The prospect of consolidation of the video game software sector took another step forward Friday, as Acclaim Entertainment ( AKLM) warned that it may soon wind up in bankruptcy.

Acclaim shares were recently down 8 cents, or 24%, to 25 cents after hitting a 52-week low of 24 cents earlier in the session.

"Acclaim shares remain a speculative investment until management demonstrates its ability to execute on its strategy of making fewer, higher quality games," Wedbush Morgan analyst Michael Pachter wrote Friday. "We believe that the company has a respectable lineup of games planned for release in fiscal 2005 , but due to continuing cash flow problems, its ability to deliver these games on time remains in question."

In its annual report filed Thursday and in an earnings release on Friday, the game maker reported that it is in default on some of its convertible notes and at least three of its licensing agreements are in dispute, in part because Acclaim's partners claim it hasn't been paying royalties on time. While Acclaim negotiated a $30 million line of credit in May, it is facing a cash crunch. At the end of fiscal year on March 31, the company had just $1.1 million in cash, compared to $41.2 million in short-term debt.

"The company cannot assure its stockholders that its future operating cash flows will be sufficient to meet its operating requirements and debt service requirements," Acclaim said in its earnings release. If the company doesn't get an influx of cash and reduce expenses, it "would be materially and adversely affected and it could be forced to cease operations or seek bankruptcy protection."

Acclaim is only the latest video game software company whose future as an independent, ongoing entity remains in question. After delaying the release of one of its key titles, London-based Eidos said last month that it is exploring a possible sale of its business or assets. Meanwhile, Viacom ( VIA.B) CEO Sumner Redstone has been buying up the stock of Midway Games ( MWY), and has said that he is considering taking the company private .

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