Microprose Inc/DE – ‘10-K’ for 3/31/97

As of:  Monday, 6/30/97   ·   For:  3/31/97   ·   Accession #:  912057-97-22501   ·   File #:  0-19463

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Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         54    314K 
 2: EX-11.1     Statement re: Computation of Earnings Per Share        1      7K 
 3: EX-21.1     Subsidiaries of the Registrant                         1      5K 
 4: EX-23.1     Consent of Experts or Counsel                          1      6K 
 5: EX-27.1     Financial Data Schedule (Pre-XBRL)                     2      6K 

10-K   —   Annual Report
Document Table of Contents

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        SECURITIES AND EXCHANGE COMMISSION
      Washington, D.C. 20549
      ----------------
     FORM 10-K
(Mark One)                                                                      

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE    
ACT OF 1934                                                             
      For the fiscal year ended March 31, 1997, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES         
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]                                  
For the transition period from       to 

      Commission file number 0-19463

     SPECTRUM HOLOBYTE, INC.
      (Exact name of registrant as specified in its charter)

State of Incorporation: DELAWARE  I.R.S. Employer Identification No.: 52-1728656

     2490 MARINER SQUARE LOOP, SUITE 100, ALAMEDA, CA  94501
      (Address of principal executive offices)

Registrant's telephone number:   (510) 522-3584           

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

     Securities registered pursuant to Section 12(g) of the Act:
     COMMON STOCK, $.001 PAR VALUE

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

Indicate by a check mark if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K is not contained herein, and will not be contained,  
to the best of registrant's knowledge, in definitive proxy or information       
statements incorporated by reference in Part III of this Form 10-K or any       
amendment to this Form 10-K.  [  ]                                              

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 18, 1997, was approximately $116,075,324 (based on the
June 18, 1997 closing price for shares of the Registrant's Common Stock as      
reported by the Nasdaq National Market).  Shares of Common Stock held by each   
officer, director and holder of 5% or more of the outstanding Common Stock have 
been excluded in that such persons may be deemed to be affiliates.  This        
determination of affiliate status is not necessarily a conclusive determination 
for other purposes.                                                             

On June 18, 1997, approximately 28,327,557 shares of the Registrant's   
Common Stock, par value $.001, were outstanding.                                

      DOCUMENTS INCORPORATED BY REFERENCE.

   Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on September 18, 1997, are incorporated by reference    
into Part III of this Report on Form 10-K to the extent stated herein.          

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     TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I.........................................................................3

     ITEM 1.   BUSINESS........................................................3
     ITEM 2.   FACILITIES AND PROPERTY........................................12
     ITEM 3.   LEGAL PROCEEDINGS..............................................12
     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............12

PART II.......................................................................13
ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED       
               STOCKHOLDER MATTERS............................................13
     ITEM 6.   SELECTED FINANCIAL DATA........................................14
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL           
               CONDITION AND RESULTS OF OPERATIONS............................16
ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY         
               DATA...........................................................29
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON            
               ACCOUNTING AND FINANCIAL DISCLOSURE............................44

PART III......................................................................45

     ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT.......................45
     ITEM 11.  EXECUTIVE COMPENSATION.........................................45
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS             
               AND MANAGEMENT.................................................45
     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................45

PART IV.......................................................................45

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS        
               ON FORM S-K ...................................................45

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PART I                                                                          

ITEM 1.  BUSINESS                                                               

Spectrum HoloByte, Inc. ("Spectrum HoloByte" or the "Company") is a     
developer, producer and publisher of entertainment software for personal        
computers and certain console platforms. The Company creates, acquires or       
licenses properties with mass market appeal and develops branded products       
based on these properties. A range of advanced technologies are incorporated    
into these products, such as multiplayer networking, simulation, real-time      
response and 3-D texture-mapped graphics to enhance each product's              
distinctive characteristics. The Company also distributes entertainment         
software and related products published by third-parties.                       

Spectrum HoloByte primarily develops products in the categories of    
Simulation, Strategy, and 3-D Action. Management believes these three           
categories leverage the Company's product development core competencies.  The   
Company's most popular products to date include the FALCON series, GRAND PRIX   
II, MAGIC: THE GATHERING, MASTER OF ORION-TM-II, SID MEIER'S CIVILIZATION II,   
the STAR TREK-TM- series, TOP GUN-TM-: FIRE AT WILL!-TM- and the X-COM series.  

During fiscal 1996 and early fiscal 1997, the Company undertook a       
strategic restructuring with the goal of better integrating the operations of   
Spectrum HoloByte and MicroProse, streamlining product development efforts,     
and reducing operating costs. Certain domestic operations were consolidated     
in California, including marketing, operations, customer support, finance and   
product planning. The Company largely discontinued its Japanese operations,     
and entered into an exclusive distribution agreement in Japan which is          
expected to generate royalties in future periods.  The Company's domestic       
affiliated label programs were largely terminated and the number of products    
being published and actively marketed was significantly reduced in order to     
focus the Company's sales and distribution efforts.  As a result of these       
changes, the Company has improved operating efficiencies, reduced headcount     
and reduced operating costs.  See Item 7 - "Strategic Restructuring".           

PRODUCTS                                                                        

The Company's simulation products feature advanced 3D graphics, digital 
sound effects and sophisticated artificial intelligence ("AI") algorithms       
designed to create compelling, realistic experiences for players in a variety of
perilous circumstances or historical contexts.  The Company's strategy products 
allow players to assume the role of specified characters or god-like beings to  
experience or control the creation of new civilizations, discover or colonize   
new worlds or battle powerful alien forces to save the world.  The Company also 
leverages its established areas of expertise such as 3D graphic environments,   
digital sound and strong AI to develop fast-paced, action-oriented products.    

As a result of consumer research, the Company discontinued publishing   
products under the Spectrum HoloByte and SimTex brands in fiscal 1997, and is   
currently publishing all of its products under the MicroProse brand name.  The  
individual branded identities created or licensed by the Company and the related
products which are either currently being published or are under development by 
the Company include, but are not necessarily limited to, the following:         

STAR TREK: THE NEXT GENERATION-Registered Trademark- BRAND                      

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 The Company has the rights to release a series of games based on the STAR
TREK: THE NEXT GENERATION television series, one game based on the STAR TREK    
GENERATIONS-TM- movie, and one game based on STAR TREK: FIRST CONTACT-TM-,      
the latest feature film from Paramount Pictures.   Products currently offered   
or under development include:                                                   

-   STAR TREK: THE NEXT GENERATION-Registered Trademark- "A FINAL UNITY"-TM-:   
This game combines traditional adventure, simulation, and role playing  
elements as players embark on missions for the Federation and find      
   themselves caught up in an unfolding mystery which they and the crew of the
Starship Enterprise must solve.                                         

-   STAR TREK GENERATIONS: This 3D action game follows and expands upon the plot
    of the feature film of the same name.  The game features the two captains of
the U.S.S. Enterprise joining forces to battle the evil Soran, in first 
person point of view, along with exciting space combat.                 

-   STAR TREK: KLINGON HONOR GUARD-TM- (Under Development): A 3D action shooter 
   game where the player is a member of an elite Navy Seal-like Klingon combat
unit.                                                                   

-   STAR TREK: BIRTH OF THE FEDERATION-TM- (Under Development): A strategy game 
  in which players build a space-faring civilization as one of the five STAR
TREK races: Federation, Klingon, Cardassian, Ferengi, or Romulan.       

-   STAR TREK: FIRST CONTACT (Under Development): A 3D action game based on     
fighting the Borg in real time first person.                            

WORLD CIRCUIT RACING-TM- BRAND                                                  

This series of products lets the player take the wheel in simulations of
real world car races.  Products include:                                        

-   GRAND PRIX II: This sequel to the GRAND PRIX/WORLD CIRCUIT RACING game is a 
challenging Formula 1 racing simulation where the player experiences the
 excitement of international Grand Prix racing on real tracks against real
drivers.                                                                

-   GRAND PRIX MANAGER-TM- II: This game moves the player from behind the wheel 
to behind the desk as a team owner on the Formula 1 circuit.  The player
 controls all aspects of team management including hiring and firing staff
and drivers, negotiating contracts and funding R&D.                     

CIVILIZATION BRAND                                                              

This series of award winning imaginative strategy games is educational, 
dynamic and highly entertaining.  Strong AI and historical data combined with   
ease of use make these games appealing and accessible to players of all levels. 
Products currently offered or under development include:                        

-   SID MEIER'S CIVILIZATION II: This strategy game has won Game of the Year    
  awards from Time Magazine, PC Gamer and Computer Retail Week. New features
   include additional technologies, new "Wonders of the World" video clips and
more sophisticated diplomacy.                                           

-   SID MEIER'S CIVILIZATION-Registered Trademark- II SCENARIOS: This add-on    
  pack has 20 new scenarios including the American Civil War, Alien Invasion
and After the Apocalypse.                                               

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-   ULTIMATE CIV II-TM- (Under development): Capitalizing on the success of SID 
MEIER'S CIVILIZATION II is the ULTIMATE CIV II construction set. This   
product allows players to create terrains, units, wonders, and worlds by
offering a powerful new set of editing tools for gamers to reconstruct  
history.                                                                

MAGIC: THE GATHERING BRAND                                                      

  The MAGIC: THE GATHERING product line is based on the popular trading card
game of the same name by Wizards of the Coast. Products currently offered or    
under development include:                                                      

-   MAGIC: THE GATHERING: This game offers the player the ability to play the   
  card game against the computer, as well as play Shandalar, a strategy card
 game where players collect and trade cards to build custom decks and duel
other wizards represented by the sophisticated AI.                      

-   MAGIC: THE GATHERING-Registered Trademark- PC EXPANSIONS (Under             
Development): Players have a chance to play with more cards to build a  
 library of magic spells with increased powers to duel other wizards.  The
first of two expansions will feature multi-player networking.           

FALCON BRAND                                                                    

In the award-winning FALCON series, a player pilots a jet fighter in    
realistic combat campaigns.  The original FALCON was introduced in 1984 and the 
FALCON series now includes upgraded versions with advanced 3D graphics and the  
availability of compatible add-on products with new missions and different      
planes.  Products include:                                                      

-   FALCON-Registered Trademark- 4.0 (Under Development): This game will        
simulate a real-time war in which the player takes the role of a single 
   pilot in an F-16 jet fighter.  The Campaign Manager feature will create all
  of the tension, chaos and adventure that exists in modern air combat.  The
game will also feature multi-player capability, advanced 3D terrain     
graphics, highly developed avionics and strong AI.                      

MICROPROSE MILITARY SIMULATION BRAND                                            

The MicroProse line of military simulation titles include award-winning,
popular games such AS F-15 STRIKE EAGLE-Registered Trademark-, M1 TANK          
PLATOON-Registered Trademark-, GUNSHIP-Registered Trademark- and FLEET          
DEFENDER-Registered Trademark-. Products currently offered or under development 
include:                                                                        

-   GUNSHIP:  An AH-64A Apache gunship simulation including full texture mapped 
terrain, ground troop support and competing helicopters and tanks.  The 
player can choose a "quick fire" mode or a full campaign mode for a more
in-depth experience.                                                    

-   EUROPEAN AIR WAR-TM- (Under Development): This flight simulation depicts    
 the air battles over Europe during World War II.  The player can fly over
a dozen of the greatest fighter aircraft of the era for the Allied or   
German forces.  The title will have multiplayer capabilities to further 
enhance the experience.                                                 

-   M1 TANK PLATOON-Registered Trademark- II (Under Development): An M1 Abrams  
simulation featuring an accurate and realistic simulation of the US Main
Battle Tank in a modern day combat environment.                         

X-COM BRAND                                                                     

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In this award-winning series, players battle for survival against alien races in
suspenseful science fiction tales that take them to all corners of the galaxy.  
Products currently offered or under development include:                        

-   X-COM: UFO DEFENSE-TM-: This adventure pits the player against aliens       
terrorizing the Earth.  Players must command groups of scientists,      
engineers and soldiers as well as develop a strategy to ensure human    
survival.                                                               

-   X-COM: TERROR FROM THE DEEP-TM-: This sequel to UFO DEFENSE brings alien    
  terror into a totally new dimension as creatures begin to stir deep in our
oceans and X-COM's space foes attack from  below.                       

-   X-COM: APOCALYPSE-TM- (Under Development): This product will be a           
  continuation of the X-COM saga where aliens have infiltrated human society
by taking on human form; the player must battle the aliens in human     
disguise.                                                               

-   X-COM: INTERCEPTOR-TM- (Under Development): This action-packed product will 
allow players to fight the aliens in outer space by piloting spacecraft,
exploring alien worlds, and thwarting another alien threat to humanity. 

MASTER OF ..... BRAND                                                           

This popular line of science fiction titles adds a new dimension to     
strategic adventure games.  Players trade, negotiate and steal technology as    
they battle to expand their empires. Products currently offered or under        
development include:                                                            

-   MASTER OF MAGIC-TM-: A strategy game in which players choose from a varied  
  selection of "wizards" possessing specialized powers and battle with other
wizards for ultimate domination of mythical worlds.                     

-   MASTER OF ORION II: This product is a sequel to MASTER OF ORION-TM-.  New   
gameplay features include a larger, more diverse "space universe", the  
addition of cinematics and multi-player capability over a LAN and Total 
Entertainment Network ("TEN").                                          

-   MASTER OF MAGIC-TM- II (Under Development): This sequel to the highly       
   acclaimed MASTER OF MAGIC will include several new features including three
new goals, new spells and multiple planes of existence.                 

TOP GUN BRAND                                                                   

The Company has developed products for both the PC CD-ROM and Sony      
PlayStation-TM- based on TOP GUN, the popular feature film from Paramount       
Pictures.  In these games, the player assumes the role of "Maverick" and        
engages in combat scenarios, experiencing sights and sounds of the feature      
film.  The Company plans to develop follow-up products under this brand in      
the future.  Products include:                                                  

-   TOP GUN: FIRE AT WILL!: A fast action dog-fighting adventure story in which 
the player graduates from the Top Gun Flight Academy and pilots an F-14 
fighter jet on over 40 possible missions.  Live action video is used to 
effectively tell the story as seen through the player's eyes.           

