                                      1996             1997
                                                 -------------    --------------
Net Income (loss)
        As reported                              $     349,074    $  (4,499,541)
        Pro-forma                                $     304,176    $  (4,694,950)

Net income (loss) per share
        As reported                              $         .05    $        (.54)
        Pro-forma                                $         .04    $        (.56)


The pro-forma  disclosures shown are not representative of the effects on income
(loss) and earnings (loss) per share in future years.

The fair value of the Company's stock options used to compute  pro-forma  income
(loss) and earning (loss) per share  disclosures is the estimated  present value
at grant  date  using the  Black-Scholes  option-pricing  model.  The  following
weighted average  assumptions were used to value grants:  expected volatility of
60%; a risk-free interest rate of 6.22%; and an expected holding period of seven
years.

14.  Subsequent Events

On December 22, 1997,  the Company  acquired  all the  outstanding  stock of L&J
Marketing Inc. d/b/a Alliance Distributors ("Alliance").  Alliance is engaged in
the wholesale  distribution of interactive  software games and videos.  Alliance
was merged into Alliance  Inventory  Management,  Inc.  ("AIM"),  a newly formed
wholly-owned subsidiary of IMSI. The Company issued 500,000 shares of restricted
common  stock  and paid  $1,500,000  in  connection  with this  acquisition.  In
addition,  the Company  granted  five-year  options to purchase an  aggregate 


                                                                              20


<PAGE>


of 76,000 shares of common stock at an exercise  price of $2.00 per share.  Such
non-qualified options vest over the next three years.

In December  1997, AIM entered into two  employment  agreements  with the former
shareholders  of Alliance for a term expiring on December 22, 2001.  Pursuant to
such  agreements,  the former  shareholders  are  entitled  to receive 5% of net
income of AIM and .125% of the first $20 million in  combined  sales of Take-Two
and AIM for each fiscal year during the term of the agreement.  In addition, the
employment  agreements  provide  for a fixed  base  salary at an annual  rate of
$183,500  subject to cost of living  adjustments and an automobile  allowance of
$650 per month.

In December 1997,  IMSI and AIM entered into a  line-of-credit  agreement  which
provides  for up to  $5,000,000  of  short-term  financing.  Advances  under the
line-of-credit  are  based on a  borrowing  formula  equal to the  lesser of (i)
$5,000,000  or (ii) 80% of  eligible  accounts  receivable  plus 50% of eligible
inventory,  as defined. Any amounts drawn against this line bear interest at the
bank's prime rate plus .75% per annum, payable monthly. The principal is due and
payable in full at  maturity,  May 31, 1998,  or upon  default.  Borrowings  are
collateralized  by a lien on the accounts  receivable  and inventory of IMSI and
AIM and are guaranteed by the Company.  The available credit under this facility
is approximately $80,000 at December 31, 1997.

In November  1997, the Company  entered into a  distribution  agreement with 7th
Level,  Inc. (7th Level),  which granted to the Company the exclusive  worldwide
right to  distribute  the PC  versions  of Monty  Python's  The Meaning of Life,
Complete  Waste of Time,  Monty Python and the Holy Grail,  and the screen saver
entitled Monty Python's Desk Top Pythonizer (the  "Products").  In consideration
for  such  rights,  the  Company  has  agreed  to pay to 7th  Level  $1,480,000,
($1,230,000  of which has been paid as of January 19, 1998), a royalty of 33% of
the amounts  received by the Company in excess of seven million dollars from the
sale and distribution of the Products and all royalties  payable by 7th Level to
third  parties in respect of each such game.  In addition,  the Company must pay
the  cost  of  marketing  and  packaging  the  Products  and  provide  technical
assistance to its customers.

Also, in November 1997, the Company  entered into a publishing and  distribution
agreement with  Panasonic  Interactive  Media ("PIM"),  which granted to PIM the
exclusive  right to publish  and sell in North  America  the PC  versions of the
Monty Python Products by means of direct, retail, on-line, multi-player, network
and OEM  distribution  over the life of the copyright.  In consideration of such
rights, PIM has agreed to pay to the Company aggregate advances of approximately
$1,100,000,  all of which has been received as of January 19, 1998,  publish and
package the Products, and incur $500,000 in marketing expenses.

