Chason, Jesse Sutton, Joseph Sutton, Morris Sutton, Laurence Aronson, F. Peter Cuneo, James Halpin, Louis Lipschitz, Marc Weisman, the financial institutions that served as the underwriters of the Offering (RBC Capital Markets Corporation, JMP Securities LLC, Harris Nesbitt & Corp., and Wedbush Morgan Securities Inc.), and the Company’s auditor, Goldstein Golub Kessler LLP.

The Complaint alleges that the Registration Statement and Prospectus filed with the SEC in connection with the Company’s Offering and certain of the Company’s press releases and other public filings contained material misstatements and omissions about the Company’s financial condition and prospects as well as its products. Lead Plaintiff asserts a claim under Section 11 of the Securities Act against all the defendants on behalf of investors who purchased in the Offering. It asserts a Section 12(a)(2) claim against Majesco and the financial institutions who served as underwriters in connection with the Offering, and a Section 15 control person claim against defendants Carl Yankowski, Jan Chason, Jesse Sutton, Joseph Sutton, and Morris Sutton. Lead Plaintiff also asserts a claim under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against defendants the Company, Carl Yankowski, Jan Chason, Jesse Sutton, Joseph Sutton, and Morris Sutton and a claim under Section 20(a) of the Exchange Act against defendants Carl Yankowski, Jan Chason, Jesse Sutton, Joseph Sutton and Morris Sutton. The Complaint seeks damages in an unspecified amount. The proposed class period for the Exchange Act claims is December 8, 2004 through September 12, 2005.

On October 10, 2006, Trinad Capital Master Fund, Ltd., a shareholder of our common stock, filed a complaint against the Company and several current and former directors and officers of the Company in the United States District Court for the District of New Jersey. The current or former officers and directors named as defendants in the complaint are Morris Sutton, Jesse Sutton, Joseph Sutton and Carl Yankowski. The Complaint also named the Company’s outside auditors, Goldstein Golub Kessler LLP, as a defendant. Goldstein Golub Kessler LLP has since been voluntarily dismissed without prejudice. The allegations in the Complaint are similar to those in the Amended Consolidated Complaint filed in the In re: Majesco Securities Litigation putative class action discussed above. The Complaint alleges three causes of action: (1) a claim under Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder) against all the named defendants; (2) a claim under Section 20(a) of the Exchange Act against Morris Sutton, Jesse Sutton and Joseph Sutton; and (3) a common law fraud claim against Morris Sutton, Jesse Sutton, Joseph Sutton and Carl Yankowski. Trinad seeks compensatory damages of no less than $10 million. This amount is sought with respect to each claim. In connection with the fraud claim, Trinad also seeks $10 million in punitive damages.

On November 2, 2006, Trinad Capital Master Fund, Ltd., filed a complaint, purportedly on behalf of the Company, against certain current or former directors of the Company in the United States District Court for the District of New Jersey. The individuals named as defendants in the complaint are Morris Sutton, Jesse Sutton, Joseph Sutton, Louis Lipschitz and Laurence Aronson. The complaint also names the Company as a nominal defendant. The complaint alleges that, from late 2004 through the filing date, defendants breached their fiduciary duties which caused damage to the Company. The complaint does not specify the amount of damages sought. A response to the Complaint is due on January 31, 2007.

We are party to other routine claims and suits brought by us and against us in the ordinary course of business, including disputes arising over contractual claims and collection matters. In the opinion of management, after consultation with legal counsel, the outcome of such routine claims will not have a material adverse effect on our business, financial condition, and results of operations or liquidity. In addition, the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in those matters (including those matters described above), and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on the Company’s business, financial condition, and results of operations or liquidity.

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

Not applicable.

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PART II

Item 5.    Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed for trading on the Nasdaq Capital Market under the symbol ‘‘COOL.’’ Prior to March 13, 2006 our common stock was listed on the Nasdaq Global market. Prior to January 26, 2005, our common stock was quoted on the OTC Bulletin Board. The market for our common stock has often been sporadic, volatile and limited.

The following table shows the high and low bid quotations for our common stock as reported by the OTC Bulletin Board for 2004, the Nasdaq Global Market for periods prior to March 13, 2006, and Nasdaq Capital Market from March 13, 2006 through October 31, 2006. The amounts below have been adjusted to reflect our 1-for-7 reverse stock split effectuated on December 31, 2004. The prices reflect inter-dealer quotations, without retail markup, markdown or commissions and may not represent actual transactions.

			High						Low
Fiscal Year 2004
First Quarter				$	14.56					$	7.07
Second Quarter				$	31.36					$	9.73
Third Quarter				$	34.30					$	17.50
Fourth Quarter				$	23.66					$	12.39
Fiscal Year 2005
First Quarter				$	16.25					$	1.57
Second Quarter				$	13.10					$	8.90
Third Quarter				$	9.23					$	3.10
Fourth Quarter				$	3.30					$	1.13
Fiscal Year 2006
First Quarter				$	1.73					$	0.85
Second Quarter				$	1.84					$	1.00
Third Quarter				$	1.81					$	1.25
Fourth Quarter				$	1.50					$	1.13

Holders of Common Stock.    On January 19, 2007, we had approximately 2,520 registered holders of record of our common stock. On January 19, 2007, the closing sales price of our common stock as reported on the Nasdaq Capital Market was $1.68 per share.

Dividends and dividend policy.    We have never declared or paid any dividends on our common stock and we do not anticipate paying dividends on the common stock at the present time. We currently intend to retain earnings, if any, for use in our business. We do not anticipate paying dividends in the foreseeable future.

Securities authorized for issuance under equity compensation plans.    The information called for by this item is incorporated by reference from our definitive proxy statement relating to our 2007 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our October 31, 2006 fiscal year end.

Recent Sales of Unregistered Securities.

Not applicable.

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Item 6.    Selected Financial Data.

The following tables summarize certain selected consolidated financial data, which should be read in conjunction with our audited consolidated financial statements and the notes thereto and with management’s discussion and analysis of financial condition and results of operations included elsewhere in this report. The Company’s merger on December 5, 2003 was treated for accounting purposes as a reverse acquisition of a public shell, and the transaction has been accounted for as a recapitalization, rather than a business combination. In addition all financial information presented reflects as appropriate the 1-for-7 reverse stock split of our common stock, which occurred on December 31, 2004.

			Year Ended October 31
			2006						2005						2004						2003						2002
			(in thousands, except share data)
Consolidated Statement Of Operations Data:
Net revenues				$	66,683					$	59,716					$	120,984					$	46,608					$	49,688
Cost of sales (1)					46,858						61,101						86,242						30,803						31,992
Gross (loss) profit					19,825						(1,385	)					34,742						15,805						17,696
Operating expenses (2)					22,820						68,805						22,630						24,545						16,153
Operating (loss) income					(2,995	)					(70,190	)					12,112						(8,740	)					1,543
Interest and financing costs, net					2,371						1,869						2,806						2,077						2,093
Other non-operating expense (3)					—						48						19,068						24						201
(Loss) provision before income taxes					(5,366	)					(72,107	)					(9,762	)					(10,841	)					(751	)
(Benefit) for income taxes					—						(1,207	)					1,424						—						—
Net (loss)				$	(5,366	)				$	(70,900	)				$	(11,186	)				$	(10,841	)				$	(751	)
Net (loss) attributable to common
stockholders (4)				$	(5,366	)				$	(72,000	)				$	(15,388	)				$	(10,841	)				$	(751	)
Net (loss) attributable to common
stockholders per share:
Basic and Diluted				$	(0.24	)				$	(3.48	)				$	(1.84	)				$	(4.95	)				$	(0.34	)
Weighted average shares outstanding:
Basic and Diluted					22,616,419						20,686,863						8,385,657						2,189,285						2,189,285

			October 31
			2006						2005						2004						2003						2002
			In thousands
Consolidated Balance Sheet Data:
Cash and cash equivalents				$	3,794					$	2,407					$	4,170					$	314					$	692
Working capital (deficit)					977						3,757						8,915						(10,927	)					1,404
Total assets					15,011						30,703						43,952						17,611						14,215
Non-current liabilities					—						—						—						—						3,962
Dividend payable in common stock					—						—						1,261						—						—
Stockholders’ equity (deficiency)					1,749						4,761						13,785						(15,730	)					(4,871	)

(1)	Cost of sales, in 2005, includes: (i) charges of $10.5 million to recognize impairments to the carrying value of products released in 2005; and (ii) $5.1 million for reserves for slow moving inventory. Cost of sales in 2004 includes charges of $500,000 to recognize impairments to the carrying value of products released in 2004.

(2)

Operating expenses include: (i) for 2006, a gain from settlement of liabilities and other of $ 4.8 million, a loss in impairment of software development costs of $2.4 million, and non-cash compensation of $2.2 million; (ii) for 2005, a charge for an accounts receivable write-off of $0.3 million, a non-cash compensation of $1.4 million, $26.3 million to write-off capitalized costs related to video games for which development was stopped or impaired, a provision for severance of $1.4 million, and a loss of $1.4 million related to a legal settlement; (iii) for 2004, charges for an

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	accounts receivable write-off of $0.6 million, and non-cash compensation of $0.3 million, and a gain of $1.2 million related to the renegotiation of our 2003 litigation settlement; and (iv) for 2003, provisions for loss on impairment of software development costs of $3.7 million for which development was stopped and litigation and settlement costs of $4.9 million.

(3)

Other non-operating expense includes: (i) for 2005, a realized loss on foreign exchange of $48,000; (ii) for 2004, expenses related to the merger of $0.3 million, an unrealized loss on foreign exchange contract of $0.3 million and a non-cash charge of $18.5 million related to the change in fair value of warrants issued in connection with the private placement; (iv) for 2003, an unrealized loss on a foreign exchange contract of $24,000; and (v) for 2002, a loss on an abandoned equity offering of $0.2 million.

(4)

Net (loss) attributable to common stockholders includes (i) for 2005, a $1.1 million non-cash charge related to warrants exercised at a discount; and (ii) for 2004, a non-cash charge of $0.8 million related to a deemed dividend, a preferred stock dividend requirement of $1.3 million payable in common stock and a $2.2 million non-cash charge related to the fair value of warrants issued in connection with lock-up agreements by certain stockholders.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with ‘‘Selected Consolidated Financial Data’’ and our consolidated financial statements and related notes appearing elsewhere in this annual report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under ‘‘Risk Factors’’ and elsewhere in this annual report on Form 10-K.

Overview

We are a provider of interactive entertainment products. We sell our products primarily to large retail chains, specialty retail stores, video game rental outlets and distributors. We also sell our products internationally through distribution agreements with international publishers. We have developed our retail and distribution network relationships over our 20-year history.

We publish video game software for most major interactive entertainment hardware platforms, including Nintendo’s Game Boy Advance, or GBA, DS, Micro, GameCube, and Wii, Sony’s PlayStation 2, or PS2, and PlayStation Portable, or PSP™, Microsoft’s Xbox and Xbox 360and the personal computer, or PC.

Our video game titles are targeted at various demographics at a range of price points, from lower-priced ‘‘value’’ titles to more expensive ‘‘premium’’ titles. In some instances, these titles are based on licenses of well-known properties, and in other cases based on original properties. We collaborate and enter into agreements with content providers and video game development studios for the creation of our video games.

Majesco Sales Inc. was incorporated in 1986 under the laws of the State of New Jersey. On December 5, 2003, Majesco Sales Inc. completed a reverse merger with Majesco Holdings Inc (formerly, ConnectivCorp) then a publicly traded company with no active operations. Majesco Holding Inc. was incorporated in 1998 under the laws of the State of Delaware. As a result of the merger, Majesco Sales Inc. became a wholly-owned subsidiary and the sole operating business of the public company. On April 4, 2005, Majesco Sales Inc. was merged into Majesco Holdings Inc., and in connection with the merger Majesco Holdings Inc. changed its name to Majesco Entertainment Company. 

Throughout most of our history we focused on value-priced games. During 2004 and 2005 we began to grow our presence in the premium console games market. Premium console products generally require larger budgets for development and marketing and required higher unit sales to

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generate a profit. Sales volumes achieved on several of our premium games introduced during this period were not significant enough to recover development, royalty and marketing costs required to publish the games.

During the second half of fiscal 2005, we had several major developments that ultimately led us to revise our business model and shift our product strategy away from capital intensive premium console games to a focus on lower-cost games for both console and handheld systems. We also either sold the rights to, or cancelled several premium games in development in connection with this change in strategy. We believe this strategy will allow us to capitalize on our strengths and expertise while reducing some of the cost and risk associated with publishing a large number of premium console titles. We continue to publish titles for popular handheld systems such as the GBA, DS and PSP. We also intend to publish software for Nintendo’s Wii console (released in November 2006) as we believe this platform allows us to develop games within our cost parameters, while enabling us to reach the ‘‘mass market’’ consumer. In addition, we will continue to opportunistically look for titles to publish on the PC and other home console systems.

We also expanded distribution through our European subsidiary in fiscal 2006. In prior years sales were not significant in Europe. Net sales in Europe were $9.9 million or 14.8% of net sales for the year ended October 31, 2006.

We incurred a net loss of $5.4 million in 2006 and a net loss of $72 million in 2005. Historically, we have funded our operating losses through sales of our equity and use of our purchase order financing and factor arrangements. While our current plan is to fund our operations through product sales in 2007, we may be required to modify that plan, or seek outside sources of financing if our operating and sales targets are not met. There can be no assurance that such funds will be available on acceptable terms, if at all. While management has already significantly reduced expenditure levels, in the event that we are unable to negotiate alternative financing, or negotiate terms that are acceptable to us, we may be forced to further materially modify our business plan, including making further reductions in expenditures. Management believes it can operate under the existing level of financing for at least one year. However, if the current level of financing was reduced and the company was unable to obtain alternative financing, it could create a material adverse change in the business.

