According to the firm's 10-Q filing dated 11/16/1998, three class actions were filed against the Company and certain of its officers in the United States District Court for the Northern District of California: Harrow v. YES! Entertainment Corporation et al., filed on April 17, 1997; Takats v. YES! Entertainment Corporation et al., filed on June 11, 1997; and Siegel v. YES! Entertainment Corporation et al., filed on June 27, 1997. On August 6, 1997, the three federal actions were consolidated for pretrial proceedings and captioned In re YES! Entertainment Corp. Securities Litigation, Civil Action No. C-97-1388 MHP. On December 4, 1997, the action was referred to the Honorable Charles Breyer of the Northern District of California. On August 18, 1997, all defendants filed a motion to dismiss the consolidated action. In response, on November 8, 1997, plaintiffs filed a first amended consolidated compliant for violation of the Securities Exchange Act of 1934. Defendants filed a motion to dismiss the consolidated complaint on January 5, 1998. One May 15, 1998, the Court granted defendants' motion to dismiss without prejudice. Plaintiffs filed a second amended complaint on July 9, 1998. The Federal class actions were based upon claims under federal securities laws which impose liability on persons who make false or misleading statements in connection with the purchase or sales of securities. The Company maintained, and continues to maintain, that the allegations contained in each of the class actions lawsuits were without merit. Nonetheless, the Company concluded that further conduct of the class action lawsuits would be protracted and expensive, and that it would be desirable and beneficial to the Company to settle the lawsuits. Accordingly, on July 8, 1998, the Company entered into an agreement that settles all the class action securities lawsuits. The settlement calls for payment to the plaintiff class of $2.25 million, which is being funded under the Company's insurance policies. Judge Breyer preliminarily approved the settlement on July 10, 1998, and the settlement funds were placed in escrow on August 3, 1998. On September 18, 1998, the Court entered a Final Judgment and Order of Dismissal which approved the settlement of all the class action securities lawsuits and dismissed with prejudiced the Federal class actions.

The original complaint seeks to remedy violations of federal securities laws committed by Yes!, its Chief Executive Officer and its Chief Financial Officer which violations involved misrepresentations regarding Yes!'s operations and sales as well as the status and success of several of its newly introduced products, including V-Link, a 900 Mhz mobile telephone system targeted at teenage consumers which defendants asserted would be the Company's flagship product for the 1996 holiday selling season. Throughout 1996, Yes! claimed that by the end of 1996 Yes! would "sell hundreds of thousands" of units of V-Link and that V-Link sales combined with sales of Yes!'s other products would ensure 1996 revenues and net income of $100 million and $7.5 million, respectively. Despite defendants' claims that large retailers such as Toys R Us and WalMart were Yes!'s biggest supporters, the truth was that in order to get major retailers to accept shipments of V-Link in time for the 1996 holiday season Yes! opted to flout FCC regulations and ship V-Link to retailers while concealing the fact that Yes! was required to receive final marketing approval from the FCC prior to shipment.