In December 1997, TTE entered into a software  development  agreement with Carts
Entertainment  Oy  ("Carts"),  pursuant to which  Carts  granted the Company the
exclusive worldwide right to publish, manufacture,  market and distribute the PC
version of Lightning,  a futuristic racing game. Pursuant to the agreement,  TTE
is required to make  aggregate  advances to Cart in the amount of 250,000 pounds
sterling  (approximately  $419,000).  TTE is obligated to pay the developer as a
royalty 20% of net revenues,  as defined in the  agreement,  generated  from the
sale of the product and 50% of net revenues if sublicensed.


                                                                              21



<PAGE>



 
                                  SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  the  Registrant has duly signed this report on its behalf
by the undersigned, thereunto duly authorized on the 29th day of January, 1998.

                                   TAKE-TWO INTERACTIVE SOFTWARE, INC.

                                   By:/s/ Ryan A. Brant
                                      --------------------------------------
                                      Ryan A. Brant, Chief Executive Officer


In accordance with the requirements of the Securities Exchange Act of 1934, this
report was signed by the following  persons in the  capacities  and on the dates
stated.



<TABLE>
<CAPTION>
Signature                                 Title                              Date
- ---------                                 -----                              ----
<S>                                  <C>                                   <C>
                                     Chief Executive Officer and           January 29, 1998
                                     Director (Principal Executive
/s/ Ryan A. Brant                    and Accounting Officer)
- ------------------------------
Ryan A. Brant

                                     President and Director                January 29, 1998
/s/ Mark E. Seremet
- ------------------------------
Mark E. Seremet

                                     Vice President                        January   , 1998

- ------------------------------
Thomas Ptak

                                     Controller                            January 29, 1998
/s/ Barbara A. Ras
- ------------------------------
Barbara A. Ras

                                     Vice President                        January 29, 1998
/s/ James W. Bartolomei, Jr.
- ------------------------------
James W. Bartolomei, Jr.

                                     Director                              January 29, 1998
/s/ Oliver R. Grace, Jr.
- ------------------------------
Oliver R. Grace, Jr.

/s/ Neil S. Hirsch                   Director                              January 29, 1998
- ------------------------------
Neil S. Hirsch


/s/ David P. Clark                   Director                              January 29, 1998
- ------------------------------
David P. Clark


/s/ Kelly Sumner                     Director                              January 29, 1998
- ------------------------------
Kelly Sumner
</TABLE>




                                      -37-





                                              
                              
      Summary of Terms For A Publishing License and Distribution Agreement
     Between Take 2 Interactive (T2I) and Panasonic Interactive Media (PIM)


Following  is a summary of key terms  comprising  a licensing  and  distribution
agreement between the two parties:

1.   Nature of Relationship;

     PIM shall obtain exclusive publishing and distribution right to software
     products from T2I as defined hereto. The products shall be packaged and
     published by PIM for exclusive distribution into all direct, retail,
     on-line, multi-player, network and OEM channels in North America.

2.   The Product(s):

     Monty Python's The Meaning of Life
     Monty Python & The Quest For The Holy Grail
     Monty Python's Complete Waste of Time
     The Pyhtomizer Screen Saver

3.   The Exclusive-License Rights:

     a)   Territory: North America.
     b)   Term: Life of copyright.
     c)   Media: All optical media, including CD-ROM and DVD.
     d)   Host Platforms: All personal computers and set-top optical devices.

     e)   Derivative Works: PIM may, at its sole discretion and expense, create
          re-mastered and/or re-authored versions of Products. T21 shall make
          available, as necessary, any and all host assets utilized in creation
          of Products. PIM shall grant to T2I license rights, under royalty
          terms similar to those defined
 herein, to any re-mastered and/or
          re-authored versions of Products for territories outside North
          America.

4.   PIM Compensation to T2I For These Rights:

     a)   Guarantee:            $1,100,000

     b)   Recoupable 
          Advances:             PIM shall disburse Guarantee as follows:

                                $550,000  Within five (5) business days of 
                                          execution of this Summary of Terms.

                                $550,000  Within five (5) business days of 
                                          receipt of Gold Masters for all
                                          Products.

     c)   Royalty Accrual:      Royalties shall accrue as percent of PIM gross
                                profit (GP), with GP defined as the actual
                                retailer or distributor purchase price minus
                                standard trade discounts, minus rep commissions,
                                minus cost-of-goods and freight. PIM shall
                                retain 100% of all accrued royalties until all
                                advances have bee recouped.