Net Revenues.    Our revenues are derived from the following types of offerings:

•

Games.    Our video games consist of ‘‘premium’’ titles and ‘‘value’’ titles for console and handheld video game systems. Premium titles are higher-priced video games that typically involve greater development and marketing costs. We work with third-party development studios to develop our own proprietary titles and we also license rights to well-known properties from third parties. Value titles are typically sold at suggested retail prices below $20 and typically involve comparatively lower development and marketing costs than our premium titles; and

•

Other digital entertainment products.    Our GBA Video titles utilize compression technology that enables users to view up to 90 minutes of color video content with stereo audio on their GBA or DS, using a standard GBA cartridge and with no additional hardware required. We enter into licensing agreements with entertainment industry leaders for GBA Video content. In addition, we develop, manufacture and market a variety of digital media peripherals and applications including a stand-alone TV Arcade ‘‘plug-and-play’’ video game system which consists of a firmware-enabled joystick that connects directly to a user’s television and plays pre-installed video games without the need for a dedicated console.

Our revenues are recognized net of reserves for price protection and other allowances. See ‘‘Critical Accounting Policies’’ below.

Cost of Sales.    Cost of sales consists of product costs and amortization of software development costs and license fees. A significant component of our cost of sales is product costs. These are comprised primarily of manufacturing and packaging costs of the disc or cartridge media, royalties to

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the platform manufacturer and manufacturing and packaging costs of peripherals. Commencing upon the related product’s release, capitalized software development and intellectual property license costs are amortized to cost of sales.

Gross Profit.    Gross Profit is the excess of net revenues over product costs and amortization of software development and license fees. Our gross profit is directly affected by the mix of revenues from our premium and value titles. The excess of net revenues over product costs has the potential to be substantially higher from publishing premium titles given the relatively similar manufacturing costs and higher sales prices. However, development and license fees incurred to produce premium games are generally incurred up front and amortized to cost of sales. The recovery of these costs and total gross profit is dependent upon achieving a certain sales volume, which varies by title. Our value titles are generally characterized as having lower gross profit margin potential than premium titles as a result of their lower sales price, and lower financial risk associated with the recovery of upfront development and license fees associated with premium game titles.

Product Research and Development Expenses.    Product research and development expenses relate principally to our cost of supervision of the third-party developers of our video games and other products, testing new products and conducting quality evaluations during the development cycle. Costs incurred are employee-related, may include equipment and are not allocated to cost of sales. Although there can be no assurance, we anticipate that, with our focus now on low-cost handheld game and value products, expenditures for product research and development will decrease as a percentage of net sales from historical levels.

Selling and Marketing Expenses.    Selling and marketing expenses consist of marketing and promotion expenses, the cost of shipping products to customers and related employee costs. A large component of this expense relates to marketing and promotion expenses, which includes certain customer marketing allowances. We anticipate that our focus now on low-cost handheld games and value products will result in decreased sales and marketing expense as a percentage of net sales from historical levels.

General and Administrative Expenses.    General and administrative expenses primarily represent employee related costs, including corporate executive and support staff, general office expenses, professional fees and various other overhead charges. Professional fees, including legal and accounting expenses, typically represent the second largest component of our general and administrative expenses. These fees are partially attributable to our required activities as a publicly traded company, such as SEC filings. We expect to continue to incur increased costs related to the currently pending shareholder lawsuits, as well as for consultants in connection with our required compliance with recently enacted regulations regarding corporate governance and accounting. Under our revised business plan we expect a decrease in certain general and administrative expenses as a result of decreased headcount and related expenses.

Interest and Financing Costs.    Interest and financing costs are directly attributable to our factoring and our inventory financing arrangements.

(Benefit) Provision for Income Taxes.    For the year ended 2005, we incurred a loss and recognized the availability for income tax purposes of a carryback of such losses to the prior year. Utilization of our net operating loss carryforwards may be subject to a substantial annual limitation due to the ‘‘change in ownership’’ provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss carryforwards before utilization. Since the Company has a history of losses, a full valuation allowance has been established under the provisions of SFAS No. 109 and the company intends to maintain a valuation allowance for its net operating loss carryforwards until sufficient positive evidence exists to support its reversal.

Critical Accounting Policies

Our discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

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The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results could differ materially from these estimates under different assumptions or conditions.

We have identified the policies below as critical to our business operations and the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management’s discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results.

Revenue Recognition.    The Company recognizes revenue upon shipment of its product when title and risk of loss are transferred, and persuasive evidence of an arrangement exists. In order to recognize revenue, the Company must not have any continuing obligations and it must also be probable that the Company will collect the accounts receivable. Revenues, including sales to resellers and distributors, are recognized when these conditions are met.

For those agreements, which provide customers with the right to multiple copies in exchange for guaranteed minimum royalty amounts, revenue is recognized at delivery of the product master or the first copy since the Company has no continuing obligations including requirements for duplication. Royalties on sales that exceed the guaranteed minimum are recognized as earned.

The Company generally sells its products on a no-return basis, although in certain instances, the Company may provide price protection or other allowances on certain unsold products. Price protection, when granted and applicable, allows customers a partial credit against amounts they owe the Company with respect to merchandise unsold by them. Revenue is recognized net of estimates of these allowances.

Inventory.    Inventory, which consists primarily of finished goods, is stated at the lower of cost as determined by the first-in, first-out method, or market. The Company estimates the net realizable value of slow-moving inventory on a title-by-title basis and charges the excess of cost over net realizable value to cost of sales.

Reserves for Price Protection and Other Allowances.    We derive revenue from the sale of packaged video game software designed for play on consoles such as PlayStation 2, Xbox and GameCube, and hand-held game devices, including the GBA, DS and PSP. We generally sell our products on a no-return basis, although in certain instances, we may provide price protection or other allowances on certain unsold products in accordance with industry practices. Price protection, when granted and applicable, allows customers a partial credit with respect to merchandise unsold by them. Revenue is recognized net of estimates of these allowances. Sales incentives and other consideration that represent costs incurred by us for assets or services received, such as the appearance of our products in a customer’s national circular advertisement, are reflected as selling and marketing expenses. We estimate potential future product price protection and other discounts related to current period product revenue. Generally price protection for premium-priced titles is higher than that needed for our value titles. Our reserves for price protection and other allowances fluctuate over periods as a result of a number of factors including analysis of historical experience, current sell-through of retailer inventory of our products, current trends in the interactive entertainment market, the overall economy, changes in customer demand and acceptance of our products and other related factors. However, actual allowances granted could materially exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. For example, the risk of requests for allowances may increase as consoles pass the midpoint of their lifecycle and an increasing number of competitive products heighten pricing and competitive pressures. While management believes it can make reliable estimates regarding these matters, these

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estimates are inherently subjective. Accordingly, if our estimates change, this will result in a change in our reserves, which would impact the net revenues and/or selling and marketing expenses we report. For the year ended October 31, 2006, 2005 and 2004, we provided allowances for future price protection and other allowances of $3.8 million, $15.1 million and $6.7 million respectively. The fluctuations in the provisions reflected our estimates of future price protection based on the factors discussed above. We do not have significant exposure to credit risk as the factor generally buys our receivables without recourse; however, for the year ended October 31, 2005, we recorded charges for an accounts receivable write-off of $322,000 as a result of a customer bankruptcy.

Software development costs and prepaid license fees.    Software development costs include development fees, most often in the form of milestone payments made to independent software developers for development services. Software development costs are capitalized once technological feasibility of a product is established and it is determined that such costs should be recoverable against future revenues. For products where proven game engine technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Amounts related to software development that are not capitalized are charged immediately to product research and development costs. Prepaid license fees represent license fees to holders for the use of their intellectual property rights in the development of our products. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid license fees) and a current liability (accrued royalties payable) at the contractual amount upon execution of the contract when no significant performance remains with the licensor. Capitalized software development costs classified as non-current relate to titles for which we estimate the release date to be more than one year from the balance sheet date.

Commencing upon a related product’s release, capitalized software development costs and prepaid license fees are amortized to cost of sales based upon the higher of (i) the ratio of current revenue to total projected revenue or (ii) the straight-line method. The amortization period is usually no longer than one year from the initial release of the product. The recoverability of capitalized software development costs and prepaid license fees is evaluated based on the expected performance of the specific products to which the costs relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology; orders for the product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based. As of October 31, 2006 and 2005, we charged operations $2.4 million and $26.3 million, respectively, to write-off all capitalized costs related to video games and intellectual property rights for which development was stopped. We also charged $10.5 million to cost of sales, in 2005, to recognize impairments in the carrying value for games already released by October 31, 2005.

Accounting for Stock-Based Compensation.    In December 2004, the FASB issued SFAS No. 123 (revised 2004), ‘‘Share Based Payment’’ (‘‘SFAS 123(R)’’). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. We adopted SFAS 123(R) on November 1, 2005. SFAS 123(R) permits public companies to adopt its requirements using either the modified prospective or modified retrospective transition method. We have decided to use the modified prospective transition method, which require that compensation cost is recognized for all awards granted, modified or settled after the effective date as well as for all awards granted to employees prior to the effective date that remain unvested as of the effective date.

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Results of Operations

The following table sets forth our results of operations expressed as a percentage of total revenues:

			Year Ended October 31,
			2006						2005						2004
Net revenues					100.0	%					100.0	%					100.0	%
Cost of sales
Product costs					48.4						64.3						55.5
Software development costs and license fees					21.9						38.0						15.8
Gross (loss) profit					29.7						(2.3	)					28.7
Operating expenses
Product research and development					3.9						5.7						2.5
Selling and marketing					16.4						40.5						11.3
General and administrative					16.9						18.3						5.0
Depreciation and amortization					0.6						1.5						0.4
Loss on impairments and other expenses (income)					(3.6	)					49.2						(0.5	)
Operating (loss) income					(4.5	)					(117.5	)					10.0
Interest and financing costs and other non-operating expenses					3.6						3.2						18.1
Loss before income taxes					(8.0	)					(120.7	)					(8.1	)
(Benefit) provision for income taxes					—						(2.0	)					1.1
Net loss					(8.0	)%					(118.7	)%					(9.2	)%

Year ended October 31, 2006 versus year ended October 31, 2005

Net Revenues.    Net revenues for the year ended October 31, 2006 increased to $66.7 million from $59.7 million in the comparable period last year. The $7.0 million increase is primarily due to increased international sales and a lower provision for price protection and other allowances on domestic sales. The lower provision for price protection and other allowances is the result of a higher sell-through percentage at retailers for titles released during the year ended October 31, 2006. This is reflective of our change in strategy of selling fewer premium games.

Gross (Loss) Profit.    Gross profit for the year ended October 31, 2006 was $19.8 million compared to a gross loss of ($1.4) million in the prior year. The increase of $21.2 million is primarily due to a $10.5 million charge to cost of sales during the year ended October 31, 2005 to recognize impairments in the carrying value of games for which orders received were significantly below expectations, a decrease in provisions for price protection and other allowances, and increased sales in Europe. Gross profit as a percentage of net sales increased to 30% compared to (2%) in the prior year.

Product Research and Development Expenses.    For the year ended October 31, 2006 product research and development costs decreased $0.8 million to $2.6 million from $3.4 million in the comparable period in 2005. The decrease is principally attributable to a lower number of quality assurance employees as a result of the fewer number of premium game projects currently in the development cycle.

Selling and Marketing Expenses.    For the year ended October 31, 2006 total selling and marketing expenses were $10.9 million, a $13.3 million decrease from $24.2 million for the comparable period last year. The decrease is primarily the result of higher media costs related to premium games launched in the year ended October 31, 2005. During 2006, we changed our strategy to focus on value titles which typically require lower expenditures for advertising and marketing than premium titles. Sales, selling and marketing as a percentage of net sales decreased to 16% from 41% in the same period in the prior year. We expect selling and marketing to decline as a percentage of net sales as value games require less marketing than premium console games.

General and Administrative Expenses.    For the year ended October 31, 2006 general and administrative expenses increased to $11.3. million from $10.9 million during the comparable period in

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2005. The $0.4 million increase is primarily due to higher non cash compensation costs, partially offset by lower franchise taxes resulting from a lower asset base used to calculate the taxes. For the year ended October 31, 2006 we recorded $1.8 million of stock compensation expense related to the adoption of SFAS 123 (R) effective November 1, 2005, and $0.5 million for stock and warrants issued for services. For the year ended October 31, 2005 we recorded a non-cash compensation charge of $1.4 million, primarily related to a below market stock option grant to our former CEO. This option grant was subsequently forfeited as part of his severance agreement. General and administrative expenses for the twelve months ended October 31, 2006 also include approximately $1.0 million of legal settlements and related expenses.

Other Operating Expenses.    During the year ended October 31, 2006 we recorded gains on settlement of liabilities of $4.7 million, consisting of $1.5 million related to negotiated reductions in royalties due for certain video and video game titles, $0.5 million gain on the sale of the rights to certain video game titles and a $2.7 million gain on the settlement of accounts payable for legal, marketing and development expenses for less than the invoiced amounts. In addition, we charged operations $2.4 million to write-off capitalized costs related to games for which development plans were changed such that it is uncertain whether potential value of that development will be realized.

During the year ended October 31, 2005 we recorded a provision for a loss of $1.4 million in connection with a proposed settlement with one of our distributors. We do not have significant exposure to credit risk as our factor generally buys our receivables without recourse; however, during the year ended October 31, 2005, we recorded an accounts receivable write-off of $0.3 million related to customer bankruptcies. In addition, during the year ended October 31, 2005 we recorded $1.4 million of expense related to severance agreements and we charged operations $26.3 million to write-off all capitalized costs related to the development of video games that we had determined would not be commercially viable and for which development was stopped.

Operating Loss.    For the year ended October 31, 2006 we generated an operating loss of $3.0 million, compared to an operating loss of $70.2 million during the same period in 2005. The decrease in operating loss was primarily due to higher gross profit and lower selling and marketing expenses related to our shift in product strategy, a decrease in impairment of software development costs, and gains on settlement of liabilities.