BATTLETECH-Registered Trademark- BRAND                                          

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   The Company is developing two products in the popular BATTLETECH line. With
over 13 million words in print, the BATTLETECH UNIVERSE delivers extensive      
storyline depth and integrity. The intense action of 31st Century armored combat
is this brand's calling card. Products include:                                 

-   MECHWARRIOR-Registered Trademark- III (Under Development): This sequel to   
MECHWARRIOR-Registered Trademark- II is being developed by FASA         
  Interactive, the creators of the BATTLETECH UNIVERSE. Players will be able
  to choose their own missions and objectives, driving the plot at their own
speed. The 'MECH-Registered Trademark- LAB allows the players to build a
custom killing machine to their own unique specifications.              

-   BATTLETECH-Registered Trademark-: MECHCOMMANDER-TM- (Under Development):    
 This game will put the player in command of up to 12 MechWarriors as they
 battle enemy 'Mech, Elementals, and armored vehicles.  Players can create
 their own 'Mech, develop their own strategy, and choose the missions they
want to play. In this game, combat action, real-time communications, and
realistic battlefield dynamics combine to give the player the true      
experience of command.                                                  

OTHER BRANDS                                                                    

-   STARSHIP TROOPERS-TM- (Under Development): A fast-paced action title that   
blends story elements from the upcoming major motion picture release and
the classic Robert Heinlein science fiction novel.                      

-   GUARDIANS-TM-: AGENTS OF JUSTICE-TM- (Under Development): A superheroic     
 game that combines strategy and animated adventure into a challenge where
the player commands a team of super-powered crime fighters against the  
 forces of evil. Encased in 3D graphics, GUARDIANS: AGENTS OF JUSTICE is a
 turn-based game that can be played with up to six players over a network.

-   WORMS-TM- 2 (Under Development): As follow up to the european hits          
  WORMS-TM- and WORMS-TM- UNLIMITED, WORMS 2 is a turn-based arcade strategy
game where up to eight players participate in a match. WORMS 2 uses     
over 8,000 frames of animation to create a cartoon-style environment    
where humor and strategy join to make an irresistible game.  Players    
choose from an assortment of devastating weapons or create their own    
with the weapons editor to eliminate all of the opposing worms.         

There can be no assurance that products listed as "Under Development" will be   
released in a timely manner or at all. See Item 7 - "Dependence on New Product  
Introductions; Product Delays" and "Item 7 - "Changes in Technology and Product 
Platforms."                                                                     

PRODUCT DEVELOPMENT AND ACQUISITION                                             

  The Company uses both internal and external resources to develop products.
The Company supplements its internal development efforts with third-party       
subcontractors for the development of certain features or the programming of    
portions of internally developed products. The Company has also acquired        
products through publishing arrangements and the acquisition of other software  
companies.                                                                      

  The Company must continually anticipate and adapt its products to emerging
platforms and evolving consumer preferences. Failure to develop products for new
platforms and incorporate new technologies may render the Company's products    
obsolete. In addition, there can be no assurance that the platforms for which   
the Company develops products will achieve market acceptance. See Item 7 -      
"Changes in Technology and Product Platforms," Item 7 - "Dependence on New      
Product Introductions; Product Delays" and Item 7 - "Risk of Software Errors or 
Failures."                                                                      

 INTERNAL PRODUCT DEVELOPMENT.  The Company's internal product development
function is performed at five separate development studios, located in          
California, Maryland, Texas, North Carolina and the United                      

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Kingdom. Development Studios are organized to incorporate both internal and     
external research and development and quality assurance functions. The Studios  
work with marketing brand managers who define product positioning and product   
and platform mix. The internal development process includes game development and
design, prototyping, programming, art, computer graphic design, animation, sound
engineering, technical writing, editorial review and quality assurance.         
Typically, 12 to 24 months or longer are required to complete a new title with a
new engine and 6 to 14 months or longer are required to develop existing titles 
for different platforms or to develop a derivative product using a previously   
developed engine. Internally developed products are based on characters, brands 
and themes that are either owned by the Company or licensed from third parties. 
The Company develops games that may be played interactively over on-line        
services and the Internet.                                                      

   The Company's proprietary software development library of tools and content
includes animation, three-dimension, texture-mapped graphic algorithms and      
images, networking capability, artificial intelligence and simulation           
technology. To supplement its internal research and development efforts, the    
Company also buys, licenses, or contracts to have developed third-party         
development tools and content. The Company maintains a worldwide database of its
libraries, tools and other software assets. This database is electronically     
accessible by each Development Studio and exclusive third-party developers and  
publishers via a secured network. The Company believes that the use of this     
library streamlines the development process, allowing members of the development
team to focus their efforts on the play and simulation aspects of the product.  

EXTERNAL PRODUCT DEVELOPMENT.  In addition to its internal development  
teams, the Company also contracts with independent software developers. The     
Company's strategy in contracting with third-party developers is to attract     
the broadest base of available talent for creating new products. It is the      
intent of the Company to attract and maintain exclusive relationships with      
third-party developers. The Company engages in consulting or development        
agreements with its independent software developers, and manages the            
development process by establishing program schedules and milestones. In        
addition, the Company may provide its third-party developers with access to     
its extensive library of tools and content as well as program specifications,   
such as audio/visual displays, artwork, musical work, sound recordings, rules   
of play, networking and other components for the developer's use in creating    
the product. In general, the Company has less control over the scheduling and   
the quality of work of independent contractors than that of the Company's own   
employees. The Company's success in its external development efforts will       
depend in part on its continued ability to maintain relationships with          
skilled independent software developers, to obtain and renew product            
development agreements with such developers and to attract new product          
development relationships. As is customary in the industry, the Company         
compensates outside developers with nonrefundable royalty advances that are     
paid as milestones are reached. See Item 7 - "Use of Independent Software       
Developers."                                                                    

  LICENSING.  The Company from time to time licenses intellectual properties
such as trademarks, brands, characters and entertainment properties to          
complement both internal and external development projects. Typically these     
licenses are obtained for certain identified platforms over a specific length of
time in a specific territory. As is customary in the industry, this type of     
license typically involves a royalty, a portion of which is paid in advance,    
normally with a minimum guaranteed payment over the term of the license.        

PUBLISHING.  The Company extends its product offerings through          
relationships with outside developers with whom it enters into publishing       
agreements. Products subject to publishing agreements are typically either      
partially or fully completed at the time the publishing agreement is formalized.
The Company attempts to select products for publishing that will enhance its    
existing product line. The publishing agreements provide the Company with the   
rights to publish, market and sell a product for certain identified platforms,  
over a specific length of time in a specific territory, in exchange for         
royalties based on sales of the product.                                        

AFFILIATED LABEL.  Through its affiliated label program, the Company has
historically sold and distributed products that are marketed by and under the   
name of the affiliated label publisher, with an indication on the package that  
the product is distributed by Spectrum HoloByte. The Company has purchased the  
software products directly from the affiliated label publisher and resold the   
products with a distribution                                                    

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mark up. Affiliate label products typically have lower margins than internally  
developed products. In fiscal 1996, the company terminated most of it U.S.      
affiliated label agreements, including the agreement with its largest affiliated
label publisher (Domark).                                                       

   ACQUISITIONS AND JOINT VENTURES.  Spectrum HoloByte has acquired properties
through the acquisition of businesses and strategic joint ventures. The Company 
acquired SimTex Software Corporation, a software developer, in June 1995. The   
Company has also made an equity investment in Virtual World Entertainment Group,
Inc., through which the rights to its BATTLETECH properties were obtained.      

MARKETING, SALES AND DISTRIBUTION                                               

MARKETING.  Although the Company concentrates its marketing efforts in  
North America and Europe, its products are sold around the world in places such 
as Australia, Japan, Korea, Taiwan, Mexico, Singapore, the Middle East and South
America under export sales and license arrangements. The Company's marketing    
activities include print advertising in consumer and trade periodicals,         
television advertising, retail-supported print advertising, targeted direct mail
programs, retail in-store promotions, trade shows, user support programs and    
product publicity programs. The Company participates in retailers' advertising  
programs based upon the sales of products to a participating retailer and the   
commitment of the retailer to advertise certain products. The Company maintains 
an extensive database of customers who have purchased products directly from the
Company or who have returned product warranty cards, and also rents lists of    
potential customers with profiles similar to its current customers. The Company 
targets these lists with mailings of full-color product catalogs and other      
promotional materials.                                                          

SALES AND DISTRIBUTION.  There are two primary Sales and Distribution   
groups: Americas and International. Each group has sales and distribution       
responsibilities for its territories. The Company uses a combination of a direct
sales force and independent sales representatives in North America, where its   
products are sold primarily by large computer and software specialty retail     
chains, as well as by mass merchants and warehouse club stores.                 

The Company's International sales group is primarily located in Chipping
Sodbury, England, and in Gutersloh, Germany. Revenues are consummated through   
distribution to software specialty retail stores, independent retailers,        
large department stores and distributors. In June 1996, the Company acquired    
certain net assets of Leisuresoft GmbH ("Leisuresoft"), a German distributor    
of computer software and related products, for 1.2 million German Deutsche      
Marks (approximately $0.8 million). Sales in other European countries and       
Asia are made primarily through distributor, export and licensing               
arrangements with local distributors.                                           

In April 1996, the Company's wholly-owned Japanese subsidiary ("Spectrum
Japan") granted an exclusive license to Mitsui & Co., Ltd. ("Mitsui") for the   
localization, manufacture, marketing and distribution of certain Company titles 
in Japan. In connection with the license agreement, Spectrum Japan subcontracted
all of its employees to Mitsui and largely discontinued its operations. The     
Company received an up-front license fee, and earns royalties based upon        
revenues generated by Mitsui during the three-year term of the agreement.       

   The Company also enters into other license agreements which provide for: 1)
the manufacturing and distribution of the Company's products into specified     
geographic markets, 2) the development and distribution of the Company's titles 
on additional platforms, or 3) the bundled distribution of the Company's        
products along with other software products.  These agreements generally involve
a prepaid royalty, guaranteed minimum purchase or a minimum royalty to be paid  
to the Company over a specified term.                                           

The Company provides technical support in the United States, Europe and 
Japan for its products through its customer support department. The Company also
uses its support personnel to sell upgraded and                                 

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replacement software, inform customers about new products and conduct market    
surveys. In the United States, the Company also responds to customer inquiries  
through its telephone and electronic bulletin board services and conducts direct
mail services.                                                                  

     The Company's prices are standardized and are communicated on the Company's
order form. The Company annually publishes a trade policy that details the terms
and conditions under which customers may purchase from the Company. Payment     
terms of 30 to 60 days are typically granted to accounts that are in good credit
standing. The Company does not require collateral to secure payment. Retailers  
and distributors compete in a volatile industry and are subject to the risk of  
business failure. Although the Company maintains a reserve for uncollectible    
receivables that it believes to be adequate, a payment default of a significant 
customer could materially and adversely affect its operating results and        
financial condition.                                                            

 In addition, the Company is exposed to the risk of product returns from
distributors and retailers. Stock balancing and other product returns are       
restricted, based upon previous levels of purchases during specified time       
periods and the customer's credit standing with the Company. Although the       
Company provides reserves for returns that it believes are adequate, and        
although the Company's agreements with certain of its customers place certain   
limits on product returns, the Company could be forced to accept substantial    
product returns or provide markdowns on products in the distribution channel to 
maintain its relationships with retailers and its access to such channels. These
charges are likely to increase in periods in which the Company does not have    
significant new product introductions. Any significant amount of product returns
or markdowns could have a material adverse effect on the Company's business,    
operating results and financial condition.                                      

  The Company provides a 90-day limited warranty that its products will be
free from manufacturing defects. There can be no assurance that the Company will
not experience material warranty claims in the future, which could have a       
material adverse effect on the Company's business, operating results and        
financial condition.                                                            

In fiscal 1997, sales to the ten largest customers represented        
approximately 40% of the Company's revenue. The Company's principal direct      
retail accounts include Best Buy, Electronics Boutique, Babbages, and Egghead   
Software stores. The Company's distributors include Pinnacle, Navarre, GT Value 
Products Divison, Beamscope, Media Market, and Sony Electronic Publishing, Ltd. 
For the year ended March 31, 1997, one customer (Pinnacle) accounted for 12% of 
the Company's consolidated net revenue. As the installed base of multimedia PCs 
increases, the distribution channels for entertainment software are expected to 
increasingly depend on mass merchandisers to reach the broader consumer market. 

COMPETITION                                                                     

 The entertainment software industry is intensely competitive and in the
process of consolidation. The Company's competitors vary in size from very small
companies with limited resources to very large corporations with greater        
financial, marketing and product development resources than those of the        
Company. The Company competes primarily with other developers of PC             
entertainment and video game entertainment software. Significant competitors of 
the Company in the entertainment software industry include Electronic Arts, CUC 
International, Lucas Arts, Interplay, GT Interactive, Acclaim Entertainment, and
Broderbund Software, along with Virgin Interactive in Europe. The success of one
or more of these companies or the entry and participation of new companies,     
including diversified entertainment companies, may adversely affect the         
Company's future performance. The availability of significant financial         
resources has become a major competitive factor in the entertainment software   
industry, principally as a result of the technical sophistication of advanced   
multimedia computer game products requiring substantial investments in research 
and development and the increasing need to license products and rights to use   
other intellectual properties from third parties. Also, competitors with large  
product lines and popular titles typically have greater leverage with retailers 
and distributors and other customers who may be willing to promote titles with  
less consumer appeal in addition to such competitors' most popular              
titles.                                                                         

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Many of the Company's competitors are developing on-line interactive  
computer games that will be competitive with the Company's products. As         
competition increases, significant price competition and reduced profit         
margins may result. In addition, competition from new technologies may reduce   
demand in markets in which the Company has traditionally competed. Prolonged    
price competition or reduced demand as a result of competing technologies       
would have a material and adverse effect on the Company's business, financial   
condition and operating results. There can be no assurance that the Company     
will continue to compete successfully against current or future competitors     
or that competitive pressures faced by the Company will not materially and      
adversely affect its business, operating results and financial condition.       