                                                                          Page 1


<PAGE>


     d)   Retail and Direct 
          Sales Royalty:        30% of GP.

     e)   OEM Royalty:          30% of revenues actually collected by PIM, less
                                PIM actual out-of-pocket costs (if any) incurred
                                in generating such revenue.

     f)   Network/On-Line/ 
          Multi-Player Royalty: 30% of revenues actually collected by PIM, less 
                                PIM actual out-of-pocket costs (if any) incurred
                                in generating such revenue.                     
                                

5.   Marketing:

     a)   Materials:            T2I will provide to PIM within five (5) business
                                days of execution of this Summary of Terms all
                                packaging, manuals, sales and marketing
                                materials, including all available photography
                                and artwork, in a commonly readable digital
                                format for all Products.

     b)   Marketing Budget:     $500,000 of actual out-of-pocket expenses
                                incurred by PIM in the areas of consumer
                                advertising, trade marketing, public relations,
                                promotions and other marketing activities
                                defined by PIM.

     c)   Branding:             The product shall be marketed by PIM under the
                                Panasonic Interactive Media publishing label.
                                All packaging, marketing and sales materials
                                shall identify 7th Level as the Products'
                                developer.

     d)   Existing Inventory:   PIM, at its sole discretion, may elect to
                                either: i) purchase all existing 7th Level
                                inventory of Products acquired by T2I at
                                cost-of-goods, or ii) require verification that
                                all existing 7th Level inventory of Products
                                acquired by T2I has been scrapped and/or
                                exported from North America.

6.   Good Faith Negotiations:

     Upon the execution of this Summary of Terms, the parties shall negotiate in
     good faith to reach a definitive Agreement that incorporates this Summary
     of Terms and other terms and conditions typical for an agreement of this
     type.

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


Both parties hereby accept this Summary of Terms as the basis for an Agreement
between the two parties. T2I by accepting this Summary of Terms further
represents and warrants that it owns all rights in the Products and has the
right to grant PIM the rights under this Summary of Terms.



/s/ [ILLEGIBLE]       11/6/97                     /s/ Ryan Brant        11/5/97
- ------------------------------                    ------------------------------
PIM                    Date                       T2I                     Date


                                                                          Page 2




                               Take 2 / Mindscape
                                   Term Sheet

Agreement:          Mindscape  (which term shall  include  Mindscape,  Inc.  and
                    Mindscape  International  Limited) and Take-Two  Interactive
                    Software,  Inc.  ("Take  2")  hereby  agree to amend the two
                    agreements between the companies, the "U.S. Agreement" which
                    is that certain Agreement between Mindscape, Inc. and Take 2
                    dated  December  27, 1995 as amended by the First  Amendment
                    dated July 9, 1997, and the "U.K.  Agreement"  which is that
                    certain Agreement between  Mindscape  International  Limited
                    and Take 2 dated  January 31, 1997  (collectively,  the "Old
                    Agreements")   to  restructure   these   Agreements  and  to
                    incorporate  the terms of this  letter of intent  into a new
                    agreement  (the  "New  Agreement")  which  will  effectively
                    terminate  any  further  interest of  Mindscape  in the Game
                    Titles  as   defined  in  the  U.S.   Agreement.   Mindscape
                    acknowledges that, subject to the terms outlined below, Take
                    2 shall be free to solicit and market  these titles to third
                    parties.

Rights/Repayment:   U.K.  Agreement.  Mindscape shall not owe Take 2 any further
                    advances  under  the U.K.  Agreement.  Take 2 and  Mindscape
                    agree that European  distribution rights for the Game Titles
                    found in the U.K.  Agreement  will  revert back to Take 2 on
                    the condition  that all advances
 paid by Mindscape to Take 2
                    under the U.K.  Agreement  are to be repaid to  Mindscape in
                    accordance with the following schedule:

                    $170,666 on or before December 15, 1997;
                    $170,666 on or before May 15, 1998; and
                    $170,667 on or before September 15, 1998.