Interest and Financing Costs, net.    For the year ended October 31, 2006 interest and financing costs increased approximately $0.5 million to $2.4 million from $1.9 million in the same period in 2005. The increase is primarily attributable to an increase in the use of purchase order financing to purchase inventory and an increase in borrowing rates.

Loss on Foreign Exchange Contract.    During the year ended October 31, 2005 we recorded a loss of $48,000 related to a foreign exchange contract. There were no comparable amounts recorded in the 2006 period.

Income Taxes.    As a result of the availability of loss carryforwards, we have not recorded any provisions for federal or state income taxes in the current period. Federal and state income taxes were provided for at a combined effective rate of 40% in the 2005 period. We recorded a tax benefit of $1.2 million for the year ended October 31, 2005, net of a full valuation allowance against net deferred tax assets recorded in prior periods.

Net Loss.    For the year ended October 31, 2006, we generated a net loss of $5.4 million compared to a net loss of $70.9 million in the same period in 2005. Included in the loss for 2005 is a $1.1 million charge related to the fair value of warrants exercised at a discount.

Year ended October 31, 2005 versus year ended October 31, 2004

Net revenues.    Net revenues for the year ended October 31, 2005 decreased to $59.7 million from $121.0 million in the comparable period last year. The decrease is reflective of weak sales across all our product lines as compared to the strong sales associated with the introduction of GBA Video product in the prior year. The decrease is also attributable to provisions for price protection and other allowances as well as changes in market conditions and soft demand for our products.

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Cost of Sales.    Cost of sales decreased 29% to $61.1 million for 2005 from $86.2 million in the comparable period. Product costs in 2005 decreased due to lower sales, however included therein are $5.1 million of provisions for inventory reserves for slow moving products. The increase in the amortization of capitalized software costs and pre-paid license fees in 2005 reflects provisions for impairment of $10.5 million for released titles.

Gross (loss) profit.    Gross loss for the year ended October 31, 2005 was $1.4 million as compared to a gross profit of $34.7 million in 2004. The 2005 gross loss is a result of weak sales across all product lines, increased provisions for price protection and the aforementioned impairment reserves for inventory and capitalized costs related to products released.

Product research and development expenses.    For 2005, product research and development expenses increased 13% to $3.4 million from $3.0 million for the prior year. As a percentage of net revenue, product research and development expenses increased to 6% in 2005 from 3% in 2004. The increase in expense over the prior year is principally attributed to employee-related costs which include an increase in the number of quality control staff to support the higher number of products in development during the year.

Selling and marketing expenses.    For the twelve months ended October 31, 2005, selling and marketing expenses increased 76.8% to $24.2 million from $13.7 million for the prior year. Our marketing expenditures grew as a result of an increase in media campaigns and promotions to support the launch of our premium game products. As a percentage of net revenue, selling and marketing expenses increased to 40% in 2005 from 11% in 2004, due to the combined effect of increased spending and lower net revenue in 2005.

General and administrative expenses.    For 2005 general and administrative expenses increased 76% to $10.9 million from $6.2 million for the same period in the prior year. As a percentage of net revenue, general and administrative expenses increased to 18% for 2005 from 5% for 2004. The increase is attributable to additional employee related costs, professional fees, insurance and other costs incurred as a result of being a public company, including compliance costs associated with the Sarbanes Oxley Act and costs for litigation and claims including costs related to the class action lawsuit. During the year ended October 31, 2005 we recorded non-cash compensation charges of $1.4 million and $342,000, respectively, primarily related to a below market stock option grant to our former CEO. The options were forfeited in connection with his severance arrangement.

Depreciation and amortization expenses.    For 2005 depreciation and amortization expenses increased to $893,000 compared to $439,000 for the prior year and related primarily to office equipment purchases, tooling costs and the amortization of a non-compete agreement.

Loss on impairment and other operating expenses (income).    For the quarter ended October 31, 2005, we recorded a charge of $26.3 million to write-off all capitalized costs related to video games for which development was stopped or impaired. During 2005, we recorded a provision for a loss of $1.4 million in connection with a settlement with one of our distributors and in comparable prior year periods we recorded a gain of $1.2 million on the renegotiation of litigation settlement. During 2005 and 2004, we recorded charges of accounts receivable write-offs of $322,000 and $577,000, respectively, related to customer bankruptcies. In addition, during 2005 we recorded $1.4 million of expense related to severance agreements.

Operating (loss) income.    For 2005, the operating loss was $70.2 million versus operating income of $12.1 million in the prior year. The decrease in operating income was principally due to lower sales volumes, increased allowances for price protection and higher marketing costs related to our premium game releases which were not recovered as a result of weaker than planned sales of those products. In addition, as result our shift in strategy, we evaluated our existing portfolio of premium titles in development and determined to sell certain rights or cancel a number of these titles and consequently recorded impairments of $26.3 million.

Interest and financing costs, net.    For 2005, interest and financing costs decreased to $1.8 million from $2.8 million for the prior year. This resulted from the decrease in advances from the factor during the year due to the availability of funds as a result of the secondary offering and warrants exercised in January and February 2005.

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Other non-operating expenses.    During the year ended October 31, 2005, we recorded a realized loss on foreign exchange of $48,000 compared to unrealized loss of $267,000 for 2004. Additionally, for 2004 we recorded a non-cash charge of $18.5 million to reflect the change in fair value of warrants and merger costs of $342,000.

Income taxes.    As a result of the year of our loss for the year, we have recorded a tax benefit of $1.2 million compared to a provision of $1.4 million in 2004. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ‘‘change in ownership’’ provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss before utilization.

Net loss.    For the year ended October 31, 2005, we generated a net loss of $ 70.9 million versus a net loss of $11.2 million in 2004. The increase in net loss is attributable to weak sales across all of our product lines, primarily our premium game releases, which resulted in significant reserves relating to capitalized costs, increased provisions in price protection and other allowances. The net loss attributable to common stockholders for 2005 of $72.0 million includes a $1.1 million charge related to warrants exercised at a reduced price as compared to a net loss attributable to common stockholders for 2004 of $15.4 million.

Liquidity and Capital Resources

We incurred a net loss of $5.4 million in 2006 and a net loss of $70.9 million in 2005. Historically, we have funded our operating losses through sales of our equity and use of our purchase order financing and factor arrangements. In addition, as a result of a series of transactions during fiscal 2004 and 2005 related to, a private placement and secondary public offering, in which we sold equity securities including issuances upon the exercise of warrants, we received net proceeds of approximately $81.6 million. These proceeds were used to fund the 2005 operating loss, to fund the development of video games and the acquisition of intellectual property rights, to reduce indebtedness, and to satisfy certain settlements.

While our current plan is to fund our operations through product sales in 2007, we may be required to modify that plan, or seek outside sources of financing if our operating and sales targets are not met. There can be no assurance that such funds will be available on acceptable terms, if at all. While management has already significantly reduced expenditure levels, in the event that we are unable to negotiate alternative financing, or negotiate terms that are acceptable to us, we may be forced to further materially modify our business plan, including making further reductions in expenditures. Management believes it can operate under the existing level of financing for at least one year. However, if the current level of financing was reduced and the company was unable to obtain alternative financing, it could create a material adverse change in the business.

During the second half of fiscal 2005, we had several major developments that ultimately led us to revise our business model and shift our product strategy away from capital intensive premium console games to a focus on value products and lower-cost games for handheld systems. In conjunction with our shift in strategy, we evaluated our existing portfolio of premium console titles in development and decided to sell our rights or cancel a number of these titles. While this resulted in decreased revenues from premium game titles, these actions improved the financial position of the company by significantly reducing our future obligations and in some instances generating cash.

Going forward, we will continue to publish titles for popular handheld systems such as the GBA, DS and PSP, as well as look for opportunistic titles that fit our business model for home consoles such as the Wii and personal computers. In addition, we will look to offer a greater number of value titles and try to capitalize on our history and expertise in this market. We believe that a decreased emphasis on premium console titles, along with a renewed focus on value and handheld titles, will allow us to capitalize on our strengths and expertise. Although there can be no assurance, we expect this model will lessen the level of required working capital to support the plan.

While our cash and cash equivalents balance was $3.8 million as of October 31, 2006, we expect continued volatility in the use and availability of cash due to the seasonality of our business, timing of

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receivables collections and working capital needs necessary to finance our business and growth objectives. To satisfy our liquidity needs, we factor our receivables. We also utilize purchase order financing through the factor and through a finance company to provide funding for the manufacture of our products. In connection with these arrangements, the finance company and the factor have a security interest in substantially all of our assets.

In October 2005, our factor agreed to provide availability of up to $16 million in cash advances including $10 million for letters of credit and the factor also waived our covenant requirements. The factor, in his sole discretion, can reduce the availability of financing at anytime. In addition we have $10 million of availability for letters of credit and purchase order financing with another lender.

Factoring and Purchase Order Financing.    As mentioned above, to provide liquidity, we take advances from our factor and utilized purchase order financing to fund the manufacturing of our products.

Under the terms of our factoring agreement, we assign our accounts receivable to the factor. The factor, in its sole discretion, determines whether or not it will accept a receivable based on its assessment of its credit risk. Once a receivable is accepted by the factor, the factor assumes substantially all of the credit risk associated with the receivable. The factor is required to remit payments to us for the assigned accounts receivable in accordance with the terms of the assigned invoice, regardless of whether the factor receives payment on the receivable, so long as the customer does not have a valid dispute related to the invoice. The amount remitted to us by the factor equals the invoiced amount adjusted for allowances and discounts we have provided to the customer less factor charges of 0.5% of invoiced amounts for these credit and collection services.

We utilize purchase order financing arrangements in order to enable us to provide letters of credit necessary for the manufacture of our products. Manufacturers require us to present a letter of credit in order to manufacture the products required under a purchase order. Currently, we utilize letters of credit from a finance company which charges 3.3% of the purchase order amount for each transaction for 60 days. Our factor also provides purchase order financing at a cost of 0.5% of the purchase order amount for each transaction for 30 days. Additional charges are incurred if letters of credit remain outstanding in excess of the original time period and/or the financing company is not paid at the time the products are received.

In addition, we may request that the factor provide us with cash advances based on our accounts receivable and inventory. The factor may either accept or reject our request for advances at its discretion. Amounts to be paid to us by the factor for any assigned receivable are offset by any amounts previously advanced by the factor. As our needs require, we may request that the factor advance 70% of the eligible receivables and advance 50% of inventory up to a maximum of $1.5 million. The interest rate is prime plus 1.5% on 50% of advances and the rate on the balance is the greater of (i) 18% per annum, or (ii) the lesser of (a) the prime rate plus 11.25% per annum or (b) 20% per annum.

Advances From Customers.    On a case by case basis, distributors and other customers have agreed to provide us with cash advances on their orders. These advances are then applied against future sales to these customers. In exchange for these advances, we offer these customers beneficial pricing or other considerations.

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Commitments and Contingencies.    The following table summarizes our minimum guarantees and other contractual obligations as of October 31, 2006:

			Payments due by period
			Total of payments						Less than one year						1 – 3 Years
			(in thousands)
Contractual Obligations
Operating leases				$	1,161					$	453					$	708
Software development (1)					1,035						1,035						—
					2,196						1,488						708
Commercial Obligations
Letters of credit (2)					4,990						4,990
Total Obligations				$	7,186					$	6,478					$	708

(1)	Payable only upon achievement of milestones.

(2)	Arising under purchase order assignments for inventory purchases.

On November 16, 2005 Papaya Studio Corporation instituted legal proceedings against the Company for $1.9 million in the Central District Court of California alleging breach of contract. On January 29, 2007, we entered into a settlement agreement with regard to all claims relating to this litigation. Under the terms of the settlement agreement, we agreed to pay Papaya a total of $200,000 cash in installments over a period of 90 days. In addition, as part of the settlement, and in connection with Lin Shen, Papaya’s President becoming a consultant to the Company, we will grant Ms. Shen shares of our common stock worth $365,000, with the value of each share to be based on the average closing price of our common stock for the four weeks prior to the settlement date. In addition, to the extent Ms. Shen does not obtain proceeds of $365,000 from sales of these shares over a period of 10-12 months, subject to certain trading limitations, we will pay Ms. Shen in cash the difference between the proceeds received from sales of the shares and $365,000. In addition, as part of the settlement, we transferred to Papaya ownership of any video game assets developed by Papaya under the contract that was the subject of this litigation.

In July 2005, four purported class action complaints were filed against the Company and several current and former directors and officers of the Company in the United States District Court for the District of New Jersey. On September 12, 2005, a fifth purported class action complaint was filed in the same court on behalf of a class of individuals who purchased shares of our common stock in the Company’s January 26, 2005 offering of six million shares of common stock.

On October 11, 2005, the Court consolidated the five cases and appointed a Lead Plaintiff. On December 14, 2005, Lead Plaintiff filed an Amended Consolidated Complaint, which is now the operative Complaint. The Complaint names as defendants the Company, Carl Yankowski, Jan E. Chason, Jesse Sutton, Joseph Sutton, Morris Sutton, Laurence Aronson, F. Peter Cuneo, James Halpin, Louis Lipschitz, Marc Weisman, the financial institutions that served as the underwriters of the Offering (RBC Capital Markets Corporation, JMP Securities LLC, Harris Nesbitt & Corp., and Wedbush Morgan Securities Inc.), and the Company’s auditor, Goldstein Golub Kessler LLP.