Retailers of the Company's products typically have a limited amount of
shelf space and promotional resources, and there is intense competition among   
consumer software producers for adequate levels of shelf space and              
promotional support from retailers. To the extent that the number of consumer   
software products and computer platforms increases, this competition for        
shelf space may intensify. Due to increased competition for limited shelf       
space, retailers and distributors are increasingly in a better position to      
negotiate favorable terms of sale, including promotional discounts and          
product return policies. Retailers often require software publishers to pay     
fees in exchange for preferred shelf space. The Company's products constitute   
a relatively small percentage of a retailer's sales volume, and there can be    
no assurance that retailers will continue to purchase the Company's products    
or provide the Company's products with adequate levels of shelf space and       
promotional support.                                                            

As more consumers own multimedia PCs, the distribution channels for   
entertainment software have changed, and are expected to continue to change, to 
increasingly depend on mass merchandisers, online services and the Internet to  
reach the broader market. In addition, while this trend has increased the number
of distribution channels, it has intensified competition for shelf space because
these new channels generally carry only top-selling titles. In addition, other  
types of retail outlets and methods of product distribution, such as online     
services and the Internet, may become important in the future, and it will be   
important for the Company to gain access to these channels of distribution.     
There can be no assurance that the Company will gain such access or that the    
Company's access will allow the Company to maintain its historical levels of    
sales volume.                                                                   

INTELLECTUAL PROPERTY                                                           

  The Company regards the software that it owns or licenses as proprietary
and relies primarily on a combination of copyrights, trade secret laws,         
patent and trademark laws, nondisclosure agreements and other copy protection   
methods to protect its proprietary rights to its products. It is the            
Company's policy that all employees and third-party developers sign             
nondisclosure agreements. There can be no assurance that these measures will    
be sufficient to protect the Company's intellectual property rights against     
infringement. The Company owns or licenses various trademarks and copyrights.   
However, the Company has only standard "shrink wrap" license agreements or no   
license agreements at all with the end users of its products and does not       
copy-protect its software. Rather, the Company relies on the copyright laws     
to prevent unauthorized distribution of its software. Existing copyright laws   
afford only limited protection. It may be possible for unauthorized third       
parties to copy the Company's products or to reverse engineer or otherwise      
obtain and use information that the Company regards as proprietary. Policing    
unauthorized use of the Company's products is difficult, and software piracy    
can be expected to be a persistent problem. Further, the laws of certain        
countries in which the Company's products are or may be distributed do not      
protect the Company's products and intellectual rights to the same extent as    
the laws of the United States.                                                  

  The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. As the number
of entertainment software products in the industry increases, the Company       
believes that software increasingly will become the subject of claims that such 
software infringes upon the rights of others. From time to time, the Company has
received communications from third parties asserting that features or content of
certain of its products may infringe upon intellectual property rights of such  
parties. The Company believes such claims have been without merit. To date, no  
such                                                                            

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claim has had an adverse effect on the Company's ability to develop, market or  
sell its products. There can be no assurance that existing or future            
infringement claims against the Company will not result in costly litigation or 
require the Company to license the intellectual property of third parties. There
can be no assurance that such licenses will be available on reasonable terms or 
at all.                                                                         

MANUFACTURING                                                                   

     The Company's PC CD-ROM and console products consist of disks, user manuals
and packaging. All of the Company's CD-ROM printing is performed by unaffiliated
third parties. Printing of the user manual and packaging, manufacturing of      
related materials and assembly of completed packages are performed to the       
Company's specifications by outside sources. To date, the Company has not       
experienced any material difficulties or delays in the manufacture and assembly 
of its PC CD-ROM and console products.                                          

EMPLOYEES                                                                       

   As of May 31, 1997, the Company employed 390 persons, excluding temporary
employees and consultants, including 212 in product development, 88 in sales,   
marketing and customer support, 23 in manufacturing and operations, and 67 in   
administration and finance, systems support, legal and human resources. None of 
the Company's employees are represented by a labor union or bound by a          
collective bargaining agreement, and the Company has experienced no work        
stoppages. The Company believes that its employee relations are good.           

     Competition in recruiting of personnel in the software industry is intense.
The Company believes that its future success will depend in part on its         
continued ability to recruit and retain highly skilled management, marketing,   
creative and technical personnel.                                               

ITEM 2.  FACILITIES AND PROPERTY                                                

The Company leases approximately 31,900 square feet of office space in
Alameda County, California which is utilized for the Company's headquarters,    
product development, sales and administration under a lease that expires in     
2002. Also in Alameda County, California, is an additional 14,000 square feet of
manufacturing and warehouse space that the Company leases under a lease that    
expires in 1997. The Company's MicroProse subsidiary, located in Hunt Valley,   
Maryland, leases approximately 35,800 square feet of office space under a lease 
that expires in August 1998. The Company's Chapel Hill, North Carolina          
development facility consists of approximately 3,200 square feet under a lease  
that expires in March 1998.  The Company's SimTex subsidiary leases             
approximately 11,500 square feet of office space in Austin, Texas, pursuant to a
lease that expires in 2002. The Company's United Kingdom subsidiary leases      
approximately 28,700 square feet of office space in Chipping Sodbury, England   
under a lease that expires in September 2003. The Company leases approximately  
2,400 square feet of office space in Gutersloh, Germany, under a lease that     
expires in March 1999. The Company owns 31,800 square feet of office and        
warehouse space and 47,900 square feet of land in Bonen, Germany. The Company   
believes that its existing facilities are adequate to meet its current needs and
that, if required, suitable additional or substitute space is likely to be      
available on reasonably acceptable terms.                                       

ITEM 3.  LEGAL PROCEEDINGS                                                      

LEGAL PROCEEDINGS                                                               

On July 9, 1996, a lawsuit entitled Acclaim Entertainment, Inc. v. Spectrum     
Holobyte California, Inc. No. 96-2462 WHO, was filed in the United States       
District Court for Northern District of California. MicroProse Software, Inc.   
was also named as a defendant. The complaint alleged various causes of action   
related to an exclusive license Acclaim holds from Wizard of Coast, Inc.        
("WOTC") to develop certain computer game products based on the world and       
characters of the MAGIC: THE GATHERING card game.  Acclaim alleged that its     
license is being infringed by the MAGIC: THE GATHERING computer game being      
developed by the Company, which also holds an exclusive license from WOTC.      

On September 20, 1996, the Company filed an answer and counterclaim denying     
the allegations in the complaint and asserting claims for unfair competition,   
copyright infringement, and interference with contract against Acclaim.         

On November 4, 1996, the Company, MicroProse and Acclaim entered into an        
agreement settling the lawsuit.  Under the terms of the settlement, the         
Company is not required to make any monetary payment or alter its computer      
game product. The parties agreed to differentiate their respective titles in    
the marketplace. Acclaim agreed to market its product for Windows 95 under      
the name MAGIC: THE GATHERING-BATTLEMAGE and to position the title as a         
real-time, multi-player strategy game, based on the characters and scenarios    
of the fantasy adventure world of MAGIC: THE GATHERING.  The Company agreed     
to release its title under the MICROPROSE brand name and position it as an      
interactive version of the MAGIC: THE GATHERING card game.  The parties also    
agreed to coordinate the release dates for their respective products.           

On January 23, 1997, the Company filed suit against Acclaim for violation of    
certain terms of the settlement agreement.  On February 18, 1997, Acclaim       
filed an answer and counterclaims for breach of contract and abuse of           
process.  On April 30, 1997, Acclaim's counterclaim for abuse of process was    
dismissed without leave to amend by the United States District Court for the    
Northern District of California.  The Company believes that Acclaim's           
remaining counterclaim is without merit.                                        

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

None.                                                                 

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     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER      
MATTERS                                                       

PRICE RANGE OF COMMON STOCK                                                     
  The Company's common stock is traded on the Nasdaq National Market under
the symbol SBYT. The following table sets forth, for the periods indicated, the 
high and low closing sale prices for the common stock as reported by the Nasdaq 
National Market.                                                                

                                                  HIGH           LOW
                                                ------------------------
FISCAL 1997                                                                     
Fourth Quarter                                 $   9.50       $   6.62
Third Quarter                                      7.75           4.87
Second Quarter                                     7.25           3.87
First Quarter                                      8.62           5.37

FISCAL 1996                                                                     
Fourth Quarter                                 $   9.63       $   4.75
Third Quarter                                     13.13           6.00
Second Quarter                                    21.38          12.38
First Quarter                                     17.13          13.13

     On June 18, 1997, the closing sale price of the common stock as reported on
Nasdaq was $4.56 per share. As of that date, there were approximately 235       
holders of record (not including beneficial holders of stock held in street     
name) and approximately 28,327,557 shares of common stock were outstanding.     
There has historically been significant volatility in the share price for the   
Company's common stock, and the market price of the Company's common stock may  
be highly volatile in the future.                                               

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ITEM 6.  SELECTED FINANCIAL DATA                                                

CONSOLIDATED STATEMENTS OF OPERATIONS DATA                                      
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS                                          

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED MARCH 31,                                  
                                             ------------------------------------------                         
                                                 1997           1996           1995         1994        1993    
                                             ------------------------------------------------------------------ 
                                                                                                                
Net revenue                                   $100,253      $  59,694      $  84,350     $  40,887    $  13,632 
Cost of revenue                                 39,317         30,554         43,434        24,519        6,881 
                                             ------------------------------------------------------------------ 
Gross profit                                    60,936         29,140         40,916        16,368        6,301 
Operating expenses:                                                                                             
    Sales and marketing                         18,741         21,642         26,063        11,703        3,254 
    General and administrative                  14,670         14,409         12,985         7,276        4,058 
    Research and development                    23,145         27,490         19,995        10,712        3,268 
    In-process research and development              -              -              -        46,319            - 
    Restructuring charges                            -          1,123              -             -            - 
                                             ------------------------------------------------------------------ 
    Total operating expenses                    56,556         64,664         59,043        76,010       10,580 
                                             ------------------------------------------------------------------ 
Operating income (loss)                          4,380        (35,524)       (18,127)      (59,642)      (3,779)
Other income (expense), net                        511         (4,317)            76           (85)        (254)
                                             ------------------------------------------------------------------ 
Income (loss) before income taxes                                                                               
    and extraordinary item                       4,891        (39,841)       (18,051)      (59,727)      (4,033)
Income tax provision (benefit)                     450              -              -        (1,267)          26 
                                             ------------------------------------------------------------------ 
Income (loss) before extraordinary item          4,441        (39,841)       (18,051)      (58,460)      (4,059)
Extraordinary item, net of tax effect            3,547              -              -            -             - 
                                             ------------------------------------------------------------------ 
Net income (loss)                             $  7,988      $ (39,841)     $ (18,051)    $ (58,460)     $(4,059)
                                             ------------------------------------------------------------------ 
Per share data:                                                                                                 
    Income (loss) before extraordinary item   $   0.15      $   (1.70)     $   (0.91)    $   (5.54)     $ (1.14)
    Extraordinary item, net of tax effect         0.13              -              -             -            - 
                                             ------------------------------------------------------------------ 
    Net income (loss)                         $   0.28      $   (1.70)     $   (0.91)    $   (5.54)     $ (1.14)
                                             ------------------------------------------------------------------ 
                                             ------------------------------------------------------------------ 
Number of shares used in computation of                                                                         
    per share data                              27,776         23,636         20,111        10.612        3,678 
                                             ------------------------------------------------------------------ 
                                             ------------------------------------------------------------------ 


(CONTINUED)                                                                     

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CONSOLIDATED BALANCE SHEET DATA                                                 
IN THOUSANDS                                                                    

                                                        [Enlarge/Download Table]


                                                                   MARCH 31,                                  
                                        ----------------------------------------------------------------------
                                            1997           1996           1995           1994           1993  
                                        ----------------------------------------------------------------------
                                                                                                              
Working capital (deficit)                $44,333       $ 35,685      $   6,203      $  (7,008)     $   8,930  
Total assets                              80,305         65,922         59,350         33,191         14,529  
Notes and borrowings under                                                                                    
    lines of credit and long-term debt    32,739         50,504         11,474          4,701              -  
Notes payable and amounts                                                                                     
   due to related parties                      -              -              -          1,739              -  
Capital lease obligations                    409            815          1,816          3,096          1,087  
Redeemable preferred stock                 5,881          5,881          5,881          5,881          5,881  
Total stockholders' equity (deficit)      21,598         (8,915)         8,562         (6,025)         4,170  

QUARTERLY FINANCIAL DATA                                                        
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS                                          

                                                        [Enlarge/Download Table]

1997                                       4TH QUARTER    3RD QUARTER    2ND QUARTER    1ST QUARTER  
-----------------------------------------------------------------------------------------------------
                                                                                                     
Net revenue                                  $  23,880      $  35,888      $  27,413      $  13,072  
Gross profit                                    13,536         22,000         17,227          8,173  
Operating  income (loss)                         1,473          6,447          2,229         (5,769) 
Net income (loss)                                1,135          5,658          2,710         (1,515) 
Net income (loss) per share                       0.04           0.20           0.09          (0.07) 


1996                                       4TH QUARTER    3RD QUARTER    2ND QUARTER    1ST QUARTER  
-----------------------------------------------------------------------------------------------------
                                                                                                     
Net revenue                                  $  15,531      $  13,389      $  13,845      $  16,929  
Gross profit                                     8,889          6,357          4,668          9,226  
Operating loss                                  (7,228)        (8,226)       (11,042)        (9,028) 
Net loss                                        (8,905)        (9,947)       (11,591)        (9,398) 
Net loss per share                               (0.37)         (0.41)         (0.49)         (0.42) 


1995                                       4TH QUARTER    3RD QUARTER    2ND QUARTER    1ST QUARTER  
-----------------------------------------------------------------------------------------------------
                                                                                                     
Net revenue                                  $  13,150      $  25,503      $  26,550      $  19,147  
Gross profit                                     3,268         14,674         14,188          8,786  
Operating income (loss)                        (14,195)          (848)           363         (3,447) 
Net income (loss)                              (13,970)          (628)            98         (3,551) 
Net income (loss) per share                      (0.68)         (0.03)          0.00          (0.18) 


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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND        
RESULTS OF OPERATIONS                                         

OVERVIEW                                                                        

Spectrum HoloByte, Inc. ("the Company") derives revenue primarily from  
publishing and distributing entertainment software. This software is generally  
published by the Company for the following platforms:                           

-    Compact-Disc Read-Only Memory ("CD-ROM") for the personal computer 
("PC").                                                       

-    Videogame consoles, which include 32-bit "next-generation" systems.