                    U.S.  Agreement.  Take 2 and Mindscape  agree that worldwide
                    distribution  rights for the Game Titles  listed in the U.S.
                    Agreement will revert back to Take 2 Interactive (subject to
                    a six month  sell off period for  Callahan's  CTS),  and the
                    following  U.S.  advances for these products shall be repaid
                    to Mindscape, under the following schedule:

                        Jetfighter: Full Burn

                        The  $500,000  advance for this Game Title  ($100,000 of
                        which is in repayment of the advances on Steel and Bone,
                        which Take 2 canceled)  shall be repaid to  Mindscape no
                        later  than  three  (3)  months  after  its  publication
                        anywhere in the world,  under any product  name,  by any
                        party (e.g., Take 2 Interactive, a third party, or under
                        license/sublicense).

                        Black Dahlia

                        The $300,000 advance for this Game Title shall be repaid
                        to  Mindscape  no later than three (3) months  after its
                        publication  anywhere  in the world,  under any  product
                        name, by any party (e.g.,  Take 2  Interactive,  a third
                        party, or under license/sublicense).


<PAGE>


                    If Take 2 is able to derive  revenue from a  third-party  by
                    publishing,  licensing, or otherwise commercially exploiting
                    or transferring its rights in either  Jetfighter:  Full Burn
                    or  Black  Dahlia,  Take  2's  repayment  obligations  shall
                    accelerate  and Take 2 shall  repay all  advances previously
                    paid for that Game  Title to  Mindscape  immediately  to the
                    extent of revenues received;  provided, however, that Take 2
                    may first  recoup its direct costs of  completing  such Game
                    Title,  such  direct  costs to be  limited  to out of pocket
                    costs incurred for product  development  employee's salaries
                    and/or payments made to contractors.

                    After it has recouped its direct costs for  completing  such
                    game  titles,  Take 2  further  agrees  to pay  Mindscape  a
                    fifteen  percent (15%) royalty on any revenues  attributable
                    to Jetfighter, Full Burn or Black Dahlia, provided, however,
                    that if Take 2 has completely  reimbursed  Mindscape for all
                    advances  on these  titles  under the U.S.  Agreement  by no
                    later than March 1, 1998,  the royalty rate shall be reduced
                    to ten percent (10%).


Other:              By signing  below,  the  parties  agree that these terms are
                    binding upon them but that they will negotiate in good faith
                    with  the   intention   of   executing   in  due   course  a
                    comprehensive   mutually  acceptable   definitive  agreement
                    reflecting  these and other customary and appropriate  terms
                    which definitive agreement,  when executed,  shall supersede
                    these terms.  Except as modified  here,  the Old  Agreements
                    shall stand in full force and effect  until such time.  This
                    Letter of Intent shall not be valid until its signed by both
                    parties.


Mindscape, Inc:                           Take 2 Interactive Software:

/s/ [ILLEGIBLE]                           /s/ Ryan Brant       
- -----------------------------------       --------------------------------------
By:                                       By:    Ryan Brant
Title:                                    Title: CEO
Date:   11/11/97                          Date:  Nov. 11, 1997
                                          


<PAGE>


[LETTERHEAD]
 MINDSCAPE


January 28, 1998


Ryan Brant
Take Two Interactive Software
575 Broadway 
New York, NY 10012


Dear Ryan,

Here are the revised terms we have discussed with respect to the proposed
distribution by Mindscape of Jeopardy! 64 and Wheel of Fortune 64 to the Target
and K-Mart accounts.

Take Two designates Mindscape as its exclusive distributor of Jeopardy! 64 and
Wheel of Fortune 64 for the Target Stores, Inc. account and as its exclusive
distributor of Jeopardy! 64 for the K-Mart Corp. account. Mindscape Inc. shall
order inventory from Take Two for Jeopardy! 64 and Wheel of Fortune 64 at the
prices on the attached schedule. The initial order of 6,000 units of Wheel of
Fortune 64 shall be provided by Take Two to Mindscape immediately. Additionally,
we understand that Take Two has instructed Nintendo Company, Ltd. to ship 14,000
units of Jeopardy! 64 which Take Two has already paid for directly to Mindscape.
Upon signing this letter and receiving appropriate confirmation from Nintendo,
Mindscape will consider Take Two to have fulfilled its obligation with respect
to these units of Jeopardy! 64 to be shipped by Nintendo. Freight costs to
Mindscape's warehouse or, if reasonably equivalent, directly to an account's
central warehouse, shall be Take Two's responsibility. Freight costs from
Mindscape to the accounts shall be Mindscape's responsibility.