The Complaint alleges that the Registration Statement and Prospectus filed with the SEC in connection with the Company’s Offering and certain of the Company’s press releases and other public filings contained material misstatements and omissions about the Company’s financial condition and prospects as well as its products. Lead Plaintiff asserts a claim under Section 11 of the Securities Act against all the defendants on behalf of investors who purchased in the Offering. It asserts a Section 12(a)(2) claim against Majesco and the financial institutions who served as underwriters in connection with the Offering, and a Section 15 control person claim against defendants Carl Yankowski, Jan Chason, Jesse Sutton, Joseph Sutton, and Morris Sutton. Lead Plaintiff also asserts a claim under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against defendants the Company, Carl Yankowski, Jan Chason, Jesse Sutton, Joseph Sutton, and Morris

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Sutton and a claim under Section 20(a) of the Exchange Act against defendants Carl Yankowski, Jan Chason, Jesse Sutton, Joseph Sutton and Morris Sutton. The Complaint seeks damages in an unspecified amount. The proposed class period for the Exchange Act claims is December 8, 2004 through September 12, 2005.

On October 10, 2006, Trinad Capital Master Fund, Ltd., a shareholder of our common stock, filed a complaint against the Company and several current and former directors and officers of the Company in the United States District Court for the District of New Jersey. The current or former officers and directors named as defendants in the complaint are Morris Sutton, Jesse Sutton, Joseph Sutton and Carl Yankowski. The Complaint also named the Company’s outside auditors, Goldstein Golub Kessler LLP, as a defendant. Goldstein Golub Kessler LLP has since been voluntarily dismissed without prejudice. The allegations in the Complaint are similar to those in the Amended Consolidated Complaint filed in the In re: Majesco Securities Litigation putative class action discussed above. The Complaint alleges three causes of action: (1) a claim under Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder) against all the named defendants; (2) a claim under Section 20(a) of the Exchange Act against Morris Sutton, Jesse Sutton and Joseph Sutton; and (3) a common law fraud claim against Morris Sutton, Jesse Sutton, Joseph Sutton and Carl Yankowski. Trinad seeks compensatory damages of no less than $10 million. This amount is sought with respect to each claim. In connection with the fraud claim, Trinad also seeks $10 million in punitive damages.

On November 2, 2006, Trinad Capital Master Fund, Ltd., filed a complaint, purportedly on behalf of the Company, against certain current or former directors of the Company in the United States District Court for the District of New Jersey. The individuals named as defendants in the complaint are Morris Sutton, Jesse Sutton, Joseph Sutton, Louis Lipschitz and Laurence Aronson. The complaint also names the Company as a nominal defendant. The complaint alleges that, from late 2004 through the filing date, defendants breached their fiduciary duties which caused damage to the Company. The complaint does not specify the amount of damages sought. A response to the Complaint is due on January 31, 2007.

Cash Flows

Cash and cash equivalents were $3.8 million as of October 31, 2006 compared to $2.4 million at October 31, 2005. Working capital as of October 31, 2006 was $1.0 million compared to $3.8 million at October 31, 2005.

Operating Cash Flows.    Our principal operating source of cash is from the sales of our interactive entertainment products.  Our principal operating uses of cash are for payments associated with third-party developers of our software, costs incurred to manufacture, sell and market our video games and general and administrative expenses. For the year ended October 31, 2006 we generated approximately $0.2 million from operations. The increase in cash provided by operating activities reflects our change in strategy to video games with lower upfront development and license acquisition costs. Included in cash from operations is approximately $9.1 million from the sale of the rights to certain video game titles which were in development.

For the year ended October 31, 2005, we used cash of $55.0 million in operating activities principally to fund the loss of $17.9 million, excluding non cash items of $53.0 million and the acquisition of capitalized software and intellectual property rights of $52.9 million. Cash from operations was principally provided by the net reduction in due from factor of $15.8 million, and as a result of availability of excess cash from the secondary offering and lower sales volume in the second half of fiscal 2005, both of which reduced our need to borrow from the factor.

For the year ended October 31, 2004, we used $18.9 million of cash in operating activities. Our net loss attributable to common stockholders of $15.4 million was principally attributable to the $18.5 million charge for the change in fair value of the warrants less a gain of $1.2 million from the renegotiation of a litigation settlement, which were both non-cash items. Our cash usage was attributable to (i) the increase in due from factor of $9.5 million reflecting higher receivables from customers net of advances from the factor, (ii) an increase in inventory of $1.8 million, (iii) a decrease in advances from customers for prepayments of $9.5 million as a result of our fulfillment of their

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related orders in the first quarter, (iv) increased expenditures for capitalized software development and prepaid license costs of $30.8 million for video games in development net of amortization of $19.1 million, as well as royalty advances to content providers for GBA Video, net of amounts expensed during the period and (v) payments of $5.5 million related to a settlement obligation. This was partially offset by increases in cash attributable to an increase in accounts payable and accrued expenses of $11.8 million, reflecting the significant increased level of operations in the fiscal 2004 fourth quarter.

Investing Cash Flows.    Cash used in investing activities for the year ended October 31, 2006, 2005 and 2004 are primarily related to purchases of computer equipment and leasehold improvements of $0.2, $0.5, and $0.3 million, respectively.

Financing Cash Flows.    Net cash generated by financing activities for the year ended October 31, 2006 was $1.4 million and consisted of proceeds from purchase order financing.

Net cash generated from financing activities for the year ended October 31, 2005 was $53.7 million which consisted of: (i) net proceeds of $41.9 million from the sale of stock in our secondary public offering; (ii) net proceeds from the exercise of stockholder and placement agent warrants, issued in the February 2004 private placement of $12.1 million; and (iii) net proceeds of $6.5 million from the exercise of warrants at reduced exercise price. Financing cash was used to repay $6.7 million of inventory financing.

Net cash generated from financing activities for the year ended October 31, 2004 was $23.1 million. The increase is attributed to the $21.2 million in net proceeds from the February 2004 private placement, $3.7 million in additional inventory financing and a loan from a related party of $1 million, which were partially offset by the repayment of $2.8 in loans from stockholders and an officer.

Item 7a.    Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to various market risks, including the changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from changes in market rates and prices. Foreign exchange contracts used to hedge foreign currency exposure are subject to market risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes. For the year ended October 31, 2005 we recorded a $48,000 loss related to a foreign currency forward exchange contract which expired on March 31, 2005.

Item 8.    Financial Statements and Supplementary Data.

The financial statements required by this item are submitted in a separate section beginning on Page F-1 of this report.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9a.    Controls and Procedures.

Our management, with the participation of our Interim chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

No system of controls can prevent errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are

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resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur. Controls can also be circumvented by individual acts of some people, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Subject to the limitations above, management believes that the consolidated financial statements and other financial information contained in this report, fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented.

Based on the evaluation of the effectiveness of our disclosure controls and procedures, our Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective at a reasonable assurance level. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

Item 9b.    Other Information.

Not applicable

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PART III

The information required by Part III of Form 10-K under

	•	Item 10 – Directors and Executive Officers of the Registrant

	•	Item 11 – Executive Compensation

	•	Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

	•	Item 13 – Certain Relationships and Related Transactions

	•	Item 14 – Principal Accountant Fees and Services

is incorporated by reference from our definitive proxy statement relating to the 2007 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our October 31, 2006 fiscal year end.

PART IV

Item 15.    Exhibits and Financial Statement Schedules.

(a)    (1)    Financial Statements.

The financial statements required by this item are submitted in a separate section beginning on Page F-1 of this report.

(2)    Financial Statement Schedules.

Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto.

(3)    Exhibits.

The following exhibits are filed with this report, or incorporated by reference as noted.

2.1			Agreement and Plan of Merger, dated as of November 10, 2003, by and among ConnectivCorp, CTTV Merger Corp. and Majesco Sales Inc. (incorporated by reference to Exhibit 2.1 to an Amendment to our Current Report on Form 8-K filed on December 22, 2003).
2.2			Amendment to Agreement and Plan of Merger, dated December 3, 2003, by and among ConnectivCorp, CTTV Merger Corp. and Majesco Sales Inc. (incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K filed on December 22, 2003).
3.1			Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
3.2			Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June 17, 2005).
4.1			Certificate of Designations, Preferences and Rights of 7% Cumulative Convertible Preferred Stock, filed with the Secretary of State of the State of Delaware on February 20, 2004 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on March 1, 2004).
4.2			Form of investor Subscription Agreement (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on March 1, 2004).
4.3			Form of warrant issued to investors (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed on March 1, 2004).

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4.4			Form of placement agent warrant (incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K filed on March 1, 2004).
10.1			Lease Agreement, dated as of February 2, 1999, by and between 160 Raritan Center Parkway, L.L.C. and Majesco Sales Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 11, 2004).
10.2			Xbox Publisher License Agreement, dated January 31, 2001, by and between Microsoft Corporation and Majesco Sales Inc. (incorporated by reference to Exhibit 10.3 to an Amendment to our Current Report on Form 8-K filed on October 22, 2004).
10.3			Amendment to the Xbox Publisher Licensing Agreement, dated April 4, 2002, by and between Microsoft Corporation and Majesco Sales Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on September 3, 2004).
10.4			Amendment to the Xbox Publisher Licensing Agreement (Xbox Live Distribution) dated March 17, 2003, by and between Microsoft Corporation and Majesco Sales Inc. (incorporated by reference to Exhibit 10.4 to an Amendment to our Current Report on Form 8-K filed on October 22, 2004).
10.5			Amendment to the Xbox Publisher License Agreement (Tiered Royalty Rate Structure and Xbox Platinum Hits Program), dated January 31, 2003, by and between Microsoft Corporation and Majesco Sales Inc. (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on September 3, 2004).
10.6			PlayStation 2 Licensed Publisher Agreement, dated April 1, 2000, by and between Sony Computer Entertainment America, Inc. and Majesco Sales Inc. (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on September 3, 2004).
10.7			License Agreement for Game Boy Advance (Western Hemisphere), dated May 10, 2001, by and between Nintendo of America, Inc. and Majesco Sales Inc. (incorporated by reference to Exhibit 10.1 to an Amendment to our Current Report on Form 8-K filed on October 22, 2004).
10.8			License Agreement for GameCube, (Western Hemisphere), dated January 11, 2001, by and between Nintendo of America, Inc. and Majesco Sales Inc. (incorporated by reference to Exhibit 10.2 to an Amendment to our Current Report on Form 8-K filed on October 22, 2004).
10.9			Escrow Agreement, dated February 19, 2004, by and among Majesco Holdings Inc., Jesse Sutton, Joseph Sutton, Adam Sutton, Morris Sutton, on behalf of Sarah Sutton and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 10.17 to an Amendment to our Registration Statement on Form S-1 filed on October 19, 2004).
10.10			Employment Agreement, dated August 24, 2004, by and among Majesco Holdings Inc., Majesco Sales Inc. and Carl Yankowski (incorporated by reference to Exhibit 10.1 to an Amendment to our Current Report on Form 8-K filed on August 31, 2004).
10.11			Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 22, 2004).
10.12			Amendment to Factoring Agreement, dated March 18, 1999, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 22, 2004).
10.13			Amendment to Factoring Agreement, dated September 30, 2004, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 22, 2004).

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10.14			Assignment of Monies Due Under Factoring Agreement, dated July 21, 2000, by and among Majesco Sales Inc., Rosenthal & Rosenthal, Inc. and Transcap Trade Finance (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 22, 2004).
10.15			Master Purchase Order Assignment Agreement, dated July 21, 2000, between Majesco Sales Inc. and Transcap Trade Finance (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 22, 2004).
10.16			Sixth Amendment to Master Purchase Order Assignment Agreement, dated September 12, 2003, by and between Transcap Trade Finance and Majesco Sales Inc. (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on October 22, 2004).
10.17			Seventh Amendment to Master Purchase Order Assignment Agreement, dated October 16, 2003, by and between Transcap Trade Finance and Majesco Sales Inc. (incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed on October 22, 2004).
10.18			Eighth Amendment to Master Purchase Order Assignment Agreement, dated April 14, 2004, by and between Transcap Trade Finance and Majesco Sales Inc. (incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K filed on October 22, 2004).
10.19			Guaranty and Pledge Agreement, dated July 21, 2000, by and among Jesse Sutton, Joseph Sutton, Morris Sutton, Adam Sutton and Transcap Trade Finance (incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K filed on October 22, 2004).
10.20			Employment Agreement, dated February 2, 2005 by and between Majesco Holdings Inc., Majesco Sales Inc. and Lester E. Greenman (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on March 17, 2005).
10.21			Form of Warrant Exercise Agreement, dated December 17, 2004 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 7, 2005).
10.22			Amended and Restated 2004 Employee, Director and Consultant Incentive Plan (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
10.23			Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
10.24			Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
10.25			Employment Agreement, dated June 27, 2005, by and between Majesco Entertainment Company and John Gross (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on September 14, 2005).
10.26			Severance Agreement, dated July 8, 2005, by Majesco Entertainment Company and Carl Yankowski (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on September 14, 2005).
10.27			Separation Agreement, dated August 2, 2005, by Majesco Entertainment Company and Lester E. Greenman (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on September 14, 2005).
10.28			Revised Director Compensation Policy (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on September 14, 2005).
10.29			Amendment to Factoring Agreement, dated October 18, 2005 (incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K filed on February 1, 2006).

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10.30			Compensation Arrangements with Interim Chief Executive Officer and Chairman (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on June 9, 2006).
*21.1			Subsidiaries.
*23.1			Consent of Goldstein Golub Kessler LLP.
*31.1			Certification of Principal Executive Officer
*31.2			Certification of Principal Financial Officer.
*32.1			Section 1350 Certificate of President and Chief Financial Officer.

*	Filed herewith.

	(b) Exhibits.

	See (a)(3) above.

	(c) Financial Statement Schedules.