In addition, the Company generates revenue from the licensing of its    
products to third-party publishers and the distribution of third-party software 
and related products.                                                           

The Company generates a substantial portion of its revenue from the     
introduction of new products. In order to maintain or grow its current revenue  
levels, the Company believes it will be necessary to develop or obtain rights to
new products that achieve market acceptance, are developed for the appropriate  
platforms, are introduced in a timely manner and are able to sustain market     
acceptance. The Company is continuing to devote considerable resources toward   
the development of new products and has secured rights to intellectual          
properties owned by third parties. As is typical in the industry, the Company   
maintains internally developed release schedules, but there can be no assurance 
that new products under development will be released on schedule or at all, or  
that any such products will generate significant revenue. Historically, the     
Company has frequently missed product release schedules. To the extent that     
major new products are not released on schedule, both net revenue and net income
are likely to be adversely affected. In addition, as access to distribution     
channels and retail shelf space becomes increasingly competitive, the Company's 
ability to produce and bring to market new and compelling products in a timely  
fashion plays an increasingly important role in the Company's ability to retain 
adequate access to these channels.                                              

 The Company's operating results have varied significantly in the past and
are expected to vary significantly in the future. This variability is a result  
of factors such as: 1) volume shipments of significant new products, 2) the     
degree of market acceptance of the Company's products, 3) the introduction of   
products competitive with those of the Company, 4) the timing and market        
acceptance of new hardware and software product introductions, 5) the size and  
growth rate of the consumer software market, 6) the seasonality of sales, 7)    
development and promotional expenses relating to the introduction of new        
products or new versions of existing products, 8) product returns and markdowns,
9) changes in pricing policies by the Company and its competitors, 10) the      
accuracy of retailers' forecasts of consumer demand, 11) the timing of orders   
from major customers, 12) order cancellations, 13) delays of shipment, and 14)  
write-offs of advance royalty payments. Because a majority of the unit sales for
most product typically occurs in the first 90 to 120 days following the         
introduction of the product, the Company's revenue may increase significantly in
a period in which one or more major product introductions occur and may decline 
in following periods or in periods in which there are no major product          
introductions. The Company's expenses are based, in part, on expected future    
revenue. Certain overhead and product development expenses are relatively fixed 
and do not vary directly with revenue. Consequently, if net revenue is below    
expectations, the Company's operating results are likely to be materially       
adversely affected. In addition, the market price of the Company's shares could 
be adversely impacted in future periods.                                        

The entertainment software business is highly seasonal. Typically, net  
revenue is highest during the last calendar quarter (which includes the holiday 
buying season), declines in the first calendar quarter, is lowest               
in the second and increases in the third calendar quarter. This seasonal pattern
is due primarily to the increased demand for entertainment software products    
during the year-end holiday buying season. The Company's net revenue, however,  
is largely dependent on releases of major new products and, as such, may not    
necessarily reflect the seasonal patterns of the industry as a whole.           
The Company expects that its net revenue and operating results will continue to 
fluctuate significantly in the future.                                          

 The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve     
risks and uncertainties. The Company may, from time to time, make oral          
forward-looking statements. The factors discussed herein and in the Company's   
Securities and Exchange Commission filings, including but not limited to Item 7 
of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 
1997, are important factors that could cause actual results to differ materially
from those projected in any such forward-looking statements.                    

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OPERATING RESULTS                                                               

Consolidated net revenue for fiscal 1997, 1996 and 1995 consisted of the        
following (dollars in thousands):                                               

                                                        [Enlarge/Download Table]

                                       AMOUNT                   % CHANGE       % OF CONSOLIDATED NET REVENUE
                         ---------------------------------  -----------------  -----------------------------
                             1997       1996       1995      1997       1996     1997      1996       1995  
                         ---------------------------------  -----------------  -----------------------------
                                                                                                            
By Territory:                                                                                               
  North America          $  36,522   $ 30,351   $ 60,249     20.3%     -49.6%   36.4%      50.8%      71.4% 
  International             63,731     29,343     24,101    117.2%      21.8%   63.6%      49.2%      28.6% 
                         ---------------------------------  -----------------  -----------------------------
  Consolidated           $ 100,253   $ 59,694   $ 84,350     67.9%     -29.2%  100.0%     100.0%     100.0% 
                         ---------------------------------  -----------------  -----------------------------
                         ---------------------------------  -----------------  -----------------------------
By Platform/Type:                                                                                           
  CD-ROM                 $  74,606   $ 40,338   $ 28,331     85.0%      42.4%   74.4%      67.6%      33.6% 
  Videogame                 10,226      2,125     11,517    381.2%     -81.5%   10.2%       3.6%      13.7% 
  Licensing/OEM              4,539      4,212      7,403      7.8%     -43.1%    4.5%       7.0%       8.8% 
  Distribution               9,664      8,703      3,327     11.0%     161.6%    9.7%      14.6%       3.9% 
  Floppy disk and other      1,218      4,316     33,772     71.8%     -87.2%    1.2%       7.2%      40.0% 
                         ---------------------------------  -----------------  -----------------------------
  Consolidated           $ 100,253   $ 59,694   $ 84,350     67.9%     -29.2%  100.0%     100.0%     100.0% 
                         ---------------------------------  -----------------  -----------------------------
                         ---------------------------------  -----------------  -----------------------------


   The increase in consolidated fiscal 1997 net revenue was largely due to the
strong success of two PC CD-ROM titles, GRAND PRIX II, a racing simulation game 
released in fiscal 1997, and SID MEIER'S CIVILIZATION-Registered Trademark- II, 
a strategy game released late in fiscal 1996. Net revenue related to these two  
products comprised approximately 51% of fiscal 1997 consolidated net revenue.   
The increases in the amount and proportion of international revenue were mostly 
due to European shipments of GRAND PRIX II. Approximately 88% of the GRAND PRIX 
II revenue for fiscal 1997 was generated internationally. Other significant     
fiscal 1997 PC CD-ROM releases included MASTER OF ORION-TM- II and MAGIC: THE   
GATHERING-Registered Trademark-.                                                

  The increase in videogame revenue in fiscal 1997 was due to the release of
three videogame console titles as compared to one title in fiscal 1996. The     
three fiscal 1997 titles (all for the Sony PlayStation-TM-) were TOP GUN-TM-:   
FIRE AT WILL!-TM-, GUNSHIP 2000-Registered Trademark-, and X-COM: TERROR FROM   
THE DEEP-TM-.                                                                   

In total, the Company released eight new products in fiscal 1997 as     
compared to 23 new products released in fiscal 1996. The average unit volume per
new title during the year of release increased significantly, however, from     
approximately 62,000 units in fiscal 1996 to 246,000 units in fiscal 1997. The  
decrease in the number of new products released and the increase in the number  
of units shipped per title were due to the Company's focus on a fewer number of 
titles with greater market appeal. There can be no assurances that the Company's
continued focus on this strategy will be successful.                            

Net revenue in fiscal 1997 was also favorably impacted by a percentage  
decrease in the provisions recorded for returns and markdowns. These decreases  
were due to a focused effort to better manage inventories of the Company's      
products in the distribution channel and better product sell-through.           

Distribution revenue includes shipments of computer software and related
products published or manufactured by third parties and distributed by the      
Company, including shipments under affiliated label agreements to distribute    
third-party entertainment software titles. In late fiscal 1996, the Company     
terminated most of its U.S. affiliated label agreements. In fiscal 1997, the    
Company acquired a majority interest in Leisuresoft GmbH, a German distribution 
company. Substantially all of the distribution revenue generated in fiscal 1997 
relates to shipments by Leisuresoft. The increase in distribution revenue in    
fiscal 1996 was due to an increase in the number of new affiliated label titles 
released, which increased from three in fiscal 1995 to eight in fiscal 1996.    

In fiscal 1996, the proportion of net revenue generated from floppy disk
and other products decreased and the proportion of net revenue generated from   
CD-ROM products increased due to the transition of the personal computer        
entertainment market towards fully integrated, multimedia products on the CD-ROM
platform. This trend continued in fiscal 1997, and the Company is generating    
virtually no floppy disk revenue. Videogame console revenue declined in fiscal  
1996 as the Company ceased developing or selling products for 8-bit and 16-bit  
console platforms. The fiscal 1996 decline in licensing/OEM net revenue was due 
to the Company's election to distribute a number of older titles at reduced     
prices through retail channels rather than through OEM channels.                

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Gross profit consisted of the following (dollars in thousands):                 

                                                        [Enlarge/Download Table]

                            AMOUNT                 % CHANGE       % OF CONSOLIDATED NET REVENUE
              --------------------------------  ----------------  -----------------------------
                 1997        1996       1995     1997     1996      1997       1996       1995 
              --------------------------------  ----------------  -----------------------------
                                                                                               
GROSS PROFIT  $ 60,936     $ 29,140   $ 40,916  109.1%  -28.8%     60.8%       48.8%     48.5% 
              --------------------------------                    -----------------------------
              --------------------------------                    -----------------------------

Gross profit as a percentage of consolidated net revenue increased in   
fiscal 1997 due to reductions in both the direct per unit costs of products     
shipped and the amounts provided for in-house and channel inventory reserves.   
The direct per unit costs decreased due to a reduction in the cost of both      
materials and outside order fulfillment services. The amounts provided for      
inventory reserves declined in fiscal 1997 as significant charges related to    
floppy disk products were made in fiscal 1996.  Partially offsetting these      
increases in fiscal 1997 gross margins were declines caused by increased        
revenue from lower-margin distribution and next-generation products.            

The Company believes that gross profit could be adversely impacted in   
future periods by an increased proportion of distribution revenue, increased    
license royalties and by competitive pricing pressures.                         

Operating expenses were as follows (dollars in thousands):              

                                                        [Enlarge/Download Table]

                                         AMOUNT                    % CHANGE       % OF CONSOLIDATED NET REVENUE
                            ---------------------------------  -----------------  -----------------------------
                                1997       1996       1995      1997       1996    1997       1996       1995  
                            ---------------------------------  -----------------  -----------------------------
                                                                                                               
Sales and marketing         $  18,741  $  21,642  $  26,063    -13.4%     -17.0%   18.7%      36.3%      30.9% 
General and administrative     14,670     14,409     12,985      1.8%      11.0%   14.6%      24.1%      15.4% 
Research and development       23,145     27,490     19,995    -15.8%      37.5%   23.1%      46.1%      23.7% 
Restructuring charges               -      1,123          -    100.0%          -       -       1.9%          - 
                            ---------------------------------                     -----------------------------
  Total operating costs     $  56,556  $  64,664  $  59,043    -12.5%       9.5%   56.4%     108.3%      70.0% 
                            ---------------------------------                     -----------------------------
                            ---------------------------------                     -----------------------------

  The decrease in sales and marketing expense in fiscal 1997 was largely due
to a decline in variable marketing costs due to fewer new product releases and  
due to high fiscal 1996 promotional costs related to the release of the PC      
versions of STAR TREK: THE NEXT GENERATION-TM- "A FINAL UNITY-TM-" and TOP GUN: 
FIRE AT WILL!. In addition, certain redundant domestic sales and marketing      
functions were eliminated or consolidated during fiscal 1997. The decrease in   
fiscal 1996 costs as compared to fiscal 1995 was primarily due to a $2.6 million
reduction in distributor and retailer cooperative marketing costs and the       
reorganization of certain domestic marketing and sales functions ($1.1 million).
In addition, variable marketing costs decreased due to the release of fewer new 
products in fiscal 1996.                                                        

The increase in general and administrative costs in fiscal 1997 included
increased charges for bad debt expense ($1.0 million) and incentive compensation
($1.2 million). Before these charges, general and administrative costs decreased
by approximately $2 million due to a domestic consolidation in certain          
administrative functions and reductions in professional fees, severance costs   
and recruiting costs. The increase in general and administrative costs from     
fiscal 1995 to fiscal 1996 was due primarily to a $1.6 million increase in the  
provision for bad debts related to specific customer accounts and to costs      
related to turnover in executive and administrative staff.  Partially offsetting
these increases was a $1.4 million reduction due to the consolidation of certain
domestic administrative functions.                                              

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 Research and development costs decreased in fiscal  1997 due partially to
the elimination of redundant product test functions ($0.9 million) and certain  
product development headcount in the Company's Maryland and UK studios ($1.8    
million). In addition, write-offs of development advances decreased by $1.4     
million as the Company canceled a larger number of products in fiscal 1996 as a 
part of the strategic refocusing of its product lines.  The increase in research
and development costs in fiscal 1996 was due to: 1) higher costs associated with
the development of full multimedia products for CD-ROM and next-generation      
hardware platforms, 2) research and development expenses of $1.7 million        
associated with the SimTex development studio, acquired in the first quarter of 
fiscal 1996 through a pooling of interests (research and development            
expenditures in prior fiscal periods were not restated for the SimTex           
acquisition due to the immateriality of the related SimTex expenditures), and 3)
the write-off of $1.9 million of development advances associated with           
discontinued projects as part of the Company's continued efforts to refocus its 
product lines.                                                                  

The fiscal 1996 restructuring charges of approximately $1.1 million     
included severance costs related to the Company's downsizing efforts, reserves  
on inventories related to terminated affiliated label publishing agreements, and
charges to write down the net assets of the Company's wholly-owned Japanese     
subsidiary to their estimated realizable values.                                

The following table sets forth other income and expense, provision for  
income taxes and extraordinary items (dollars in thousands):                    

                                                        [Enlarge/Download Table]

                                          AMOUNT                  % CHANGE       % OF CONSOLIDATED NET REVENUE 
                            ---------------------------------  ----------------  ------------------------------
                                1997       1996       1995      1997    1996      1997       1996       1995   
                            ---------------------------------  ----------------  ------------------------------
                                                                                                               
Other income (expense), net   $   511    $(4,317)    $   76     -          -     0.5%      -7.2%       0.1%    
                            ---------------------------------                    ------------------------------
                            ---------------------------------                    ------------------------------
Provision for income taxes    $   450   $      -     $    -     -          -     0.4%          -          -    
                            ---------------------------------                    ------------------------------
                            ---------------------------------                    ------------------------------
Extraordinary item,                                                                                            
     net of tax effect        $ 3,547   $      -     $    -     -          -     3.5%          -          -    
                            ---------------------------------                    ------------------------------
                            ---------------------------------                    ------------------------------

Other income increased in fiscal 1997 due primarily to the following    
factors: 1) a $1.9 million gain was recorded in fiscal 1997 on the sale of the  
Company's investment in FASA Interactive Technologies, Inc., 2) equity losses   
and writedowns of $1.6 million were recorded in fiscal 1996 from the Company's  
investment in OT Sports, Inc.; this investment was sold in early fiscal 1997 for
its net book value of $250,000, 3) interest expense was down in fiscal 1997 due 
to a reduction in borrowings under Notes and revolving lines of credit, and 4)  
net foreign currency transaction gains increased.  The net expense recorded in  
fiscal 1996 was due mostly to interest expense ($1.5 million) recorded on the   
October 1995 debt financing and the losses related to OT Sports.                