Take Two agrees that it will provide up to 4,608 units of Jeopardy! 64 and 1,000
units of Wheel of Fortune 64 to Mindscape immediately upon written request to
fulfill any reorders from said accounts. Mindscape shall submit a purchase order
to Take Two for these units and Take Two shall ship inventory directly to the
account's central warehouse as may be mutually agreed, or to Mindscape's
designated warehouse FOB Mindscape, within five days of receipt of a purchase
order.

All such units shipped to Mindscape (or to Mindscape's account) shall be
transferred to Mindscape's ownership upon receipt. Mindscape shall have the
right to sell this inventory to Target and K-Mart. The purchase price for a
total of 7,000 units of Wheel of Fortune 64 and 18,608 units of Jeopardy! 64
shall be $800,000 which shall accrue for the benefit of Take Two upon Take Two
signing this letter but shall be offset against amounts currently owned to
Mindscape by Take Two under the Term Sheet of November



<PAGE>


January 28, 1998
Ryan Brant
Page 2


11, 1997 between the parties with respect to the U.S. Agreement (as defined in
the Term Sheet) of $800,000 related to royalty advances for Black Dahlia and Jet
Fighter Full Burn. Any units ordered by Mindscape and shipped beyond the units
described above may similarly be offset against other amounts owed by Take Two
with respect to advances for other titles, and other unreimbursed amounts
including MDF in the amount of $107,662.


Please sign below to confirm your agreement to these terms.


Sincerely,                               Take Two Interactive

/s/ Ian Rose                            /s/ Ryan Brant
- ------------------                      --------------------
Ian Rose                                Ryan Brant, CEO
Senior Vice President


Cc:  Jim Prather
     Gordon Landies
     Bill Arkwright
     Chuck Kroegel
     Debbie Minardi
     Caryn Minal








                                Interplay [LOGO]
                             BY GAMES FOR GAMES (TM)


November 13, 1997


Ryan Brant
Chief Executive Officer
Take 2 Interactive Software
1004 Ligonier St., 3rd Floor
Latrobe, PA 15690

Dear Mark,

I have set forth below the principle deal points proposed by Interplay
Productions, a California corporation ("Interplay") in connection with
consummating an affiliate label distribution agreement with Take 2 Interactive
Software ("Take 2") with respect to the MS-DOS (launchable in Windows '95)
CD-ROM & DVD versions of Jetfighter: Full Burn and the Windows '95 CD-ROM & DVD
versions of the Black Dahlia computer software products (the "Products"). The
definitive agreement will include the following terms:

Territory: North America and South America

Term: Active Economic Life (i.e. latter of: (i) five (5) years from the
effective date of the definitive agreement, or (ii) the time while the Products
are marketed or sold plus six (6) months).

Distribution Rights: Exclusive distribution rights of JetFighter: Full Burn,
Black Dahlia, and any subsequent mission disks and/or add-on products to
distributors, resellers, direct sales and OEM Bundling (OEM Bundling terms to be
agreed upon by the parties in good faith). Interplay's OEM Bundling rights
within the Territory
 will be exclusive, while Interplay's OEM Bundling rights in
the rest of the world will be co-exclusive with Take 2.

Guarantee: Two Million Dollars (US $2,000,000). The individual Product
guarantees shall be $1,500,000 for Jetfighter: Full Burn and $500,000 for Black
Dahlia.* However, any royalties accrued under this agreement will be
cross-collaterized against any advances and the Guarantee. Furthermore, if for
any reason the MS-DOS CD-ROM version of Jetfighter: Full Burn does not ship
pursuant to this letter agreement, the entire Guarantee will be removed.

Marketing Guarantee: Take 2 agrees to spend at minimum a total of $375,000 in
consumer advertising on Black Dahlia and Jetfighter: Full Burn prior to November
2, 1998.

Royalty Split of Net Receipts (Calculated after cost of goods (Cogs) are
reimbursed): 60% - Take 2; 40% - Interplay. Subject to recoupment of any
advances, royalties will be due sixty (60) days after the month end in which
such units of a Product are shipped.

Anticipated Wholesale Price:       Black Dahlia                  $40.00
                                   Jetfighter: Full Burn         $42.00

Product Forecasts: MS-DOS CD-ROM & DVD versions with respect to Jetfighter: Full
Burn, and Windows '95 CD-ROM & DVD versions with respect to Black Dahlia.