	See (a)(2) above.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
By:			/s/ Jesse Sutton
Date: January 29, 2007

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

Signature		Title		Date
/s/ Jesse Sutton		Interim Chief Executive Officer and Director		January 29, 2007
/s/ John Gross		Chief Financial Officer (Principal Financial and Accounting Officer)		January 29, 2007
John Gross
/s/ Laurence Aronson		Director		January 29, 2007
Laurence Aronson
/s/ Louis Lipschitz		Director		January 29, 2007
Louis Lipschitz
/s/ Mark Stewart		Director		January 29, 2007
Mark Stewart
/s/ Stephen Wilson		Director		January 29, 2007
Stephen Wilson

39

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

			Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated balance sheet — October 31, 2006 and 2005			F-3
Consolidated statement of operations — Year ended October 31, 2006, 2005 and 2004			F-4
Consolidated statement of stockholders’ equity — Year ended October 31, 2006, 2005, 2004 and 2003			F-5 – F-6
Consolidated statement of cash flows — Year ended October 31, 2006, 2005 and 2004			F-7
Notes to consolidated financial statements			F-8 – F-25

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Majesco Entertainment Company

We have audited the accompanying consolidated balance sheets of Majesco Entertainment Company and subsidiary as of October 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended October 31, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Majesco Entertainment Company and subsidiary as of October 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2006, in conformity with United States generally accepted accounting principles.

As disclosed in Note 3, the Company changed its method of accounting for stock-based compensation, effective November 1, 2005.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered losses that raise substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

GOLDSTEIN GOLUB KESSLER LLP

New York, New York
January 19, 2007

F-2

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET
(dollars in thousands)

			October 31,
			2006						2005
ASSETS
Current assets:
Cash and cash equivalents				$	3,794					$	2,407
Due from factor					1,189						—
Accounts and other receivables					3,103						622
Income taxes receivable					—						826
Inventory					2,438						8,058
Capitalized software development costs and license fees					1,489						17,278
Prepaid expenses					2,226						508
Total current assets				$	14,239					$	29,699
Property and equipment – net					701						862
Other assets					71						142
Total assets				$	15,011					$	30,703
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses				$	10,911					$	18,494
Due to factor					—						6,964
Inventory financing payables					1,390						—
Advances from customers					961						484
Total current liabilities					13,262						25,942
Stockholders’ equity:
Common stock – $.001 par value; 250,000,000 shares authorized; 23,427,462 and 22,242,476
Issued and outstanding at October 31, 2006 and October 31, 2005 respectively					23						22
Additional paid in capital					94,529						92,158
Accumulated deficit					(92,754	)					(87,388	)
Accumulated other comprehensive loss					(49	)					(31	)
Total stockholders’ equity					1,749						4,761
Total liabilities and stockholders’ equity				$	15,011					$	30,703

See accompanying notes

F-3

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands, except share amounts)

			Year Ended October 31,
			2006						2005						2004
Net revenues				$	66,683					$	59,716					$	120,984
Cost of sales
Product costs					32,259						38,384						67,151
Software development costs and license fees					14,599						22,717						19,091
					46,858						61,101						86,242
Gross profit (loss)					19,825						(1,385	)					34,742
Operating costs and expenses
Product research and development					2,607						3,415						2,994
Selling and marketing					10,910						24,160						13,664
General and administrative					11,251						10,937						6,156
Depreciation and amortization					430						893						439
Write-off of accounts receivable					—						322						577
(Gain) loss on settlements					(4,753	)					1,437						(1,200	)
Loss on impairment of software development costs					2,375						26,281						—
Severance					—						1,360						—
					22,820						68,805						22,630
Operating (loss) income					(2,995	)					(70,190	)					12,112
Other expenses
Interest and financing costs, net					2,371						1,869						2,806
Realized/unrealized loss on foreign exchange contract					—						48						267
Change in fair value of warrants					—						—						18,459
Merger costs					—						—						342
Loss before income taxes					(5,366	)					(72,107	)					(9,762	)
(Benefit) provision for income taxes					—						(1,207	)					1,424
Net loss					(5,366	)					(70,900	)					(11,186	)
Fair value charge for warrants exercised at a discount											1,100
Deemed dividend to preferred stockholders					—						—						759
Preferred stock dividend					—						—						1,261
Fair value of warrants issued in connection with lock-up agreements					—						—						2,182
Net loss attributable to common stockholders				$	(5,366	)				$	(72,000	)				$	(15,388	)
Net loss attributable to common stockholders per share:
Basic and diluted				$	(0.24	)				$	(3.48	)				$	(1.84	)
Weighted average shares outstanding:
Basic and diluted					22,616,419						20,686,863						8,385,657

See accompanying notes

F-4

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)

			Common Stock – $.001 par value												Sales A Preferred Stock – $.001 par value												7% Preferred Stock – $.001 par value												Additional Paid In Capital						Accumulated Deficit						Accumulated Other Comprehensive Loss						Total Stockholders’ Equity
			Number						Amount						Number						Amount						Number						Amount
Balance – October 31, 2003					2,189,285					$	2						132,142					$	—						—					$	—					$	298					$	(16,012	)				$		(18)				$	(15,730	)
Reclassification of accumulated deficit as a result of revocation of S Corporation election					—						—						—						—						—						—						(16,012	)					16,012						—						—
Effect of recapitalization – reverse merger					3,264,805						3						—						—						—						—						(3	)					—						—						—
Issuance of units pursuant to private placement memorandum, net of initial classification of $20,730 warrant liability and net of related expenses of $4,653					—						—						—						—						369						—						449						—						—						449
Issuance of units in connection with settlement of loans payable – stockholders					—						—						—						—						14						—						1,000						—						—						1,000
Deemed dividend – beneficial conversion charge					—						—						—						—						—						—						759						(759	)					—						—
Surrender of Series A preferred stock					—						—						(50,301	)					—						—						—						—						—						—						—
Issuance of common stock upon conversion of:
Series A preferred stock					5,810,721						6						(81,841	)					—						—						—						(6	)					—						—						—
Loan payable – related party					285,714						—						—						—						—						—						1,000						—						—						1,000
Warrants					20,355						—						—						—						—						—						—						—						—						—
7% convertible preferred stock					3,832,824						4						—						—						(383	)					—						(4	)					—						—						—
Reclassification of warrant liability					—						—						—						—						—						—						39,189						—						—						39,189
Issuance of stock options for services rendered					—						—						—						—						—						—						26						—						—						26
Value of warrants issued to investors					—						—						—						—						—						—						2,182						(2,182	)					—						—
Non-cash stock option compensation					—						—						—						—						—						—						316						—						—						316
Preferred dividend payable in common stock					—						—						—						—						—						—						—						(1,261	)					—						(1,261	)
Net loss																																															(11,186	)					—						(11,186	)
Foreign currency translation adjustment					—						—						—						—						—						—						—						—						(18	)					(18	)
Total comprehensive loss					—						—						—						—						—						—						—						—						—						11,204
Balance – October 31, 2004					15,403,704						15						—						—						—						—						29,194						(15,388	)					(36	)					13,785
Issuance of common stock in connection with:
Secondary offering (net of underwriting discounts, commissions and expenses of $4,148)					3,682,176						4						—						—						—						—						41,875						—						—						41,879
Exercise of warrants at $5.95 (net of expenses of $488)					1,171,418						1						—						—						—						—						7,581						(1,100	)					—						6,482
Exercise of warrants at $7.00 (net of expenses of $1,111)					1,889,985						2						—						—						—						—						12,106						—						—						12,108
Issuance of common stock as dividend on preferred stock					78,283						—						—						—						—						—						1,261						—						—						1,261
Non-cash director compensation					16,246						—						—						—						—						—						80						—						—						80

F-5

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			Common Stock – $.001 par value												Sales A Preferred Stock – $.001 par value												7% Preferred Stock – $.001 par value												Additional Paid In Capital						Accumulated Deficit						Accumulated Other Comprehensive Loss						Total Stockholders’ Equity
			Number						Amount						Number						Amount						Number						Amount
Settlement obligation related to predecessor company					664					$	—						—					$	—						—					$	—					$	(1,235	)				$	—					$	—					$	(1,235	)
Non-cash compensation charges					—						—						—						—						—						—						1,296						—						—						1,296
Net loss					—						—						—						—						—						—						—						(70,900	)					—						(70,900	)
Foreign currency translation adjustment					—						—						—						—						—						—						—						—						5						5
Total comprehensive loss					—						—						—						—						—						—						—						—						—						(70,895	)
Balance –  October 31, 2005					22,242,476					$	22						—					$	—						—					$	—					$	92,158					$	(87,388	)				$	(31	)				$	4,761
Issuance of common stock in connection with:
settlement of accounts payable					116,442						—						—						—						—						—						126						—						—						126
restricted stock grants – directors					71,393						—						—						—						—						—						127						—						—						127
restricted stock grants – employees					997,151						1						—						—						—						—						114						—						—						115
Non-cash compensation charges – stock options					—						—						—						—						—						—						1,818						—						—						1,818
Issuance of warrants for services																																									186																		186
Net loss					—						—						—						—						—						—						—						(5,366	)					—						(5,366	)
Foreign currency translation adjustment					—						—						—						—						—						—						—						—						(18	)					(18	)
Total comprehensive loss					—						—						—						—						—						—						—						—												(5,384	)
Balance –  October 31, 2006					23,427,462					$	23						—					$	—						—					$	—					$	94,529					$	(92,754	)				$	(49	)				$	1,749

See accompanying notes

F-6

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Table of Contents

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)

			Year Ended October 31,
			2006						2005						2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss				$	(5,366	)				$	(70,900	)				$	(11,186	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Change in fair value of warrants					—						—						18,459
Depreciation and amortization					430						893						439
Amortization of capitalized software development costs and prepaid licenses fees					11,051						22,717						19,091
Non-cash compensation expense					2,246						1,376						342
Write-off of accounts receivable					—						322						577
Loss (gain) on settlements					(4,753	)					1,437						(1,200	)
Loss on impairment of software development costs					2,375						26,281						—
Changes in operating assets and liabilities
Decrease (increase) in due to/from factor – net					(8,153	)					15,834						(9,472	)
Increase in accounts and other receivables					(2,481	)					—						—
Decrease (increase) in inventory					5,620						4,696						(1,760	)
Decrease (increase) in capitalized software development costs and prepaid license fees					2,863						(52,879	)					(30,823	)
Decrease (increase) in income tax receivable					826						(826	)					—
Decrease (increase) in prepaid expenses					(1,718	)					323						150
Decrease (increase) in other assets					9						114						(368	)
Increase (Decrease) in accounts payable and accrued expenses					(3,204	)					(1,492	)					11,847
Increase (decrease) in advances from customers					477						(1,687	)					(9,453	)
Payment of settlement obligations					—						(1,235	)					(5,510	)
Net cash provided by (used in) operating activities					222						(55,026	)					(18,867	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment					(207	)					(451	)					(319	)
Net cash used in investing activities					(207	)					(451	)					(319	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from secondary offering					—						41,879						—
Net proceeds from exercise of warrants at discoun t					—						6,482						—
Net proceeds from exercise of warrants					—						12,108						—
Inventory financing					1,390						(6,750	)					3,684
Repayments – loans from stockholders – net					—						—						(2,562	)
Principal payments on capital lease obligations					—						—						(41	)
Repayment to officer – net					—						—						(200	)
Proceeds from private placement, net of expenses					—						—						21,179
Convertible loan from related party					—						—						1,000
Net cash provided by financing activities					1,390						53,719						23,060
Effect of exchange rates on cash and cash equivalents					(18	)					(5	)					(18	)
Net increase (decrease) in cash and cash equivalents					1,387						(1,763	)					3,856
Cash and cash equivalents – beginning of year					2,407						4,170						314
Cash and cash equivalents – end of year				$	3,794					$	2,407					$	4,170
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest				$	2,285					$	1,869					$	2,806
Cash paid during the year for income taxes					—					$	1,325					$	240
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock in payment of accounts payable				$	126						—						—
Settlement of loans from stockholders					—						—					$	1,000
Fair value charge for warrants exercised at discount										$	1,100						—
Issuance common stock as repayment of loan from related party					—						—					$	1,000
Issuance of common stock as a dividend on the preferred stock					—					$	1,261						—
Deemed dividend arising from beneficial conversion feature of the preferred stock					—						—					$	759
Dividend declared on preferred stock payable in common stock					—						—					$	1,261
Fair value of warrants issued in connection with lock-up agreement					—						—					$	2,182

See accompanying notes

F-7

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Table of Contents

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    BASIS OF PRESENTATION

Majesco Entertainment Company and its wholly owned UK subsidiary (‘‘Majesco’’ or ‘‘Company’’) is a provider of interactive entertainment products. The Company’s offerings include video game software and other digital entertainment products.

On December 3, 2003, the Company consummated a merger (the ‘‘Merger’’) with Majesco Sales Inc. (‘‘MSI’’). Pursuant to the Merger, MSI became a wholly-owned subsidiary. As a result of the Merger, the former stockholders of MSI were the controlling stockholders of the Company. Prior to the Merger, the Company had no substantial assets. Accordingly, the transaction was treated for accounting purposes as a reverse acquisition of a public shell, and the transaction has been accounted for as a recapitalization of MSI, rather than a business combination. Therefore, the historical financial statements of MSI are the historical financial statements of the Company and historical stockholders’ equity of MSI has been restated to reflect the recapitalization. Pro forma information has not been presented since the transaction is not a business combination.

On April 4, 2005, the Company and its principal subsidiary MSI merged and in connection with this merger, changed its name to Majesco Entertainment Company.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered losses that 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.

As of October 31, 2006, assuming continued availability of funding at previous levels by the current factor or alternative sources, management believes that there will be sufficient capital resources from operations and financing arrangements for the next twelve months in order to meet our requirements for: development, production, marketing, purchases of equipment, and the acquisition of intellectual property rights for future products.

However, in the event that the Company is unable to generate the level of operating revenues in the business plan, the Company will be required to reduce operating expenditures or obtain additional sources of financing. There can be no assurance that additional sources of financing will be available on acceptable terms, if at all. If no additional sources of financing are available, it could create a material adverse effect on future operating prospects.

2.    PRINCIPAL BUSINESS ACTIVITY

The Company is a provider of interactive entertainment products. The Company’s offerings include video game software and other digital entertainment products.