   The fiscal 1997 provision for income taxes was made to provide for earnings
of the Company's foreign subsidiaries. The extraordinary item recorded in fiscal
1997 reflects the gains realized upon the repurchase or the conversion to equity
of a portion of the Company's Subordinated Notes at a discount from face value. 

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LIQUIDITY AND CAPITAL RESOURCES                                                 

Working capital increased to over $44 million and cash increased $11.7  
million to approximately $47 million during fiscal 1997. The main sources of    
funds in fiscal 1997 were from operations and from a private placement of common
stock.                                                                          

The Company generated positive cash flows from operations during fiscal 
1997 due to the net income generated, strong collections of receivables and     
non-cash increases in certain accrued liabilities. Accounts receivable decreased
as days sales outstanding declined from 57 days at March 1996 to 30 days at     
March 1997.                                                                     

In fiscal 1997, the Company generated $5.2 million from financing       
activities and used $3.1 million in investing activities. Private placements of 
1,818,367 shares of common stock generated approximately $9.6 million in        
proceeds, net of associated issuance costs including placement fees. The Company
repurchased $4 million of Notes (see below) for approximately $2.9 million of   
cash, and exchanged another $14.9 million of Notes for 1,918,860 shares of      
Series B and B-1 preferred stock. The investing activities included investments 
in property and equipment and in Leisuresoft.                                   

   On October 2, 1995, the Company completed a private offering of $50 million
face value Convertible Subordinated Notes (the "Notes") pursuant to Rule 144A of
the Securities Act of 1933. Net proceeds to the Company approximated $48.0      
million, after discounts, commissions and other issuance costs. The Notes, which
bear interest at the rate of 6.5 percent per annum, will mature on September 15,
2002, and are convertible into shares of the Company's common stock at any time 
after 60 days following the latest date of original issuance through maturity,  
unless previously redeemed or repurchased, at a conversion price of $15.84 per  
share (subject to adjustment for certain events). The Notes may be redeemed at  
the option of the Company subsequent to September 17, 1998, in whole or in part,
at various declining redemption prices from 103.7% to 100%, together with       
accrued interest thereon. The Notes may also be redeemed at the option of the   
holder at 100% upon the occurrence of certain events. As of March 31, 1997,     
Notes with a face value of approximately $31.1 million were outstanding.        

The substantial debt incurred by the Company will have several important
consequences for the Company's future operations, including the following: 1) a 
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of interest on, and principal of, its indebtedness; 2) the       
Company's ability to obtain additional financing in the future for capital      
expenditures, acquisitions, general corporate purposes or other purposes may be 
impaired; and 3) the Company's ability to withstand competitive pressures,      
adverse economic conditions and adverse changes in governmental regulations and 
to make acquisitions or otherwise take advantage of significant business        
opportunities that may arise may be negatively impacted. The Company's ability  
to meet its debt service obligations and to reduce its total indebtedness will  
be dependent upon its future performance, which will be subject to financial,   
business and other factors affecting the operations of the Company, many of     
which are beyond its control. If the Company is unable to generate sufficient   
cash flows from operations in the future to service its debt, it may be required
to refinance all or a portion of such debt, including the Notes, or to obtain   
additional financing. However, there can be no assurance that any refinancing   
would be possible or that any additional financing could be obtained.           

The Company has an overdraft/line of credit facility in the UK that is  
based upon qualifying receivables and certain other bank requirements for       
amounts up to a maximum credit limit of 1,850,000 pounds sterling (approximately
$2.9 million at March 31, 1997).  This facility bears interest at the rate of   
2.75% over the bank's base rate, and expires September 10, 1997. There can be no
assurance that the Company will be able to renegotiate this facility upon its   
expiration or that any additional borrowing facilities will be made available to
the Company on acceptable terms.                                                

  Management believes that existing cash and cash equivalents, together with
cash generated from operations, will be sufficient to meet the Company's        
liquidity and capital needs for the next 12 months.                             

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RISK FACTORS                                                            

 The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 1 of this Annual Report on Form 10-K contain 
forward-looking statements which involve risks and uncertainties.  The Company  
may, from time to time, make oral forward-looking statements.  The factors      
discussed above and in the Company's Securities and Exchange Commission filings,
as well as the following, are important factors that could cause actual results 
to differ materially from those projected in any such forward-looking           
statements.                                                                     

THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE     
COMPANY AND ITS BUSINESS PROSPECTS.                                             

OPERATING RESULTS.  Although the Company reported net income for the year ended 
March 31, 1997 of $8.0 million or $0.28 per share, the Company had net losses of
approximately $39.8 million and $18.1 million in fiscal years 1996 and 1995,    
respectively. There can be no assurance that the Company's business strategies  
and tactics will be successful and that the Company will be able to generate    
profitability in future quarterly or annual periods. In particular, the         
Company announced that it expects to report a loss in the first quarter of      
fiscal 1998 of between $0.22 and $0.28 per share.                               

FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY.  The Company's operating results
have varied significantly in the past, and are expected to vary significantly in
the future.  This variability is a result of factors such as: 1) volume         
shipments of significant new products, 2) the degree of market acceptance of the
Company's products, 3) the introduction of products competitive with those of   
the Company, 4) the timing and market acceptance of new hardware and software   
product introductions, 5) the size and growth rate of the consumer software     
market, 6) the seasonality of sales, 7) development and promotional expenses    
relating to the introduction of new products or new versions of existing        
products, 8) product returns and markdowns, 9) changes in pricing policies by   
the Company and its competitors, 10) the accuracy of retailers' forecasts of    
consumer demand, 11) the timing of orders from major customers, 12) order       
cancellations, 13) delays of shipment, and 14) write-offs of advance royalty    
payments. Because a majority of the unit sales for a product typically occurs in
the first 90 to 120 days following the introduction of the product, the         
Company's revenue may increase significantly in a period in which a major       
product introduction occurs and may decline in following periods or in periods  
in which there are no major product introductions. The Company's expenses are   
based, in part, on expected future revenue. Certain overhead and product        
development expenses are fixed and do not vary directly in relation to revenue. 
Consequently, if net revenue is below expectations, the Company's operating     
results are likely to be materially and adversely affected. In certain past     
periods the Company's revenue or operating results were below the expectations  
of, and certain new products were not introduced when anticipated by, public    
market analysts and investors. These circumstances could recur in future        
periods, and in such event, the prices of the Company's common stock and Notes  
would likely be materially and adversely affected.                              

The entertainment software business is highly seasonal. Typically, net  
revenue is highest during the last calendar quarter (which includes the holiday 
buying season), declines in the first calendar quarter, is lowest in the second 
and increases in the third calendar quarter. This seasonal pattern is due       
primarily to the increased demand for entertainment software products during the
year-end holiday buying season. The Company's net revenue, however, is largely  
dependent on releases of major new products and, as such, may not necessarily   
reflect the seasonal patterns of the industry as a whole. The Company expects   
that its net revenue and operating results will continue to fluctuate           
significantly in the future.                                                    

SIGNIFICANT LEVERAGE.  As of March 31, 1997, the Company had outstanding        
indebtedness for borrowed funds of approximately $32.7 million and cumulative   
manditorily redeemable preferred stock of $5.9 million. This substantial        
leverage will have several important consequences for the Company's future      
operations, including the following: (i) a substantial portion of the Company's 
cash flows from operations will be dedicated to the payment of interest on, and 
principal of, its indebtedness; (ii) the Company's ability to obtain additional 
financing in the future for capital expenditures, acquisitions, general         
corporate purposes or other purposes may be impaired; and (iii) the Company's   
ability to withstand competitive pressures, adverse economic                    

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conditions and adverse changes in governmental regulations and to make          
acquisitions or otherwise take advantage of significant business opportunities  
that may arise may be negatively impacted.                                      

   The Company in the future may enter into lines of credit or other borrowing
arrangements, any of which would add to the total outstanding indebtedness of   
the Company. The Company's ability to meet its debt service obligations and to  
reduce its total indebtedness will be dependent upon the Company's future       
performance, which will be subject to financial, business and other factors     
affecting the operations of the Company, many of which are beyond its control.  
If the Company is unable to generate sufficient cash flow from operations in the
future to service its debt, it may be required to convert or refinance all or a 
portion of such debt, including the Notes (see below), or to obtain additional  
financing. However, there can be no assurance that any refinancing would be     
possible or that any additional financing could be obtained.                    

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS.  A significant portion 
of the Company's fiscal year revenue is generated by products introduced during 
that fiscal year. The Company depends on both the timely introduction of        
successful new products or sequels to existing products to replace declining    
revenue from older products and continued revenue from back-catalog products. If
for any reason revenue from new products or other activities fails to replace   
declining revenue from existing products, or if revenue from back-catalog titles
declines significantly, the Company's business, operating results and financial 
condition may be materially and adversely affected.  In order to maintain or    
grow its current revenue levels, the Company believes it will be necessary to   
develop or obtain rights to new products that achieve and sustain market        
acceptance, are developed for the appropriate platforms and are introduced in a 
timely manner. The Company is continuing to devote considerable resources toward
the development of new products and has secured rights to intellectual          
properties owned by third parties. As is typical in the industry, while the     
Company maintains internally developed release schedules, there can be no       
assurance that new products under development will be released on schedule or at
all, or that any such products will generate significant revenue. Historically, 
the Company has frequently missed product release schedules. To the extent that 
major new products are not released on schedule, both net revenue and gross     
profit are likely to be materially and adversely affected. In addition, as      
access to distribution channels and retail shelf space becomes increasingly     
competitive, the Company's ability to produce and bring to market new and       
compelling products in a timely fashion plays an increasingly important role in 
the Company's ability to retain adequate access to these channels.              

The Company's current production schedules contemplate that the Company 
will commence shipments of a number of new products in fiscal 1998. As with any 
software product, however, until all aspects of the development and initial     
distribution of a game are completed, there can be no assurance of its release  
date. Release dates will vary depending on quality assurance testing and other  
development factors. If the Company were unable to commence volume shipments of 
a significant new product during the scheduled quarter, the Company's revenue   
and earnings would likely be materially and adversely affected in that quarter. 
In the past, the Company has experienced significant delays in the introduction 
of certain new products. It is likely in the future that certain new products   
will not be released in accordance with the Company's internal development      
schedule or the expectations of public market analysts and investors. A         
significant delay in the introduction of, or the presence of a defect in, one or
more new products could have a material adverse effect on the ultimate success  
of such products and on the Company's business, operating results and financial 
condition, particularly in the quarter in which such products were scheduled to 
be introduced.                                                                  

The process of developing software products such as those offered by the
Company is extremely complex and is expected to become more complex and         
expensive in the future as consumers demand products with more sophisticated and
elaborate multimedia features and as new platforms and technologies are         
supported. At the same time, the introduction of new technologies and           
competitive products, the increase in competition for retail shelf space among  
software products and other factors may cause the effective lives of the        
Company's products to become shorter and the Company's ability to introduce new 
products on a timely basis to become increasingly important. As the Company     
intends to focus its resources on a smaller number of titles, its exposure to   
the risks of delays of any one title will increase.                             

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UNCERTAINTY OF MARKET ACCEPTANCE; UNPREDICTABLE PRODUCT LIFE CYCLES.  Consumer  
preferences for entertainment software products are continually and rapidly     
changing and are extremely difficult to predict. Few entertainment software     
products achieve sustained market acceptance, for example, beyond one holiday   
buying season. There can be no assurance that new products introduced by the    
Company will achieve any significant degree of market acceptance, or that       
acceptance, if achieved, will be sustained for any significant period. Further, 
there can be no assurance that such products will not be subject to changes in  
consumer preferences or that product life cycles will be sufficient to permit   
the Company to recover development and other associated costs. In addition,     
sales of any single title of the Company's entertainment software products will 
decline over time. A majority of the unit sales for a product typically occurs  
in the first 90 to 120 days after the product is introduced. Therefore, the     
Company cannot rely on the sales of current products to sustain its business in 
the future. Failure of new products or platforms to achieve or sustain market   
acceptance would have a material and adverse effect on the Company's business,  
operating results and financial condition. In addition, the Company does not    
carry significant inventory of its new products. As a result, significant       
production delays would have a material and adverse effect on the Company's     
business and operating results. Further, if demand for a particular product is  
greater than anticipated, the Company may not have sufficient inventory to meet 
customer demands.                                                               

COMPETITION. The entertainment software industry is intensely competitive and in
the process of consolidation. The Company's competitors vary in size from very  
small companies with limited resources to very large corporations with greater  
financial, marketing and product development resources than those of the        
Company. The Company competes primarily with other developers of PC             
entertainment and video game entertainment software. Significant competitors of 
the Company in the entertainment software industry include Electronic Arts, CUC 
International, Lucas Arts, Interplay, GT Interactive, Acclaim Entertainment, and
Broderbund Software, along with Virgin Interactive in Europe. The success of one
or more of these companies or the entry and participation of new companies,     
including diversified entertainment companies, may adversely affect the         
Company's future performance. The availability of significant financial         
resources has become a major competitive factor in the entertainment software   
industry, principally as a result of the technical sophistication of advanced   
multimedia computer game products requiring substantial investments in research 
and development and the increasing need to license products and rights to use   
other intellectual properties from third parties. Also, competitors with large  
product lines and popular titles typically have greater leverage with retailers 
and distributors and other customers who may be willing to promote titles with  
less consumer appeal in return for access to such competitors' most popular     
titles.                                                                         

  Many games of the Company's competitors are developing on-line interactive
computer games that will be competitive with the Company's products. As         
competition increases, significant price competition and reduced profit margins 
may result. In addition, competition from new technologies may reduce demand in 
markets in which the Company has traditionally competed. Prolonged price        
competition or reduced demand as a result of competing technologies would have a
material and adverse effect on the Company's business, financial condition and  
operating results. There can be no assurance that the Company will continue to  
compete successfully against current or future competitors or that competitive  
pressures faced by the Company will not materially and adversely affect its     
business, operating results and financial condition.                            