<PAGE>



MDF (Marketing Development Funds): A launch fund will be mutually agreed upon by
the parties and will be at least seven percent (7%) of initial gross sales.
Interplay will continue to maintain a MDF reserve of five percent (5%)
thereafter. Take 2 will be responsible for the costs of all MDF.

Interplay will be responsible for the building of inventory after receiving all
final art files and media deliverables for duplication. Interplay will also fund
the costs for each unit produced.

Return Reserve: Interplay will withhold seven percent (7%) of the wholesale
purchase price of each purchase as a reserve for returns and defectives. On a
semi-annual basis, beginning six (6) months after release of each ProductSKU,
any amount exceeding such maximum general reserve not scheduled or applied to
returns of such ProductSKU will be paid to Take 2 with the next payment due.

In order to ensure a January launch of the products, Take 2 will deliver
approved gold masters and all related artwork necessary to produce the final
Products on or by January 5, 1998. Take 2 agrees to take best efforts to deliver
a gold master to permit a January shipment of the Products by Interplay.

Interplay will make the following advance payments (against the guarantee):

                    November 15, 1997        $300,000
                    December 15, 1997        $250,000
                    March 15, 1998           $450,000*
                    May 15, 1998             $500,000*
                    December 31, 1998        $500,000*

* Note if for any reason Take 2 fails to deliver the approved gold masters and
all related artwork for the MS-DOS CD-ROM version of JetFighter: Full Burn or
the Windows '95 CD-ROM version of Black Dahlia by January 5, 1998, the guarantee
will be reduced as follows:


<TABLE>
<CAPTION>
==============================================================================================
Product        Delay          Reduction   Delay Date      Reduction    Delay Date   Reduction
               Dates          of                          of                        of
                              Guarantee                   Guarantee                 Guarantee
- ------------   -----------    ---------   -----------     ---------    ----------   ---------
<S>            <C>            <C>         <C>             <C>          <C>          <C>     
Black Dahlia   January 6,     $120,000    February 9,     $240,000     March 8,     $360,000
               1998                       1998                         1998
               through                    through                      through
               February 8,                March 7,                     April 5,
               1998                       1998                         1998
- ---------------------------------------------------------------------------------------------
Jetfighter:    January 6,     $180,000    February 9,     $360,000     March 8,     $540,000
Full Burn      1998                       1998                         1998
               through                    through                      through
               February 8,                March 7,                     April 5,
               1998                       1998                         1998
==============================================================================================
</TABLE>


     Any reduction in the guarantee due to missed dates as described above will
be spread equally across the remaining advance dates. It is further understood
that in the event of missed dates the remaining advance dates will be launched
back thirty (30) days for each level of missed dates. Should a Product be
delayed beyond April 5, 1998, the remaining advance and the Guarantee will be
deleted with respect to such Product.


                                        2



<PAGE>



     Interplay and Take 2 agree to negotiate in good faith an agreement that
will contain the North American distribution rights to all Take 2 CD ROM and DVD
products scheduled for release to the next two (2) years including Jetfighter 4,
Full Burn 2, and Things (Working Title), Interplay shall have a right of first
option on these products and Take 2 will refrain from negotiating such rights
with any third party through February 28, 1998.

     Take 2 agrees to keep this letter, the terms of this letter agreement
herein and its relationship with Interplay confidential and to not discuss,
solicit, offer or enter into any other agreement regarding the Products.
Further, Take 2 agrees that so long as Interplay is attempting to complete the
definitive agreement in good faith (the "Lock-Out Period"), Take 2 will not
either itself or through any adviser or agent solicit any offer from a third
party, respond to any offer from a third party, make any offer or proposal to a
third party concerning any affiliate label or distribution deal relating to the
Products or any other transaction which could interfere with the consummation of
the transactions contemplated by this letter. After the expiration of the
Lock-Out Period, and any extension thereto mutually agreed by the parties, if
the parties have not signed a definitive agreement, this agreement will
terminate and Take 2 will be free to negotiate with other parties.