Majesco’s products provide it with opportunities to capitalize on the large and growing installed base of interactive entertainment platforms and an increasing number of interactive entertainment enthusiasts. The Company sells its products directly and through resellers primarily to U.S. retail chains, including Best Buy, GameStop/Electronics Boutique, Circuit City, Target, Toys ‘‘R’’ Us and Wal-Mart. Majesco also sells products internationally through partnerships with international publishers. The Company has developed retail and distribution network relationships over its more than 20-year history.

Majesco provides offerings for most major interactive entertainment hardware platforms, including Nintendo’s Game Boy Advance, or GBA, DS, Micro and GameCube, Sony’s PlayStation 2, or PS2, and PlayStation Portable, or PSP, Microsoft’s Xbox and the personal computer, or PC.

The Company’s offerings include video game software and other digital entertainment products. The Company’s operations involve similar products and customers worldwide. The products are developed and sold domestically and internationally. The Company is centrally managed and the chief

F-8

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Table of Contents

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

operating decision makers, the chief executive and other officers, use consolidated financial information supplemented by sales information by product category, major product title and platform for making operational decisions and assessing financial performance. Accordingly, the Company operates in a single segment. Net sales for the Company in the United States were $56.8 million or 85.2% of net sales for the twelve months ended October 31, 2006. Net sales in Europe were $9.9 million or 14.8% of net sales for the year ended October 31, 2006. There were no material sales in Europe for the corresponding periods in prior years.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.    The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary located in the United Kingdom. Significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition.    The Company recognizes revenue upon shipment of its product when title and risk of loss are transferred and persuasive evidence of an arrangement exists. In order to recognize revenue, the Company must not have any continuing obligations and it must also be probable that the Company will collect the accounts receivable. Revenues, including sales to resellers and distributors, are recognized when these conditions are met.

For those agreements, which provide customers with the right to multiple copies in exchange for guaranteed minimum royalty amounts, revenue is recognized at delivery of the product master or the first copy since the Company has no continuing obligations including requirements for duplication. Royalties on sales that exceed the guaranteed minimum are recognized as earned.

The Company generally sells its products on a no-return basis, although in certain instances, the Company may provide price protection or other allowances on certain unsold products. Price protection, when granted and applicable, allows customers a partial credit against amounts they owe the Company with respect to merchandise unsold by them. Revenue is recognized net of estimates of these allowances.

The Company estimates potential future product price protection and other allowances related to current period product revenue. The Company analyzes historical experience, current sell through of retailer inventory of the Company’s products, current trends in the video game market, the overall economy, changes in customer demand and acceptance of the Company’s products and other related factors when evaluating the adequacy of price protection and other allowances.

Sales incentives or other consideration given by the Company to customers that are considered adjustments of the selling price of its products, such as rebates and product placement fees, are reflected as reductions of revenue. Sales incentives and other consideration that represent costs incurred by the Company for assets or services received, such as the appearance of the Company’s products in a customer’s national circular ad, are reflected as selling and marketing expenses.

Shipping and handling, which consist principally of transportation charges incurred to move finished goods to customers, amounted to $0.5 million, $1.1 million and $1.7 million and are included in selling expenses for the years ended October 31, 2006, 2005 and 2004, respectively.

Software Development Costs and Intellectual Property Licenses.    Software development costs include milestone payments made to independent software developers under development arrangements. Software development costs are capitalized once technological feasibility of a product is established and it is determined that such costs should be recoverable against future revenues. For products where proven game engine technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Amounts related to software development that are not capitalized are charged immediately to product research and development costs. Prepaid license fees represent license fees to holders for the use of their intellectual property rights in the development of our products. Minimum guaranteed royalty payments for intellectual

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

property licenses are initially recorded as an asset (prepaid license fees) and a current liability (accrued royalties payable) at the contractual amount upon execution of the contract when no significant performance remains with the licensor. Capitalized software development costs classified as non-current relate to titles for which we estimate the release date to be more than one year from the balance sheet date.

Commencing upon the related product’s release, capitalized software development and prepaid license fees are amortized to cost of sales based upon the higher of (i) the ratio of current revenue to total projected revenue or (ii) the straight-line method. The amortization period is usually no longer than one year from the initial release of the product. The recoverability of capitalized software development costs and prepaid license fees is evaluated based on the expected performance of the specific products for which the costs relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology; orders for the product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based.

Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as in the ongoing assessment of the recoverability of capitalized costs. If revised forecasted or actual product sales are less than and/or revised forecasted or actual costs are greater than the original forecasted amount utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.

During the twelve months ended October 31, 2005, we charged operations $26.3 million to write-off all capitalized costs related to video games for which development was stopped. We also charged $10.5 million to cost of sales to recognize impairments in the carrying value for games released for which sales were significantly below expectations. As of October 31, 2006, we charged operations $2.3 million to write-off capitalized costs related to video games for which development was stopped.

Advertising Expenses.    The Company generally expenses advertising costs as incurred except for production costs associated with media campaigns which are deferred and charged to expense at the first run of the ad. Advertising costs charged to operations were $5.0 million, $7.1 million and $3.6 million for the years ended October 31, 2006, 2005, and 2004, respectively.

Income taxes.    The Company accounts for income taxes under the asset and liability method using Statement of Financial Accounting Standards (‘‘SFAS’’) No. 109, ‘‘Accounting for Income Taxes.’’ Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Stock Based Compensation.    In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards No. 123 (R) (revised 2004), ‘‘Share-Based Payment’’ which revised Statement of Financial Accounting Standards No. 123, ‘‘Accounting for Stock-Based Compensation’’. This statement supersedes Opinion No. 25, ‘‘Accounting for Stock Issued to Employees.’’ The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the statement of operations. The revised statement has been implemented by the Company effective November 1, 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The implementation of FAS No. 123 (R) has resulted in charges of $1.8 million for the twelve month period ended October 31, 2006.

For the 2005 fiscal year the Company accounted for its employee incentive stock option plans using the intrinsic value method in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees.’’ Had the Company determined compensation expenses based on the fair value at the grant dates for those awards consistent with the method of SFAS 123, the Company’s net (loss) per share would have increased to the following pro forma amounts:

(in thousands, except per share amounts)			Twelve Months Ended October 31, 2005						Twelve Months Ended October 31, 2004
Net income (loss) – as reported				$	(70,900	)				$	(11,186	)
Add: total stock based employee compensation expense determined under intrinsic value based methods for all awards					1,376						190
Less: stock based employee compensation determined under fair value based method net of income tax effect					(2,339	)					(2,053	)
Net income (loss) – pro forma				$	(71,863	)				$	(13,049	)
Net income (loss) attributable to common stockholders per share:
Basic and diluted net loss per share as reported				$	(3.44	)				$	(1.84	)
Pro forma basic and diluted basic loss per share				$	(3.49	)				$	(2.06	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

			October 31, 2006			October 31, 2004 and 2005
Risk free annual interest rate			4.30%			2.71% to 3.85%
Expected volatility			90%			30% to 90%
Expected life			5 years			5 years
Assumed dividends			None			None

Effective November 1, 2005, the Company adopted FAS No. 123 (R) utilizing the modified prospective method. FAS No. 123 (R) requires the recognition of stock-based compensation expense in the financial statements.

Under the modified prospective method, the provisions of FAS No. 123 (R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of FAS 123, ‘‘Accounting for Stock Based Compensation’’, shall be recognized in net earnings in the periods after the date of adoption. Stock based compensation consists primarily of stock options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. Stock options generally vest over three years and have a term of seven years. Compensation expense for stock options is recognized on a straight line basis over the period of the award.

The fair value for options issued was estimated at the date of grant using a Black-Scholes option-pricing model. The risk free rate was derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor was determined based on our historical stock prices and those of comparable companies. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and cash equivalents.    Cash equivalents consist of highly liquid investments with insignificant rate risk and with maturities of three months or less at the date of purchase.

At various times, the Company had deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.

Inventory.    Inventory, which consists primarily of finished goods, is stated at the lower of cost as determined by the first-in, first-out method, or market. The Company estimates the net realizable value of slow-moving inventory on a title-by-title basis and charges the excess of cost over net realizable value to cost of sales.

Property and equipment.    Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.

Estimates.    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these financial statements are the estimated customer allowances, the valuation of inventory and the recoverability of advance payments for software development costs and intellectual property licenses. Actual results could differ from those estimates.

Foreign Currency Translation.    The functional currency of the Company’s foreign subsidiary is its local currency. All assets and liabilities of the Company’s foreign subsidiary are translated into U.S. dollars at the exchange rate in effect at the end of the year, and revenue and operating expenses are translated at weighted average exchange rates during the year. The resulting translation adjustments are included in accumulated other comprehensive loss in the statement of stockholders’ equity.

Loss per share.    Basic loss per common share is computed by dividing net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted loss per common share has not been presented for the periods because the impact of the conversion or exercise, as applicable, of the following warrants, stock options, placement agent warrants and lock-up warrants would be antidilutive.

			October 31,
			2006						2005
Warrants					878,571						878,571
Stock options					1,527,494						1,820,550
Placement agent warrants					665,739						665,739
Lock-up warrants					526,377						526,377
Warrants issued for services					150,000						—

Recent accounting pronouncements.    In June of 2005, the FASB issued Statement of Financial Accounting Standards No. 154, (‘‘SFAS 154’’), ‘‘Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,’’ ‘‘Accounting Changes’’ and FASB Statement No. 3, ‘‘Reporting Accounting Changes in Interim Financial Statements.’’ SFAS 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting a change in accounting principle. SFAS 154 requires the retrospective application to prior periods’ financial statements of the direct effect of a voluntary change in accounting principle unless it is impracticable. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The Company has adopted the provisions of FAS 154 and does not expect any material effect on its results of operations or financial position.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In June 2006 the FASB issued interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, ‘‘Accounting for Income Taxes.’’ FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently reviewing this new standard to determine its effects, if any, on our results of operations or financial position.

The Company does not believe that any other recently issued, but not yet effective accounting standards will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Reclassifications.    For comparability, certain 2005 amounts have been reclassified, where appropriate, to conform to the financial statement presentation used in 2006.

4.    FACTORED RECEIVABLES

The Company uses a factor to approve credit and to collect the proceeds from a substantial portion of its sales. The Company also utilizes purchase order financing through the factor to provide funding for the manufacture of its products (see Note 7). In connection with these arrangements, the factor has a security interest in substantially all of the Company’s assets. In addition, certain officers of the Company provide limited personal guarantees in connection with these arrangements.

Under the terms of the agreement, the Company assigns to the factor and the factor purchases from the Company eligible accounts receivable.

The factor, in its sole discretion, determines whether or not it will accept a receivable based on its assessment of credit risk. Once a receivable is accepted by the factor, the factor assumes substantially all of the credit risk associated with the receivable. The factor is required to remit payments to the Company for the assigned accounts receivable in accordance with the terms of the assigned invoice, regardless of whether the factor receives payment on the receivable, so long as the customer does not have a valid dispute related to the invoice. The amount remitted to the Company by the factor equals the invoiced amount adjusted for allowances and discounts the Company has provided to the customer. The factor charges 0.5% of invoiced amounts for these credit and collection services.

In addition, the Company may request that the factor provide cash advances based upon the Company’s accounts receivable and inventory. The factor may either accept or reject the request for advances in its discretion. Amounts to be advanced to the Company by the factor for any assigned receivable are offset by any amounts previously advanced by the factor. As of October 31, 2006, the factor was advancing approximately 70% of the eligible accounts receivable and also is advancing approximately 25% of inventory, up to a maximum of $6 million. Total advances under the factoring arrangement include letters of credit for purchase order financing (see Note 7) and is limited to $16 million in cash advances including $2 million for letters of credits. The interest rate is prime plus 1.5% on 50% of advances and the rate on the balance is the greater of (i) 18% per annum, or (ii) the lesser of (a) the prime rate plus 11.25% per annum or (b) 20% per annum. The factor’s charges and interest expense on the advances are included in ‘‘interest and financing costs’’ in the accompanying consolidated statement of operations.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Due from (to) factor consists of the following:

			October 31, (in thousands)
			2006						2005
Accounts receivable sold to factor				$	14,384					$	4,842
Less: allowances					(4,047	)					(9,551	)
advances from factor					(9,148	)					(2,255	)
				$	1,189					$	(6,964	)

The following table sets forth the adjustments to the price protection and other customer sales incentive allowances included as a reduction of the amounts due from factor:

			Year Ended October 31, (in thousands)
			2006						2005						2004
Balance – beginning of year				$	(9,551	)				$	(4,860	)				$	(2,173	)
Add: provisions					(3,799	)					(15,091	)					(6,664	)
Less: amounts charged against allowance					9,303						10,400						3,977
Balance – end of year				$	(4,047	)				$	(9,551	)				$	(4,860	)

5.    PREPAID EXPENSES

The following table presents the major components of prepaid expenses:

			October 31, (in thousands)
			2006						2005
Advance payments for inventory				$	1,934					$	—
Other (less than 5% of total assets)					292						508
				$	2,226					$	508

6.    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The following table presents the major components of accounts payable and accrued expenses:

			October 31, (in thousands)
			2006						2005
Accounts payable-trade				$	4,992					$	9,563
Royalties					3,233						5,634
Sales commissions					406						467
Salaries and other compensation					499						1,481
Other accruals					1,781						1,348
				$	10,911					$	18,493

7.    INVENTORY FINANCING PAYABLE

The Company has arrangements with its factor and a finance company for purchase order financing in order to provide letters of credit necessary for the manufacture of our products. Manufacturers require the Company to present letters of credit in order to manufacture the products

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

required under purchase orders from the Company’s customers. The Company utilizes letters of credit from a finance company, which charges 3.3% of the purchase order amount for each transaction for 60 days. The Company’s factor also provides letters of credit for which the factor charges 0.5% of the purchase order amount for 30 days. Additional charges are incurred if the letters of credit remain outstanding in excess of the original time period and/or the financing company is not paid at the time the products are received.