Retailers of the Company's products typically have a limited amount of  
shelf space and promotional resources, and there is intense competition among   
consumer software producers for adequate levels of shelf space and              
promotional support from retailers. To the extent that the number of consumer   
software products and computer platforms increases, this competition for        
shelf space may intensify. Due to increased competition for limited shelf       
space, retailers and distributors are increasingly in a better position to      
negotiate favorable terms of sale, including promotional discounts and          
product return policies. Retailers often require software publishers to pay     
fees in exchange for preferred shelf space. The Company's products constitute   
a relatively small percentage of a retailer's sales volume, and there can be    
no assurance that retailers will continue to purchase the Company's products    
or provide the Company's products with adequate levels of shelf space and       
promotional support.                                                            

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As more consumers own multimedia PCs, the distribution channels for     
entertainment software have changed, and are expected to continue to change, to 
increasingly depend on mass merchandisers, online services and the Internet to  
reach the broader market. In addition, while this trend has increased the number
of distribution channels, it has intensified competition for shelf space because
these new channels generally carry only top-selling titles. In addition, other  
types of retail outlets and methods of product distribution, such as online     
services and the Internet, may become important in the future, and it will be   
important for the Company to gain access to these channels of distribution.     
There can be no assurance that the Company will gain such access or that the    
Company's access will allow the Company to maintain its historical levels of    
sales volume.                                                                   

CONCENTRATION OF CUSTOMER BASE; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT      
RETURNS.  The Company principally sells its products to retailers and           
distributors, who in turn resell the products to consumers. During the year     
ended March 31, 1997, sales to the top ten such customers represented           
approximately 40% of the Company's net revenue. Sales are typically made on     
credit, with terms that vary depending upon the customer and the nature of the  
product. The Company does require collateral to secure payment. Retailers and   
distributors compete in a volatile industry and are subject to the risk of      
business failure. Certain of the Company's distributors and retailers have      
recently experienced financial difficulties and the Company has increased its   
reserves accordingly.  However, the business failure of a significant           
distributor or customer could have a material and adverse effect on the         
Company's business, operating results and financial condition.                  

   The Company is exposed to the risk of product returns from distributors and
retailers. The Company currently maintains a stock balancing policy that allows 
distributors and retailers to return products subject to certain conditions. The
Company provides reserves for returns that it believes are adequate, and the    
Company's agreements with various customers place certain limits on product     
returns. However, new product introductions by the Company or its competitors,  
or changes in consumer demand from that anticipated, could cause customers to   
seek to return inventory to the Company. Due to the unpredictability of consumer
demand and the uncertainties associated with a rapidly changing market, there   
can be no assurance that the Company or its customers will be able to forecast  
demand accurately. Any significant amount of product returns or markdowns could 
have a material and adverse effect on the Company's business, operating results 
and financial condition.                                                        

DEPENDENCE UPON STRATEGIC RELATIONSHIPS.  The Company's business strategy relies
to a significant extent on its strategic relationships with other companies and 
on its alliances with key developers. Certain agreements allow third parties to 
approve a product prior to its release, and therefore, subject the product to   
delay. There can be no assurance that these relationships will be successful or 
that the Company will continue to maintain and develop strategic relationships, 
or that licenses between the Company and any third party will be renewed or     
extended at their expiration dates. The Company's failure to renew or extend a  
key license or maintain its strategic relationships could materially and        
adversely affect the Company's business, operating results and financial        
condition. In addition, under certain key license agreements, the Company must  
obtain approval on a timely basis from the licensor in order to market products 
it develops under the license. There can be no assurance that the Company will  
obtain such approval, and failure to do so could have a material and adverse    
effect on the Company's operating results, financial condition and business     
prospects.                                                                      

The Company has made certain minority equity investments that it believes       
will provide future access to products, technologies or distribution            
channels. Management performs ongoing evaluations of the future realization     
of these investments, and charges any declines in value that are other than     
temporary in nature to other expense in its quarterly Consolidated Statements   
of Operations. A write down of one or more of these investments could have a    
material adverse impact on the Company's operating results and financial        
condition.                                                                      

CHANGES IN TECHNOLOGY AND PRODUCT PLATFORMS.  The market for entertainment      
software, including entertainment software platforms, is undergoing rapid       
technological change. As a result, the Company must continually anticipate and  
adapt its products to emerging platforms and evolving consumer preferences. The 
introduction of new platforms and technologies can render existing products     
obsolete and unmarketable. Development of entertainment software products for   
new hardware platforms requires substantial investments in research and         
development for technologies such as enhanced sound, digitized speech, music and
video and requires the Company to anticipate and develop products for those     
platforms that will ultimately be successful. Such research and development     
efforts, which generally require 12 to 24 months, must occur well               

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in advance of the release of new platforms in order to introduce products on a  
timely basis following the release of such platforms. In addition, the Company  
expects that the trend toward more complex multimedia products and increasing   
product development costs will continue for the foreseeable future.             

Although the Company intends to develop and market games for certain    
advanced and emerging platforms, these development and marketing efforts may    
require greater financial and technical resources than those currently possessed
by the Company. In addition, there can be no assurance that the platforms for   
which the Company develops products will achieve market acceptance and, as a    
result, there can be no assurance that the Company's development efforts with   
respect to such new platforms will lead to marketable products or products that 
generate sufficient revenue to offset research and development costs incurred in
connection with their development. There can be no assurance that the Company   
will be successful in developing and marketing products for new platforms.      
Failure to develop products for new platforms that achieve significant market   
acceptance may have a material and adverse effect on the Company's business,    
operating results and financial condition. The Company is developing games that 
may be played interactively over on-line services and the Internet, but there   
can be no assurance that the market for networked videogame play will evolve or 
develop as anticipated. Consumer preferences change continually and are         
extremely difficult to predict. Even if a market for networked videogame play   
develops, no assurance can be given that the Company's products will meet the   
requirements of such market and achieve market acceptance.                      

The Company is heavily dependent on the success of the entertainment    
software developed for use on the PC. However, there are multiple, competing and
incompatible formats being introduced in this new market. There can be no       
assurance that the Company's strategy of developing primarily for the PC or the 
other platforms the Company chooses to support ultimately will be successful.   
The development, marketing and distribution of products for game consoles the   
Company chooses to support will involve substantial investment and risks. The   
Company believes that the principal target audience for game consoles may be    
younger than the Company's traditional customers, and there can be no assurance 
that the Company's products will be successful with this different audience. In 
addition, the Company anticipates that products in the game console market will 
require substantially greater expenditures for marketing, advertising and       
inventory buildup, often before the market acceptance of a product is known.    
Inventory will be two or more times more expensive as a result of license fees  
that are required to be prepaid to the manufacturers of the hardware platforms. 
Further, game console products will be sold through channels that overlap with, 
but are somewhat different from, the retail channels currently utilized by the  
Company, and the Company will be competing in distribution against much larger  
organizations with greater financial resources. There can be no assurance that  
the Company will be successful in marketing and distributing software for game  
consoles.                                                                       

RISK OF SOFTWARE ERRORS OR FAILURES.  Software products as complex as those     
offered by the Company may contain undetected errors when first introduced or   
when new versions are released. In the past, the Company has discovered software
errors in certain of its product offerings after their introduction and has     
experienced delays or lost revenue during the period required to correct these  
errors. The Company's products must maintain compatibility with certain         
hardware, software and accessories. Any changes that result in incompatibility  
could result in significant product returns and customer service costs. In      
particular, the PC hardware environment is characterized by a wide variety of   
nonstandard peripherals (such as sound and graphics cards) and configurations   
that make prerelease testing for programming or compatibility errors very       
difficult and time consuming. There can be no assurance that, despite testing by
the Company, errors will not be found in new products or releases after         
commencement of commercial shipments, resulting in loss of or delay in market   
acceptance, which could have a material and adverse effect on the Company's     
business, operating results and financial condition. The risk of undetected     
product errors can be expected to increase as products and their development    
processes become more complex and as growing competition leads to increased     
pressure to reduce time to market.                                              

DEPENDENCE ON KEY PERSONNEL; MANAGEMENT CHANGES.  The Company's future success  
depends in large part on the continued service of its key product development,  
technical and management personnel and on its ability to continue to attract,   
motivate and retain highly qualified employees, including additional            

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management personnel. The loss of certain key employees could have a material   
and adverse effect on the Company's business. In addition, the Company depends  
on teams of programmers, game designers and artists. Competition for these      
skilled employees is intense, and the loss of the services of key development   
personnel could have a material and adverse effect upon the Company's current   
business, new product development efforts and prospects. Since January 1, 1996, 
the Company has hired a new Senior Vice President of Sales, Senior Vice         
President of Operations, Senior Vice President of Marketing, and a Senior Vice  
President of Development Studios and intends to hire other senior management    
positions including a new Chief Financial Officer. The Company has also hired a 
financial consultant to advise the Chief Executive Officer on financial         
planning, controls and reporting structures. There can be no assurance that     
qualified personnel can be readily identified and hired wherever necessary, that
any new personnel will be successfully integrated into the Company, its         
operations and culture, or that new personnel, if hired, will improve the       
Company's business, operations or operating results. The Company does not       
currently have key person life insurance on any employees.                      

USE OF INDEPENDENT SOFTWARE DEVELOPERS.  In addition to marketing internally    
developed software, the Company also markets entertainment software created by  
independent software developers. The cost to retain independent developers is   
increasing in the form of guaranteed advances and royalties. Additionally, the  
Company has less control over the scheduling and the quality of work of         
independent contractors than that of its own employees. Furthermore, the        
Company's agreements to publish and market certain independent software         
developers' titles will terminate after specified dates unless renewed. The     
Company's business and future operating results will depend in part on the      
Company's continued ability to attract and maintain relationships with skilled  
independent software developers, and to enter into and renew product development
agreements with such developers. There can be no assurance that the Company will
be able to maintain such relationships or enter into and renew such agreements. 

INTERNATIONAL REVENUE.  International net revenue represented approximately 64%,
49%, and 29% of the Company's net revenue for fiscal years 1997, 1996 and 1995, 
respectively. The Company expects that international net revenue will continue  
to account for a significant portion of its net revenue in future periods.      
International revenue is subject to inherent risks, including unexpected changes
in regulatory requirements, tariffs and other economic barriers, fluctuating    
exchange rates, difficulties in staffing and managing foreign operations and the
possibility of difficulty in accounts receivable collection. For example, the   
Company attempts to minimize its exposure to currency fluctuations by entering  
into forward currency contracts, however, there can be no assurance that the    
Company will be successful at mitigating currency risks. In some markets,       
localization of the Company's products is essential to achieve market           
penetration. The Company may incur substantial costs and experience delays in   
localizing its products, and there can be no assurance that any localized       
product will ever generate significant revenue. These or other factors could    
have a material and adverse effect on the Company's future international revenue
and, consequently, on the Company's business, operating results and financial   
condition.                                                                      

RECOVERY OF PREPAID ROYALTIES AND GUARANTEES.  The Company, from time to time,  
enters into agreements with licensors of intellectual property and developers of
games that involve royalty advances and guaranteed minimum royalty payments. If 
the sales volumes of products subject to such arrangements are not sufficient to
recover such advances and guarantees, the Company will be required to write-off 
unrecovered portions of such payments. The Company has been required to         
write-off a material portion of these advances in past fiscal quarters and, if  
the Company must write-off additional portions of such advances or accrue for   
the guarantees, its results of operations may be materially and adversely       
affected.                                                                       

INTELLECTUAL PROPERTY.  The Company regards the software that it owns or        
licenses as proprietary and relies primarily on a combination of copyrights,    
trade secret laws, patent and trademark laws, nondisclosure agreements and other
copy protection methods to protect its product and proprietary rights. It is the
Company's policy that all employees and third-party developers sign             
nondisclosure agreements. There can be no assurance that these measures will be 
sufficient to protect the Company's intellectual property rights against        
infringement. The Company owns or licenses various trademarks and copyrights.   
However, the                                                                    

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Company has no license agreements with the end users of its products and does   
not copy protect its software. Rather, the Company relies on the copyright laws 
to prevent unauthorized distribution of its software. Existing copyright laws   
afford only limited protection. It may be possible for unauthorized parties to  
copy the Company's products or to reverse engineer or otherwise obtain and use  
information that the Company regards as proprietary. Policing unauthorized use  
of the Company's products is difficult, and software piracy can be expected to  
be a persistent problem. Further, the laws of certain countries in which the    
Company's products are or may be distributed do not protect the Company's       
products and intellectual property rights to the same extent as the laws of the 
United States.                                                                  

The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of parties. As the number of   
entertainment software products in the industry increases, the Company believes 
that software increasingly will become the subject of claims that such software 
infringes upon the rights of others. From time to time, the Company has received
communications from parties asserting that features or content of certain of its
products may infringe upon intellectual property rights of such parties. The    
Company believes such claims have been without merit. To date, no such claims   
have had an adverse effect on the Company's ability to develop, market or sell  
its products. There can be no assurance that existing or future infringement    
claims against the Company will not result in costly litigation or require the  
Company to license the intellectual property rights of parties. There can be no 
assurance that such licenses will be available on reasonable terms or at all.   

STRATEGIC RESTRUCTURING.  In fiscal 1996 and early fiscal 1997, the Company     
undertook a strategic restructuring with the goals of better integrating the    
operations of Spectrum HoloByte and MicroProse, streamlining product development
efforts and reducing operating costs. Certain domestic operations were          
streamlined and consolidated in California, including marketing, operations,    
customer support, finance and product planning. The Company discontinued its    
Japanese operations, and entered into an exclusive three-year distribution      
agreement in Japan which is expected to generate royalties in future periods.   
The Company's domestic affiliated label programs were terminated and the number 
of products being published and actively marketed was significantly reduced in  
order to focus the Company's sales and distribution efforts.  As a result of    
these changes, the Company has improved operating efficiencies, reduced         
headcount and reduced operating costs. As a result of reducing the number of the
Company's products, there can be no assurance that the Company's expected       
revenue will be sufficient to generate operating profits.                       