     Take 2 represents and warrants that it has all legal right and authority to
grant the rights to interplay in the Products, as described herein, and agrees
to indemnify Interplay against all costs, fees, expenses and damages incurred by
Interplay as a result of any breach of the foregoing representation and
warranty. Without limiting the foregoing, Take 2 represents that the right of
Mindscapes to the Products have been terminated.

     In addition, Interplay and Take 2 agree that any and all invoices for
Jetfighter: Platinum Edition that become due prior to February 15, 1998 will
have their payment terms extended to February 15, 1998.

     This letter constitutes a binding agreement between the parties, which will
serve as the agreement between the parties until they have had the opportunity
to negotiate and enter into a definitive agreement on the principle terms
contained in this letter. The parties agree that the definitive agreement will
contain other customary terms and conditions including, without limitation,
representations, indemnities, sell-off period, and the like. The parties agree
to negotiate in good faith to reach and execute a mutually acceptable definitive
agreement as soon as practicable, but in any event by the end of the Lock-Out
period. This letter is to be governed under the laws of California. This letter
agreement may be signed in counterpart and delivered by facsimile.




<PAGE>



     If the terms of this letter are acceptable, please sign below and return to
my attention. Upon receipt of a signed copy of this letter, we will prepare the
definitive agreement.



/s/ Phil Adam
Phil Adam
Vice President
Business Development
Interplay Productions




ACKNOWLEDGED AND AGREED

TAKE 2 INTERACTIVE SOFTWARE



By: /s/ Mark E. Seremet
    ------------------------
    MARK E. SEREMET
    PRESIDENT COO






                                                                      Exhibit 11

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Statement of Computation of Earnings Per Share

For the years ended October 31, 1996 and 1997



                                                       Years Ended October 31,
                                                     --------------------------
                                                        1996            1997
                                                     ----------      ----------

Primary:
     Net income (loss)                                  349,074      (4,499,591)
                                                     ==========      ==========

     Common stock outstanding                         6,497,664       7,914,006
     Common stock equivalents                         1,173,400         425,423
                                                     ----------      ----------
     Total                                            7,671,064       8,339,429
                                                     ==========      ==========

     Net income (loss) per share                            .05            (.54)
                                                     ==========      ==========

Fully diluted:
     Net income (loss)                               $               $
                                                        349,074      (4,499,591)
                                                     ==========      ==========

     Common stock outstanding                         6,497,664       7,914,006
     Common stock equivalents                         1,173,400         431,172
                                                     ----------      ----------
     Total                                            7,671,064       8,345,178
                                                     ==========      ==========

     Net income (loss) per share                            .05            (.54)
                                                     ==========      ==========









                                  Exhibit 22.1

                           Subsidiaries of the Company



Mission Studios, Inc.

Take-Two Interactive Software Europe Limited

Alternative Reality Technologies, Inc.

Inventory Management Systems, Inc.

Creative Alliance Group, Inc.

Alliance Inventory Management, Inc.









<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL  STATEMENT  INCLUDED IN THIS QUARTERLY  REPORT ON FORM 10-KSB,  AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                              OCT-31-1997
<PERIOD-END>                                   OCT-31-1997
<CASH>                                           1,882,915
<SECURITIES>                                             0
<RECEIVABLES>                                    4,666,862
<ALLOWANCES>                                             0
<INVENTORY>                                      1,149,590
<CURRENT-ASSETS>                                12,898,117
<PP&E>                                           1,555,648
<DEPRECIATION>                                     348,034
<TOTAL-ASSETS>                                  25,090,200
<CURRENT-LIABILITIES>                           14,341,091
<BONDS>                                                  0
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                            317
<COMMON>                                            92,500
<OTHER-SE>                                       9,789,071
<TOTAL-LIABILITY-AND-EQUITY>                     9,881,888
<SALES>                                         19,014,083
<TOTAL-REVENUES>                                19,014,083
<CGS>                                           12,459,189
<TOTAL-COSTS>                                   12,459,189
<OTHER-EXPENSES>                                 2,092,479
<LOSS-PROVISION>                                         0
<INTEREST-EXPENSE>                               1,016,612
<INCOME-PRETAX>                                (4,143,662)
<INCOME-TAX>                                        18,421
<INCOME-CONTINUING>                                      0
<DISCONTINUED>                                           0
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                   (4,162,083)
<EPS-PRIMARY>                                       (0.54)
<EPS-DILUTED>                                       (0.54)
                                               


</TABLE>