8.    ADVANCES FROM CUSTOMERS

In certain instances, customers and distributors have agreed to provide the Company with cash advances on their orders. These advances ($961,000 and $ 484,000 at October 31, 2006 and 2005, respectively) are then applied against future sales to these customers.

9.     SETTLEMENTS AND OTHER

During the year ended October 31, 2006 we recorded gains on settlement of liabilities of $4.7 million, consisting of $1.5 million related to negotiated reductions in royalties due for certain video and video game titles, $0.5 million gain on the sale of the rights to certain video game titles and a $2.7 million gain on the settlement of accounts payable for legal, marketing and development expenses for less than the invoiced amount.

The Company sold and transferred all of its rights, title and interest with respect to the interactive software games ‘‘Ghost Rider’’ and ‘‘The Darkness’’ that were in development (together, the ‘‘Products’’). Under the terms of the agreement, the Company was paid $7,216,000 in cash for the Products, all intellectual property and contracts related to the Products, and any and all assets related to the Products that are in the possession of or controlled by the Company, and the third party publisher assumed all of the Company’s obligations and liabilities related to the Products. Additionally, $784,000 was paid directly to two vendors to relieve the Company of obligations. During the year ended October 31, 2005, the Company wrote down the capitalized value attributable to the products to approximate the sales price. Accordingly, there was no gain recognized in 2006. The Company also sold the rights to the console version of Teen Titans for gross proceeds of $1.1 million, resulting in a gain of $500.

During the year ended October 31, 2006, we charged operations $2.4 million to write-off capitalized costs related to games for which development plans were changed such that it is uncertain whether potential value of that development will be realized.

During the year ended October 31, 2005 we recorded a provision for a loss of $1.4 million in connection with a proposed settlement with one of our distributors. We do not have significant exposure to credit risk as our factor generally buys our receivables without recourse; however, during the year ended October 31, 2005, we recorded an accounts receivable write-off of $0.3 million related to customer bankruptcies. In addition, during the year ended October 31, 2005 we recorded $1.4 million of expense related to severance agreements and we charged operations $26.3 million to write-off all capitalized costs related to the development of video games that we had determined would not be commercially viable and for which development was stopped.

In August 2003, the U.S. District Court of Massachusetts, in Infogames Interactive, Inc. v. Majesco Sales Inc., entered judgment against MSI in the approximate amount of $6.7 million pursuant to a breach of contract action. In December 2003, the Company settled the case by agreeing to pay Atari Interactive, Inc. (Infogames Interactive, Inc.) (‘‘Atari’’) $6.7 million as follows: (a) $1 million no later than two weeks after signing of the settlement agreement (the ‘‘Effective Date’’); (b) $2.5 million upon the first to occur of (1) the Company receiving a total of $15 million or more in third party financing (subject to various terms and conditions) (the ‘‘Financing Date’’) or (2) June 30, 2004; (c) $1 million on the earlier of one year from the Financing Date or June 30, 2005, with interest at 5%

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

per annum; and (d) $2.2 million on a date which was to be 42 months from the Effective Date, such payment accruing interest at the rate of 5% per annum from the earlier of the Financing Date or June 30, 2004. The Company borrowed $1 million to make the initial payment, and, as a result of the private placement (See Note 9) the Company paid $2.5 million and $500,000 all in accordance with the terms of the settlement.

In May 2004, in exchange for a one-time payment of $1.5 million by the Company in settlement of the remaining obligations (resulting in a $1.2 million gain), Atari agreed to release the Company from (i) any further obligations; (ii) all restrictions contained in the settlement agreement; and (iii) all obligations of any nature whatsoever with regard to the judgment.

10.    PRIVATE PLACEMENT AND SECONDARY OFFERING

On February 26, 2004, the Company completed a private placement of securities in which the Company raised $25.8 million in gross proceeds from a group of institutional and accredited investors. The private placement resulted in net proceeds of $21.2 million after deducting the placement agent fees and other related expenses. In addition, the placement agent received warrants to purchase up to 268 of similar units, exercisable for five years from the date of issuance.

Pursuant to the terms of the private placement, the Company issued 2,583 units, each unit consisting of (i) one share of 7% convertible preferred stock, convertible into 1,428 shares of common stock and (ii) a three year warrant to purchase 1,428 shares of common stock at an exercise price of $7.00 per share.

The Company used $3.3 million of the net proceeds to pay certain creditors, including $2.5 million for a previously negotiated settlement amount to Atari and $2.5 million to repay portions of loans previously made to the Company by two of the Company’s executive officers. In order to satisfy the remaining balance of the aforementioned loan, the Company agreed to issue to the executive officers, in the aggregate, 100 units. The Company used the remaining balance of the proceeds for working capital purposes.

The Company recorded a deemed dividend of $759,000 for the year ended October 31, 2004, relating to the beneficial conversion feature attributable to the 7% preferred stock, after deducting the fair value of the warrants issued. The deemed dividend increased the loss attributable to common stockholders in the calculation of basic and diluted net loss per common share.

Each share of 7% preferred stock automatically converted into common stock at a conversion price of $7.00 per share as of October 29, 2004, the effective date of a registration statement as to the resale of the common stock underlying the 7% preferred stock and the warrants. Each share of 7% preferred stock entitled the holder to receive a 7% cumulative dividend payable solely in shares of common stock, on an annual basis. As of October 31, 2004, the Company recorded a liability of $1.3 million for the 78,283 shares of common stock to be issued for the dividend accrued during the period prior to the conversion of the preferred stock. The dividend was paid on November 15, 2004.

In connection with the private placement, the holders of the Series A preferred stock surrendered an aggregate of 50,301 shares of their Series A convertible preferred stock, which were convertible into 3,571,421 shares of common stock. On April 13, 2004, the Company amended its Certificate of Incorporation to increase its authorized common stock to 250,000,000 shares and the holders of the Series A preferred stock converted their remaining 81,841 shares into 5,810,721 shares of common stock. Effective February 17, 2004, in order to assist the Company in its financing efforts, the former holders of the Series A Preferred Stock agreed to place an aggregate of 142,857 shares (35,714 each) of common stock received in the Merger into escrow for five years to satisfy certain claims that may arise in the future as a result of the merger.

In accordance with Emerging Issues Task Force Issue 00-19, referred to as EITF 00-19, ‘‘Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled in, a Company’s

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Own Stock,’’ the Company initially accounted for the fair value of $21 million for the warrants as a liability since the Company would have incurred substantial penalties if it had not complied on a timely basis with the warrant holders’ registration rights. The fair value of the warrants was calculated utilizing the Black-Scholes option-pricing model.

As a result of changes in the market value of the Company’s common stock from the closing date through October 29, 2004, the effective date of the registration statement relating to the resale of the shares of common stock underlying the warrants, the Company recorded a non-cash charge of $18.5 million to reflect the associated change in value of the warrants during the period. As of the effective date of the resale registration statement, the fair value of $39.2 million for the warrants was reclassified to equity pursuant to paragraph 10 of EITF 00-19. Accordingly, the company recorded a non-cash charge of $1.1 million to recognize the exercise of warrants. The charge reduced net income attributable to common stockholders.

The Company has the right to call the warrants issued in the private placement for $.007 per share of common stock underlying the warrants. In September 2004, in exchange for new warrants to purchase an aggregate of 263,520 shares of common stock, exercisable at $21.00 per share and expiring on September 15, 2007, the holders’ agreed to restrict the disposition of their shares of the Company’s common stock underlying the units (‘‘lock-up’’), the Company agreed with the holders to not call the warrants until the lock-up was no longer in effect. The lock-up expired January 31, 2005. The Company entered into similar lock-up agreements with the holders of 1,368,348 shares of common stock and a holder of 262,857 shares underlying warrants and convertible securities.

Warrants issued to these holders are exercisable for an aggregate of 163,120 shares. The Company recorded in the year ended October 31, 2004, a $2.2 million charge to reflect the fair value of the warrants issued in lock-up agreements. This charge increased the loss attributable to common stockholders in the calculation of basic and diluted net loss per common share.

The warrants issued in connection with the lock-up are callable at the Company’s option if the price of common stock is at least $35.00 per share for 60 consecutive days, the average daily trading volume for such period is at least 10,714 shares and the sale of the underlying common stock is registered.

In December 2004, the Company offered certain holders who were eligible, in accordance with rules promulgated by the Securities and Exchange Commission, the right to exercise warrants to purchase 1,171,418 shares of common stock at a reduced exercise price of $5.95 per share. The warrants were initially issued in the February 2004 private placement and exercisable at $7.00 per share. The Company received proceeds from the exercise of $6.5 million. As a result of this transaction, the Company recorded a non-cash charge to ‘‘Additional Paid in Capital’’ of $1.1 million to recognize the exercise of warrants at a reduced exercise price. This charge is also reflected in net loss attributable to common stockholders in the calculation of earnings (loss) per share.

On January 31, 2005, the Company completed a $75 million secondary offering, resulting in approximately $41.9 million in net proceeds to the Company through the sale of 3,682,176 shares of common stock. In addition, certain existing stockholders sold an aggregate of 2,317,824 shares in the offering for which the Company did not receive the proceeds. However, the Company received approximately $11.3 million of net proceeds from the exercise of 1,768,559 warrants by the selling stockholders at an exercise price of $7 per share, which were previously issued in the Company’s February 2004 private placement. In April 2005, the Company’s common stock began trading on the NASDAQ National Market System under the ticker symbol ‘‘COOL’’.

During the year ended October 31, 2005 the Company received $790,000 from the exercise of 121,426 warrants which were issued in the private placement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.    INCOME TAXES

The (benefit) provision for income taxes for the year ended October 31, 2006 consists of:

			(000’s omitted)
			2006						2005
Current:
Federal				$	—					$	578
State					—						—
Deferred:
Federal					(1,048	)					(22,943	)
State					(203	)					(4,626	)
Less: valuation allowance					1,251						25,784
				$	—					$	(1,207	)

The difference between income taxes computed at the statutory federal rate and the provision for income taxes for 2006 and 2005, relates to the following

			2006												2005
			(000’s omitted) Amount						Percent of Pretax income						(000’s omitted) Amount						Percent of Pretax income
Tax benefit at federal statutory rate				$	(1,824	)					(34	)%				$	(24,516	)					(34	)%
State income taxes, net of federal income taxes					(203	)					(4	)%					(4,625	)					(7	)%
Non-deductible charge for change in fair value of warrants					—						—						—						—
Net operating loss carry forwards					—						—						—						—
Change in valuation allowance					1,251						23	%					25,783						36	%
Other					776						15	%					2,151						3	%
				$	—						—	%				$	(1,207	)					(2	)%

The tax effects of temporary differences and the valuation allowance that give rise to deferred income tax assets were as follows:

			October 31, (000’s omitted)
			2006						2005
Impairment of capitalized software development costs and prepaid license fees not currently deductible				$	12,584					$	12,584
Impairment of inventory					1,002						1,734
Compensation expense not deductible until options are exercised					924						—
Net operating loss carry forward					12,631						11,466
Less valuation allowance					(27,141	)					(25,784	)
Deferred tax asset				$	—					$	—

Realization of deferred tax assets, including those related to net operating loss carryforwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. For year ended October 31, 2005, the Company recorded a benefit for net operating loss carrybacks, net of a full valuation allowance against net deferred tax assets. Based upon the Company’s current operating results, management has concluded that it is not more likely than not that such assets will be realized.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ‘‘change in ownership’’ provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss carryforwards before utilization. The net operating loss carryforwards for income tax purposes at October 31, 2006 amounts to approximately $42.5 million and expires in 2026. In addition, expenses of approximately $45.6 million for financial reporting will not be deductible for income tax purposes until future periods.

12.    STOCK-BASED COMPENSATION ARRANGEMENTS

On February 13, 2004, the stockholders approved a stock option plan that provides for the granting of options to purchase the Company’s common stock. The plan covers employees, directors and consultants and provides for among other things, the issuance of non-qualified options and incentive stock options. As of October 31, 2004, the Company has reserved 15 million shares of common stock for issuance under the plan.

On June 8, 2005, our stockholders and Board of Directors approved the amendment and restatement to our 2004 Employee, Director and Consultant Stock Plan (renamed 2004 Employee, Director and Consultant Incentive Plan) to: (a) increase the number of shares of common stock reserved for issuance under the Plan by 4 million; (b) add a share counting formula to the Plan pursuant to which each share issued under awards other than options or stock appreciation rights counts against the number of total shares available under the Plan as 1.3 shares, and each share issued as options or stock appreciation rights counts against the total shares available under the Plan as one share; (c) increase the share limitation on the number of awards that may be granted to any participant in any fiscal year to 1,000,000; (d) add provisions for the grant of cash awards and other types of equity based awards; and (e) delete a provision allowing for the repricing of awards.

A summary of the status of the Company’s options as of October 31 and changes during the year then ended is presented below:

			2006												2005												2004
									Weighted Average Exercise Price												Weighted Average Exercise Price												Weighted Average Exercise Price
			Number Of Shares												Number Of Shares												Number Of Shares
Outstanding at beginning of year				$	1,820,550					$	8.45						1,646,893					$	17.57						—
Granted					296,700					$	1.45						1,427,364						5.36						1,692,533					$	17.50
Canceled					(589,756	)				$	6.88						(1,253,707	)					18.38						(45,640	)					13.30
Outstanding at end of year					1,527,494					$	6.19						1,820,550					$	8.45						1,646,893					$	17.57
Options exercisable at year-end					539,056					$	8.92						239,290					$	18.69						440,318					$	18.69
Weighted-average fair value of options granted during the year										$	1.45											$	5.36											$	6.37

The intrinsic value of shares outstanding at October 31, 2006 was $0.