NASDAQ LISTING.  The Company was notified in February 1996 by the Nasdaq Stock  
Market ("Nasdaq") that the Company was no longer in compliance with the net     
tangible assets requirement of the National Association of Securities Dealers'  
ByLaws for listing on the Nasdaq National Market.  Nasdaq granted the Company a 
temporary exemption from the net tangible assets requirement.  The exemption    
required that the Company achieve compliance with the listing on or before July 
12, 1996.                                                                       

The Company regained compliance with the Nasdaq National Market listing 
requirements as of the end of the fiscal quarter ended June 30, 1996. There can 
be no assurance that the Company will be able to maintain compliance with the   
listing requirements of the Nasdaq National Market in the future.  If the       
Company is unable to maintain compliance, it may qualify for listing under the  
Nasdaq SmallCap Market.  If for any reason the Company is unable to achieve and 
maintain compliance with the SmallCap listing requirements and is delisted from 
both the Nasdaq National Market and the Nasdaq SmallCap Market, the holders of  
the Company's 6.5% Convertible Subordinated Notes Due 2002 (the "Notes") would  
be entitled to require the Company to repurchase all or any portion of such     
holders' Notes for cash at a price equal to the principal amount plus accrued   
interest.  In such event, the Company's business, results of operations and     
financial condition would be materially and adversely affected.                 

VOLATILITY OF PRICE OF STOCK AND NOTES.  There has been a history of significant
volatility in the market prices of companies engaged in the entertainment       
software industry, including the Company. It is likely that the market price of 
the Company's common stock will continue to be highly volatile and the price of 
the Company's Notes will also be subject to such fluctuations. Factors such as  
the timing and market acceptance                                                

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of new product introductions by the Company, the introduction of new products by
the Company's competitors, loss of key personnel of the Company, variations in  
quarterly operating results or changes in market conditions in the entertainment
software industry may have a significant impact on the market price of the      
Company's common stock and Notes. In the past, the Company has experienced      
fluctuations in its operating results, and it is likely that in some future     
quarter the Company's revenue or operating results will be below the            
expectations of, and certain new products will not be introduced when           
anticipated by, public market analysts and investors. In such event, the price  
of the Company's common stock would likely be materially adversely affected.    
Volatility in the price of the Company's common stock, changes in prevailing    
interest rates and changes in perceptions of the Company's creditworthiness may 
in the future adversely affect the price of the Notes.                          

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ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA              

CONSOLIDATED BALANCE SHEETS                                                     
MARCH 31, 1997 AND 1996                                                         
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS                                          

                                                        [Enlarge/Download Table]

                                                                                            1997              1996   
                                                                                       ------------------------------
                                                                                                                     
ASSETS                                                                                                               
Current assets:                                                                                                      
     Cash and cash equivalents                                                         $   47,110        $   35,369  
     Accounts receivable, less allowances of $6,568 and $9,179                                                       
          at March 31, 1997 and 1996, respectively                                          7,891             9,718  
     Inventories                                                                            4,042             3,673  
     Prepaid royalties                                                                      2,139             2,126  
     Other current assets                                                                   1,958             2,133  
                                                                                       ----------        ----------  
     Total current assets                                                                  63,140            53,019  

Property, plant and equipment, net                                                          7,802             5,670  
Goodwill, net                                                                                 892               818  
Investments                                                                                 6,050             4,300  
Other assets                                                                                2,421             2,115  
                                                                                       ----------        ----------  
                                                                                       $   80,305        $   65,922  
                                                                                       ----------        ----------  
                                                                                       ----------        ----------  
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                       
Current liabilities:                                                                                                 
     Accounts payable                                                                  $    3,508        $    5,694  
     Salaries, wages and related accruals                                                   6,337             3,909  
     Royalties payable                                                                      1,840             1,703  
     Other current liabilities                                                              7,122             6,028  
                                                                                       ----------        ----------  
     Total current liabilities                                                             18,807            17,334  

Other liabilities                                                                           1,280             1,622  
Long-term debt                                                                             32,739            50,000  
                                                                                       ----------        ----------  
     Total liabilities                                                                     52,826            68,956  
                                                                                       ----------        ----------  
Commitments and contingencies (Note 11)                                                                              

Redeemable preferred stock, $0.001 par value, 4,000 shares designated                                                
     Series A issued and outstanding, redemption and liquidation amount                                              
     of $5,260 and $4,980 at March 31, 1997 and 1996, respectively                          5,881             5,881  
                                                                                       ----------        ----------  
Stockholders' equity (deficit):                                                                                      
     Preferred stock, $0.001 par value, 9,000 shares authorized (of which                                            
          4,000 shares have been designated Series A), 16 Series B-1 convertible                                     
          shares issued and outstanding at March 31, 1997                                       -                 -  
     Common stock, $0.001 par value, 40,000 shares authorized, 28,287 and                                            
          24,283 shares issued and outstanding at March 31, 1997 and 1996, respectively        29                24  
     Additional paid-in capital                                                           142,558           119,923  
     Accumulated deficit                                                                 (120,468)         (128,456) 
     Foreign currency translation adjustment                                                 (521)             (406) 
                                                                                       ----------        ----------  
     Total stockholders' equity (deficit)                                                  21,598            (8,915) 
                                                                                       ----------        ----------  
                                                                                       $   80,305        $   65,922  
                                                                                       ----------        ----------  
                                                                                       ----------        ----------  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL       
STATEMENTS.                                                                     

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CONSOLIDATED STATEMENTS OF OPERATIONS                                           
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995                               
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS                                          

                                                        [Enlarge/Download Table]

                                                   1997               1996                1995    
                                              --------------------------------------------------- 
                                                                                                  
Net revenue                                   $   100,253         $    59,694         $    84,350 
Cost of revenue                                    39,317              30,554              43,434 
                                              -----------         -----------         ----------- 
     Gross profit                                  60,936              29,140              40,916 
                                              -----------         -----------         ----------- 
Operating expenses:                                                                               
     Sales and marketing                           18,741              21,642              26,063 
     General and administrative                    14,670              14,409              12,985 
     Research and development                      23,145              27,490              19,995 
     Restructuring charges                              -               1,123                   - 
                                              -----------         -----------         ----------- 
     Total operating expenses                      56,556              64,664              59,043 
                                              -----------         -----------         ----------- 

Operating income (loss)                             4,380             (35,524)            (18,127)
Other income (expense), net                           511              (4,317)                 76 
                                              -----------         -----------         ----------- 
Income (loss) before income taxes                                                                 
     and extraordinary item                         4,891             (39,841)            (18,051)
Provision for income tax                              450                   -                   - 
                                              -----------         -----------         ----------- 
Income (loss) before extraordinary item             4,441             (39,841)            (18,051)
Extraordinary item, net of tax effect               3,547                   -                   - 
                                              -----------         -----------         ----------- 
Net income (loss)                             $     7,988         $   (39,841)        $   (18,051)
                                              -----------         -----------         ----------- 
                                              -----------         -----------         ----------- 
Per share data:                                                                                   
     Income (loss) before extraordinary item  $      0.15         $     (1.70)        $     (0.91)
     Extraordinary item, net of tax effect           0.13                   -                   - 
                                              -----------         -----------         ----------- 
     Net income (loss)                        $      0.28       $       (1.70)      $       (0.91)
                                              -----------         -----------         ----------- 
                                              -----------         -----------         ----------- 
Number of shares used in the computation of                                                       
     per share data                                27,776              23,636              20,111 
                                              -----------         -----------         ----------- 
                                              -----------         -----------         ----------- 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL       
STATEMENTS.                                                                     

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)                       

FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995                               
IN THOUSANDS                                                                    

                                                        [Enlarge/Download Table]

                                           SERIES B AND B-1                                                       FOREIGN          
                                            PREFERRED STOCK     COMMON STOCK      ADDITIONAL                     CURRENCY          
                                          -----------------    ----------------      PAID-IN    ACCUMULATED   TRANSLATION          
                                            SHARES   AMOUNT    SHARES    AMOUNT      CAPITAL        DEFICIT    ADJUSTMENT     TOTAL
                                          -----------------------------------------------------------------------------------------
                                                                                                                                   
Balance at march 31, 1994                       -    $    -    17,147    $  17     $  64,539    $  (70,564)    $  (17)    $ (6,025)

Issuance of common stock in a public                                                                                               
     offering, net of issuance costs            -         -     2,545        3        20,075             -          -       20,078 
Issuance of common stock pursuant                                                                                                  
     To the exercise of warrants                -         -     2,070        2        10,238             -          -       10,240 
Issuance of common stock under                                                                                                     
     Employee stock option and                                                                                                     
     purchase plans                             -         -       715        1         3,530             -          -        3,531 
Issuance of common stock in a                                                                                                      
     private equity placement, net                                                                                                 
     of issuance costs                          -         -       700        -         8,184             -          -        8,184 
Acquisition of treasury stock                   -         -    (1,834)      (2)       (9,293)            -          -       (9,295)
Net loss                                        -         -         -        -             -       (18,051)         -      (18,051)
Foreign currency                                                                                                                   
     translation adjustment                     -         -         -        -             -             -       (100)        (100)
                                          -----------------------------------------------------------------------------------------
Balance at march 31, 1995                       -         -    21,343       21        97,273       (88,615)      (117)       8,562 

Issuance of common stock under                                                                                                     
     employee stock option and                                                                                                     
     purchase plans                             -         -       604        1         3,230             -          -        3,231 
Issuance of common stock in private                                                                                                
     placements, net of issuance costs          -         -     1,498        1        19,420             -          -       19,421 
Issuance of common stock pursuant to                                                                                               
     acquisition of simtex software corp.       -         -       838        1             -             -          -            1 
Net loss                                        -         -         -        -             -       (39,841)         -      (39,841)
Foreign currency translation                                                                                                       
     adjustment                                 -         -         -        -                           -       (289)        (289)
                                          -----------------------------------------------------------------------------------------
Balance at march 31, 1996                       -         -    24,283       24       119,923      (128,456)      (406)      (8,915)

Issuance of series B preferred                                                                                                     
     stock to extinguish debt                 750         1         -        -         4,844             -          -        4,845 

Issuance of series B-1 preferred                                                                                                   
     stock to extinguish debt               1,169         1         -        -         7,072             -          -        7,073 
Issuance of common stock pursuant                                                                                                  
     to the conversion of series B                                                                                                 
     and B-1 preferred stock               (1,903)       (2)    1,903        2             -             -          -            - 
Issuance of common stock under                                                                                                     
     employee stock option and                                                                                                     
     purchase plans                             -         -       282        1         1,155             -          -        1,156 
Issuance of common stock in                                                                                                        
     a private equity placement,                                                                                                   
     net of issuance costs                      -         -     1,819        2         9,564             -          -        9,566 
Net income                                      -         -         -        -             -         7,988          -        7,988 
Foreign currency translation                                                                                                       
     adjustment                                 -         -         -        -             -             -       (115)        (115)
                                          -----------------------------------------------------------------------------------------
Balance at march 31, 1997                      16    $    -    28,287    $  29     $ 142,558    $ (120,468)    $ (521)    $ 21,598 
                                          -----------------------------------------------------------------------------------------
                                          -----------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL       
STATEMENTS.                                                                     

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CONSOLIDATED STATEMENTS OF CASH FLOWS                                           

FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995                               

                                                        [Enlarge/Download Table]

                                                                        1997               1996               1995  
                                                                    ------------------------------------------------
                                                                                                                    
OPERATING ACTIVITIES                                                                                                
Net income (loss)                                                    $  7,988         $  (39,841)        $  (18,051)
Adjustments to reconcile net income (loss)                                                                          
to net cash provided by (used in) operating activities:                                                             
    Depreciation and amortization                                       3,944              4,102              6,651 
    Non-cash licensing revenue                                              -               (750)                 - 
    Minority interest in joint venture losses                               -              1,074                  - 
    Restructuring charges                                                   -              1,123                  - 
    Gain on sale of investment in FASA Interactive Technologies        (1,895)                 -                  - 
    Extraordinary gain on extinguishment of long-term debt             (3,547)                 -                  - 
    Other                                                                 (17)                 -               (123)
    Changes in assets and liabilities:                                                                              
        Accounts receivable                                             2,697              8,291             (8,007)
        Inventories                                                       925              1,539                219 
        Prepaid royalties                                                  25                260             (1,384)
        Other current assets                                              337              2,026               (424)
        Other assets                                                   (1,175)             1,055               (865)
        Accounts payable                                               (3,107)            (3,988)               545 
        Salaries, wages and related accruals                            2,388              1,031               (104)
        Royalties payable                                                 105                 79             (1,278)
        Other current liabilities                                       1,479               (742)              (490)
        Other liabilities                                                 (32)              (675)              (834)
                                                                   -------------------------------------------------
Net cash provided by (used in) operating activities                    10,115            (25,416)           (24,145)
                                                                   -------------------------------------------------
                                                                   -------------------------------------------------

INVESTING ACTIVITIES                                                   (3,102)            (5,589)            (5,311)

Acquisitions of property, plant and equipment                          (2,931)            (2,334)            (4,036)
Proceeds from sale of property, plant and equipment                       486                 19                  - 
Acquisition of certain net assets of Leisuresoft GmbH,                                                              
     net of cash acquired                                                (802)                 -                  - 
Proceeds from sale of investment in FASA Interactive Technologies         570                  -                  - 
Investment in Virtual World Entertainment Group, Inc.                    (570)                 -                  - 
Investment in Total Entertainment Network,                                                                          
    net of licensing revenue                                                -             (1,750)                 - 
Investment in FASA Interactive Technologies                                 -               (200)            (1,275)
Investment in OT Sports                                                  (105)            (1,324)                 - 
Proceeds from sale of OT Sports                                           205                  -                  - 
                                                                    ------------------------------------------------

Net cash used in investing activities                                  (3,102)            (5,589)            (5,311)
                                                                    ------------------------------------------------
                                                                    ------------------------------------------------

(continued)                                                                     

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL       
STATEMENTS.                                                                     

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CONSOLIDATED STATEMENTS OF CASH FLOWS                                           
(CONTINUED)                                                                     

                                                        [Enlarge/Download Table]

                                                                      1997             1996              1995     
                                                                  ------------------------------------------------
                                                                                                                  
FINANCING ACTIVITIES                                                                                              
Extinguishment of long-term debt                                  $  (2,959)        $        -         $        - 
Proceeds from issuance of common stock, net of issuance costs        10,722             22,653             42,047 
Acquisition of treasury stock                                             -                  -             (9,295)
Borrowings under notes and lines of credit, net of non-cash note                                                  
    issuance costs                                                        -             48,500              6,761 
Payment of note issuance costs                                            -               (467)                 - 
Repayments under notes and lines of credit                           (2,132)           (11,238)              (122)
Repayments on notes payable and amounts due to related parties            -                  -             (1,739)
Principal payments on capital lease obligations                        (411)              (846)            (1,291)
                                                                  ------------------------------------------------
Net cash provided by financing activities                             5,220             58,602             36,361 
                                                                  ------------------------------------------------
Effect of exchange rate changes on cash                                (492)                49                138 
                                                                  ------------------------------------------------
Increase in cash and cash equivalents                                11,741             27,646              7,043 

Cash and cash equivalents at beginning of year                       35,369              7,723                680 
                                                                  ------------------------------------------------
Cash and cash equivalents at end of year                          $  47,110         $   35,369         $    7,723 
                                                                  ------------------------------------------------
                                                                  ------------------------------------------------

SUPPLEMENTAL CASH FLOW DISCLOSURES                                                                                
    Cash paid for interest                                        $   2,223         $    2,418         $      733 
    Cash paid for income taxes                                          111                  4                  2 

    Non-cash investing and financing activities:                                                                  
        Note issuance costs                                        $      -         $    1,500         $        - 
        Issuance of common stock pursuant to conversion                                                           
             of Series B and B-1 preferred stock                     11,820                  -                  - 
        Issuance of Series B and B-1 preferred stock pursuant to                                                  
             the extinguishment of long-term debt                    11,916                  -                  - 
        Issuance of common stock pursuant to the                                                                  
             acquisition of SimTex Software Corp.                         -             11,729                  - 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL       
STATEMENTS                                                                      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

BASIS OF PRESENTATION AND PRINCIPLES                                            
OF CONSOLIDATION:                                                               

Spectrum HoloByte, Inc. (the "Company") develops and publishes        
entertainment software for use on CD-ROM personal computer systems and select   
game console platforms and distributes third-party software and related         
products. The accompanying consolidated financial statements include the        
accounts of the Company and its wholly-owned subsidiaries. All significant      
intercompany transactions and balances have been eliminated.                    