The fair value of options granted during the year was $430,297.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about stock options at October 31, 2006:

Range of Exercise Prices			Options Outstanding																		Options Exercisable
			Number Outstanding						Weighted- Average Remaining Contractual Life (Years)						Weighted- Average Exercise Price						Number Exercisable						Weighted- Average Exercise
$1.43 and $2.80					366,750						6.2					$	1.56						23,850					$	2.00
$3.20					561,835						5.8						3.20						192,518						3.20
$7.23 to $8.16					215,500						5.6						7.64						71,835						7.64
$12.67 and $13.30					333,412						4.4						13.30						222,282						13.30
$14.00 to $28.00					49,997						4.8						19.96						28,571						22.45
$1.43 to $28.00					1,527,494						5.5					$	6.19						539,056					$	8.92

The weighted average contractual term of exercisable option outstanding at October 31, 2006 was 5.5 years.

			Number Outstanding						Weighted-Average Fair Value at Grant Date						Weighted-Average Contractual Life
Non-Vested shares at October 31, 2005					1,581,260					$	4.51						6.4
Options Granted					296,700					$	1.46						6.3
Options Vested					(539,056	)				$	8.92						5.5
Options forfeited or expired					(350,466	)
Non-Vested shares at October 31, 2006					988,438					$	4.69						5.7

As of October 31, 2006, there was approximately $1.9 million of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.7 years. The total fair value of shares vested during October 31, 2006 was $3.1 million.

A summary of the status of the Company’s restricted stock grants for the twelve months ended October 31, 2006 is as follows:

			Option Shares
Balance at beginning of period					13,948
Granted					1,104,945
Vested					(60,549	)
Cancelled					(36,311	)
Outstanding at end of period					1,022,033

The fair value of restricted shares granted during the year ended October 31, 2006 was $1,530,600.

As of October 31, 2006, there was approximately $1.3 million of unrecognized compensation cost related to restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.7 years.

On July 21, 2006 the Company issued warrants to purchase an aggregate of 150,000 shares of common stock to a consulting firm in consideration for services. The warrants are exercisable at an exercise price of $1.55 at any time over a seven year period. The Company recorded $186,000 of expense in 2006, reflecting the fair value of the warrants on the date of issuance.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.    EMPLOYEE RETIREMENT PLAN

The Company has a defined contribution 401(k) plan covering all eligible employees.

The Company charged to operations $51,000, $50,000 and $69,000 for contributions to the retirement plan for the year ended October 31, 2006, 2005 and 2004 respectively.

Certain stockholders and key employees of the Company serve as trustees of the plan.

14.    MAJOR CUSTOMERS

Sales to Wal-Mart, Inc. represented 11%, 34% and 27% of net revenues in 2006, 2005 and 2004, respectively. Sales to Toys ‘‘R’’ Us Inc. represented 29%, 23% and 25% of net revenues in 2006, 2005 and 2004, respectively. Sales to Gamestop represented 12% of net revenues in 2006.

15.    CONTINGENCIES AND COMMITMENTS

Commitments

At October 31, 2006 the Company was committed under agreements with certain developers for future milestone payments aggregating $1.0 million. Milestone payments represent scheduled installments due to the Company’s developers based upon the developers providing the Company certain deliverables, as predetermined in the Company’s contracts. In addition, the Company may have to pay royalties for products sold. These payments will be used to reduce future royalties due to the developers from sales of the Company’s videogames.

The Company is obligated under noncancellable operating leases for administrative offices, automobiles, and equipment expiring at various dates through 2009. The future aggregate minimum rental commitments exclusive of required payments for operating expenses are as follows (in thousands):

Year ending October 31,			(000’s omitted)
2007				$	453
2008					366
2009					342
				$	1,161

Total rent expense amounted to $423,000, $545,000 and $461,000 for the years ended October 31, 2006, 2005 and 2004, respectively.

At October 31, 2006, the Company had open letters of credit aggregating $5.0 million under the Company’s purchase order assignment arrangements for inventory to be delivered during the subsequent year.

The Company has entered into ‘‘at will’’ employment agreements with several key executives. These employment agreements include provisions for, among other things, annual compensation, bonus arrangements and stock option grants. These agreements also contain provisions related to severance terms and change of control provisions.

Contingencies

On November 16, 2005 Papaya Studio Corporation instituted legal proceedings against the Company for $1.9 million in the Central District Court of California alleging breach of contract. On January 29, 2007, we entered into a settlement agreement with regard to all claims relating to this litigation. Under the terms of the settlement agreement, we agreed to pay Papaya a total of $200,000

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

cash in installments over a period of 90 days. In addition, as part of the settlement, and in connection with Lin Shen, Papaya’s President becoming a consultant to the Company, we will grant Ms. Shen shares of our common stock worth $365,000, with the value of each share to be based on the average closing price of our common stock for the four weeks prior to the settlement date. In addition, to the extent Ms. Shen does not obtain proceeds of $365,000 from sales of these shares over a period of 10-12 months, subject to certain trading limitations, we will pay Ms. Shen in cash the difference between the proceeds received from sales of the shares and $365,000. In addition, as part of the settlement, we transferred to Papaya ownership of any video game assets developed by Papaya under the contract that was the subject of this litigation.

In July 2005, four purported class action complaints were filed against the Company and several current and former directors and officers of the Company in the United States District Court for the District of New Jersey. On September 12, 2005, a fifth purported class action complaint was filed in the same court on behalf of a class of individuals who purchased shares of the Company common stock in the Company’s January 26, 2005 offering of six million shares of common stock (the ‘‘Offering’’). The complaint named as defendants the Company, current and former officers of the Company, and certain financial institutions who served as underwriters with respect to the Offering.

On October 11, 2005, the Court consolidated the five cases and appointed a Lead Plaintiff. On December 14, 2005, the Lead Plaintiff filed an Amended Consolidated Complaint, which is now the operative Complaint. The Complaint names the following as defendants: the Company, Carl Yankowski, Jan E. Chason, Jesse Sutton, Joseph Sutton, Morris Sutton, Laurence Aronson, F. Peter Cuneo, James Halpin, Louis Lipschitz, Marc Weisman, RBC Capital Markets Corporation, JMP Securities LLC, Harris Nesbitt & Corp., Wedbush Morgan Securities Inc., and Goldstein Golub Kessler LLP.

The Complaint alleges that the Registration Statement and Prospectus filed with the SEC in connection with the Company’s Offering and certain of the Company’s press releases and other public filings contained material misstatements and omissions about the Company’s financial condition and prospects as well as its products. The lead Plaintiff asserts a claim under Section 11 of the Securities Act against all the defendants on behalf of investors who purchased in the Offering. It asserts a Section 12(a)(2) claim against the Company and the financial institutions who served as underwriters in connection with the Offering, and a Section 15 control person claim against defendants Carl Yankowski, Jan Chason, Jesse Sutton, Joseph Sutton, and Morris Sutton (the ‘‘Defendants’’). Lead Plaintiff also asserts a claim under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated there under against the Company and the Defendants and a claim under Section 20(a) of the Exchange Act against the Defendants. The Complaint seeks damages in an unspecified amount. The proposed class period for the Exchange Act claims is December 8, 2004 through September 12, 2005.

On October 10, 2006, Trinad Capital Master Fund, Ltd., a shareholder of our common stock, filed a complaint against the Company and several current and former directors and officers of the Company in the United States District Court for the District of New Jersey. The current or former officers and directors named as defendants in the complaint are Morris Sutton, Jesse Sutton, Joseph Sutton and Carl Yankowski. The Complaint also named the Company’s outside auditors, Goldstein Golub Kessler LLP, as a defendant. Goldstein Golub Kessler LLP has since been voluntarily dismissed without prejudice. The allegations in the Complaint are similar to those in the Amended Consolidated Complaint filed in the In re: Majesco Securities Litigation putative class action discussed above. The Complaint alleges three causes of action: (1) a claim under Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder) against all the named defendants; (2) a claim under Section 20(a) of the Exchange Act against Morris Sutton, Jesse Sutton and Joseph Sutton; and (3) a common law fraud claim against Morris Sutton, Jesse Sutton, Joseph Sutton and Carl Yankowski. Trinad seeks compensatory damages of no less than $10 million. This amount is sought with respect to each claim. In connection with the fraud claim, Trinad also seeks $10 million in punitive damages.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On November 2, 2006, Trinad Capital Master Fund, Ltd., filed a complaint, purportedly on behalf of the Company, against certain current or former directors of the Company in the United States District Court for the District of New Jersey. The individuals named as defendants in the complaint are Morris Sutton, Jesse Sutton, Joseph Sutton, Louis Lipschitz and Laurence Aronson. The complaint also names the Company as a nominal defendant. The complaint alleges that, from late 2004 through the filing date, defendants breached their fiduciary duties which caused damage to the Company. The complaint does not specify the amount of damages sought. A response to the Complaint is due on January 31, 2007.

The Company at times may be a party to other routine claims and suits brought by the Company and against the Company in the ordinary course of business, including disputes arising over contractual claims and collection matters. In the opinion of management, after consultation with legal counsel, the outcome of such routine claims will not have a material adverse effect on the Company’s business, financial condition, and results of operations or liquidity. However, the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in those matters (including the matters described above), and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on the Company’s business, financial condition, and results of operations or liquidity.

16.    RELATED PARTY TRANSACTIONS

In 2003, the Company utilized $2.5 million from the proceeds of the private placement (see Note 9) to repay portions of loans previously made to the Company by two of the Company’s executive officers who are also principal stockholders. In order to satisfy the remaining balance of the loans previously provided by the two executive officers, the Company agreed to issue to them, in the aggregate, 100 units similar to those issued in the private placement.

The Company uses the services of a company in which the brother of the Chairman Emeritus is an officer and co-owner for printing and packaging of the Company’s products. During the years ended October 31, 2006, 2005 and 2004, the Company was charged $1.5 million, $2.3 million, and $4.1 million, respectively, for services provided which is principally included in ‘‘product costs’’ in the accompanying consolidated statement of operations. At October 31, 2006 and 2005 the amounts due to this vendor are $588,000 and $187,000 respectively, which are included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.    QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table is a comparative breakdown of our unaudited quarterly results for the immediately preceding eight quarters:

			For the Three Months Ended
			Jan. 31, 2005			Apr. 30, 2005			July 31, 2005			Oct. 31, 2005			Jan. 31, 2006			Apr. 30, 2006			July 31, 2006			Oct. 31, 2006
			(in thousands, except per share data)
Net revenues			$30,719			$19,855			$4,565			$4,577			$21,638			$11,185			$12,363			$21,497
Cost of sales			19,754			11,441			20,750			9,156			13,672			7,690			8,245			17,251
Gross profit (loss)			10,965			8,414			(16,185)			(4,579)			7,966			3,495			4,118			4,246
Operating costs and expenses:
Product research and development			814			982			721			898			768			629			556			654
Selling and marketing			5,276			3,839			8,479			6,566			4,456			1,869			2,159			2,426
General and administrative			2,618			2,482			3,822			2,015			2,374			2,586			3,061			3,230
Depreciation and amortization			287			290			188			128			135			128			84			83
Other Operating Costs (1)			—			—			9,236			20,164			2,375			(3,097)			(1,410)			(246)
Operating income (loss)			1,970			821			(38,631)			(34,350)			(2,142)			1,380			(332)			(1,901)
Other expenses (2)			803			506			241			367			445			541			392			993
Income (loss) before income taxes			1,167			315			(38,872)			(34,717)			(2,587)			839			(724)			(2,894)
Provision for income taxes			467			126			(1,329)			(471)			—			—			—			—
Net income (loss)			$700			$189			$(37,543)			$(34,246)			$(2,587)			$839			$(724)			$(2,894)
Net income (loss) attributable to common stockholders (3)			$(400)			$189			$(37,543)			$(34,246)			$(2,587)			$839			$(724)			$(2,894)
Net income (loss) attributable to common stockholders per share:
Basic			$(0.02)			$0.01			$(1.69)			$(1.54)			$(0.12)			$0.04			$(.03)			$(0.13)
Diluted			$(0.02)			$0.01			$(1.69)			$(1.54)			$(0.12)			$0.04			$(.03)			$(0.13)
Weighted average shares Outstanding
Basic			16,175,243			22,146,616			22,231,075			22,242,118			22,257,631			22,257,631			22,408,410			22,430,614
Diluted			16,175,243			22,957,439			22,231,075			22,242,118			22,257,631			22,257,631			22,408,410			22,430,614

(1)

Other operating costs include write off of accounts receivables of $ 0.3 million for the three month periods ended July 31, 2005, a gain on settlements of liabilities and other gain of 3.1 million, $1.4 million and 246,000 thousand for the three months ended April 30, 2006 , July 31, 2006 and October 31, 2006 respectively; and a loss on settlements of $1.4 million for the three months ended July 31, 2005; severance expense of $1.4 million in the three months ended July 31, 2005; and loss on impairment of capitalized software development costs of $6.1 million, $20.1 million and 2.4 million for the three month periods ended July 31, 2005, October 31, 2005 and January 31, 2006 respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)	Other expenses (income) include:

			For the Three Months Ended
			Jan. 31, 2005						Apr. 30, 2005						July 31, 2005						Oct. 31, 2005						Jan. 31, 2006						Apr. 30, 2006						July 31, 2006						Oct. 31, 2006
			(in thousands, except per share data)
Unrealized (gain) loss on foreign exchange				$	69					$	(21	)				$	—					$	—					$	—					$	—					$	—					$	—
Interest and financing costs, net					734						527						241						367						445						541						392						993
				$	803					$	506					$	241					$	367					$	445					$	541					$	392					$	993

(3)

A $1.1 million non-cash charge related to the fair value of warrants issued in connection with a lock-up agreement in the three month periods ended January 31, 2005; and $1.2 million on issuance of common stock as a dividend on the preferred stock in the three month period ended January 31, 2005; Accounts payable settled through the issuance of common stock of $125,000 thousand in the three month periods ended of April 30, 2006.

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