    For purposes of presentation, the Company has indicated its 1997, 1996 and
1995 fiscal periods as ended on March 31. The Company reports its financial     
results on a 52-53 week fiscal year ending on the Sunday nearest to March 31.   
The financial statements presented are therefore representative of the 52-week  
periods ended March 30, 1997, March 31, 1996 and April 2, 1995, respectively.   

USE OF ESTIMATES:                                                               

The preparation of financial statements in conformity with generally  
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amount of assets and liabilities and       
disclosure of contingent assets and liabilities at the date of the financial    
statements and the reported amounts of revenue and expenses during the reported 
periods. Actual results could differ from those estimates.                      

RECLASSIFICATIONS:                                                              

 Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year's presentation. These       
reclassifications had no effect on previously reported net losses or            
stockholders' equity (deficit).                                                 

CASH AND CASH EQUIVALENTS:                                                      

  Highly liquid investments with original maturities of 90 days or less at
the date of purchase are classified as cash and cash equivalents.               

CERTAIN RISKS AND CONCENTRATIONS:                                               

Financial instruments which potentially subject the Company to a      
concentration of credit risk principally consist of cash and cash equivalents   
and trade accounts receivable.                                                  

 At March 31, 1997, 1996 and 1995, the Company had deposits in excess of
insured amounts of approximately $46,711,000, $34,596,000, and $7,296,000,      
respectively.                                                                   

     Sales are typically made on credit, with terms that vary depending upon the
customer and the nature of the product. The Company's receivables are           
principally from distributors, software specialty retailers, computer           
superstores, mass merchandisers and discount warehouse stores. These customers  
compete in a volatile industry and are subject to the risk of business failure. 

Accounts receivable are recorded net of allowances for estimated      
uncollectible amounts due to potential credit losses, sales returns and in-     
channel markdowns. Although the Company believes these allowances are adequate, 
a payment default of a significant customer could materially and adversely      
affect its operating results and financial condition. At March 31, 1997, 1996   
and 1995, accounts receivable from the Company's five largest customers in the  
aggregate were $4,148,000, $5,278,000 and $4,837,000, respectively.             

The Company performs ongoing credit evaluations of its customers and  
generally does not require collateral. The actual losses related to             
uncollectible amounts have generally been within management's expectations. For 
the year ended March 31, 1997, one customer accounted for 12% of the Company's  
consolidated net revenue. In fiscal 1996, two customers accounted for 13% and   
10% of the Company's consolidated net revenue. For the year ended March 31,     
1995, no customer accounted for greater than 10% of the Company's consolidated  
net revenue.                                                                    

INVENTORIES:                                                                    

Inventories, generally consisting of software products and related    
materials, are stated at the lower of cost (on a first-in, first-out (FIFO)     
basis) or market.                                                               

Inventories consist of the following at March 31, 1997 and 1996 (in   
thousands):                                                                     

1997             1996 
-------------------------     
Raw materials            $    413       $      705                              
Finished goods              3,629            2,968                              
-------------------------     
$  4,042       $    3,673     
-------------------------     
-------------------------     

PREPAID ROYALTIES AND ROYALTIES PAYABLE:                                        

Prepaid royalties consist of advances made to independent software    
developers and licensors of intellectual properties. Amortization of prepaid    
royalties is based on actual realized sales of the related product and the      
contractual royalty rates. Management performs ongoing evaluations of the future
realization of prepaid royalties and charges any amounts deemed unlikely to be  
realized to research and development expense.                                   

Royalties payable are accrued based on cash receipts, revenue or units
shipped of software products published by the Company pursuant to contractual   
agreements.                                                                     

 Royalty expense, which is included in cost of revenue, was $11,846,000,
$6,075,000 and $8,431,000 for the fiscal years ended March 31, 1997, 1996 and   
1995, respectively.                                                             

PROPERTY, PLANT AND EQUIPMENT:                                                  

   Property, plant and equipment, including equipment acquired under capital
leases, is recorded at cost and depreciated using the straight-line method over 
the estimated useful lives of the assets, generally three to five               

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years for equipment and furniture and 25 years for buildings. Leasehold         
improvements are amortized over the estimated useful lives of the assets or the 
length of the respective leases, whichever is shorter. Assets and accumulated   
depreciation accounts are relieved at disposition with the resulting gains or   
losses reflected in earnings. Repairs and maintenance costs are expensed        
as incurred.                                                                    

 In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."   
During fiscal year 1997, the Company adopted SFAS No. 121 and determined that no
impairment loss needs to be recognized for applicable assets of continuing      
operations.                                                                     

    Property, plant and equipment, net, consists of the following at March 31,
1997 and 1996 (in thousands):                                                   

                                  1997        1996
                              --------------------
Equipment                                    $ 12,016   $  8,651                
Equipment under capital leases                  2,089      3,904                
Land and building                               2,193          -                
Furniture                                       1,341        876                
Leasehold improvements                          1,029        986                
                              --------------------
                               18,668     14,417
Less accumulated depreciation                                                   
and amortization:                                                             
Equipment under capital leases            (1,559)    (3,293)          
All other assets                          (9,307)    (5,454)          
                              --------------------
                             $  7,802   $  5,670
                              --------------------
                              --------------------

Depreciation and amortization expense related to property, plant and  
equipment was $3,376,000, $3,662,000 and $2,607,000 for the fiscal years ended  
March 31, 1997, 1996 and 1995, respectively.                                    

REVENUE RECOGNITION:                                                            

     The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 91-1, "Software Revenue      
Recognition." Revenue from product sales or licensing agreements is recognized  
upon shipment or fulfillment of deliverable obligations provided no significant 
vendor obligations or contingencies remain and collection of the resulting      
receivable is deemed probable. Provisions are made at the time of shipment for  
estimated future product returns and in-channel markdowns.                      

SOFTWARE DEVELOPMENT COSTS:                                                     

     SFAS No. 86 provides for the capitalization of certain software development
costs after technological feasibility of the software is attained. Software     
development costs subject to potential capitalization were not material in      
fiscal 1997, 1996 and 1995, and, as such, there were no additions to capitalized
software development costs in these years. The Company capitalized $5,144,000 of
software development costs in connection with its fiscal 1994 merger with       
MicroProse, Inc., and fully amortized these costs in fiscal 1994 and 1995.      
Amortization of these costs was $3,744,000 in fiscal 1995.                      

FOREIGN EXCHANGE:                                                               

    The functional currency for each principal foreign subsidiary is its local
currency. In accordance with SFAS No. 52, assets and liabilities of foreign     
operations are translated into U.S. dollars at the rates of exchange as of the  
balance sheet dates. Revenue and expenses are translated into U.S. dollars using
weighted average rates of exchange prevailing during each respective fiscal     
year. The effects of translation adjustments are deferred and included as a     
component of stockholders' equity (deficit). Gains and losses resulting from    
foreign currency transactions are included in results of operations.            

     The Company enters into foreign exchange forward contracts to hedge certain
foreign currency denominated balances against changes in rates of exchange.     
These contracts require the Company to exchange foreign currencies and generally
mature within three months. Gains and losses on contracts that are designated   
and effective as hedges of transactions for which a firm commitment has been    
attained are deferred and recognized in income in the same period that the      
underlying transactions are settled. Gains and losses on any instruments not    
meeting the above criteria are recognized as income in the current period.      

INCOME TAXES:                                                                   

The Company accounts for income taxes using the liability method under
which deferred tax assets or liabilities are calculated at the balance sheet    
date using current tax laws and rates in effect.                                

NET INCOME (LOSS) PER SHARE:                                                    

   Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares (when dilutive) outstanding during each  
period. Net income (loss) has been adjusted for cumulative  but undeclared      
dividends on Series A preferred stock.                                          

RECENT PRONOUNCEMENTS:                                                          

     In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15   
and is effective for financial statements issued for periods ending after       
December 15, 1997. The Company will report its earnings per share in accordance 
with this standard beginning with the quarter ended December 31, 1997.          

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2. FAIR VALUE OF FINANCIAL INSTRUMENTS                                          

The book values and estimated fair values of the Company's significant
financial instruments were as follows (in thousands):                           

                    1997                1996
                  --------------------------------------
                    BOOK      FAIR      BOOK      FAIR
                     VALUE     VALUE     VALUE     VALUE
                  ------------------  ------------------
Investments                   $  6,050  $  6,050  $  4,300  $  4,300            
Long-term debt                  32,739    26,181    50,000    37,000            
Currency  contracts              5,599     5,599         -         -            

The fair values of cash and cash equivalents, receivables and accounts
payable approximate their carrying value due to their short maturities. The fair
values of long-term debt and foreign currency exchange contracts were based upon
quotes obtained from brokers. For long-term investments which have no quoted    
market prices, a reasonable estimate of fair value was made using available     
market information and appropriate valuation techniques. The estimates presented
above require considerable judgment and are not necessarily indicative of the   
amounts that would be realized in a current market exchange.                    

3. ACQUISITIONS                                                                 

SIMTEX SOFTWARE CORPORATION:                                                    

On June 12, 1995, the Company completed a merger with SimTex Software 
Corporation ("SimTex"), a privately-held software developer, through the        
issuance of 837,802 shares of the Company's common stock. SimTex, located in    
Austin, Texas, has developed products under two brands, MASTER OF MAGIC-TM- and 
MASTER OF ORION-TM-. The combination was accounted for as a pooling of          
interests. The historical operating results and assets and liabilities of       
SimTex, however, are immaterial to the Company's consolidated financial         
statements. As a result, this combination had no impact upon the previously     
reported net losses or accumulated deficit of the Company. Earnings per share   
information has been restated to reflect the pro forma shares outstanding for   
all periods presented.                                                          

LEISURESOFT GMBH:                                                               

    In June 1996, the Company entered into an agreement to acquire certain net
assets of Leisuresoft GmbH, a German distributor of computer software and       
related products, for 1.2 million German Deutsche Marks (approximately $0.8     
million). The transaction was accounted for as a purchase. Approximately        
$407,000 of goodwill was recorded representing the excess of the purchase price 
over the identifiable net assets acquired. Goodwill is being amortized on a     
straight-line basis over five years.                                            

4. INVESTMENTS                                                                  

    The Company has invested in certain equity securities that are categorized
as held-to-maturity. For investments accounted for under the equity method of   
accounting, the Company records its share of the investee's operating results as
a component of other income and expense. For cost-basis investments, management 
performs ongoing evaluations of the future realization and charges any declines 
in value that are other-than-temporary in nature to other income and expense.   

FASA INTERACTIVE TECHNOLOGIES, INC. AND                                         
VIRTUAL WORLD ENTERTAINMENT GROUP, INC.:                                        

  In fiscal 1995 and 1996, the Company invested a total of $1.5 million in
FASA Interactive Technologies, Inc., ("FASA"), a developer of interactive       
entertainment software for PC and console platforms. In June 1996, the Company  
sold its investment in FASA to FASA for approximately $3.4 million. The Company 
received cash of $570,000 and a $2.8 million note bearing interest at a rate of 
6% per annum and due June 2001. A gain of $1.9 million was recorded on the sale 
of this investment.                                                             

    Proceeds from the sale of this investment were reinvested in Virtual World
Entertainment Group, Inc. ("VWEG"), a corporation formed for the purpose of     
acquiring Virtual World Entertainment, Inc., a developer and operator of        
location-based entertainment, and FASA.                                         

TOTAL ENTERTAINMENT NETWORK:                                                    

   In fiscal 1996 and 1997, the Company made a minority equity investment of
$2.6 million in Total Entertainment Network, Inc. This investment was made      
pursuant to an investment and licensing arrangement whereby the Company         
committed to allow certain of the Company's future titles to be played over the 
Total Entertainment Network in exchange for a $750,000 license fee. This license
fee was recognized as revenue in fiscal 1996 in the accompanying consolidated   
statement of operations.                                                        

OT SPORTS:                                                                      

     The Company entered into a Limited Liability Company ("LLC") agreement with
Capital Cities/ABC, Inc. ("ABC") effective July 1, 1995. The LLC (subsequently  
named "OT Sports") was formed for the purpose of developing a sports-based line 
of products.                                                                    

   In May 1996, the Company sold its interest in OT Sports to ABC. Under the
terms of the agreement, the Company received a note for $250,000 which was paid 
in full in November 1996. The Company is not obligated to make future           
contributions to OT Sports.                                                     

5. LICENSE AGREEMENT WITH MITSUI & CO.                                          

  In April 1996, the Company's wholly-owned Japanese subsidiary ("Spectrum
Japan") granted an exclusive license to Mitsui & Co., Ltd. ("Mitsui") for the   
localization, manufacture, marketing and distribution of certain Company titles 
in Japan. The Company received an up-front license fee of approximately         
$300,000, and will earn royalties based upon revenue generated by Mitsui during 
the three-year term of the agreement. During fiscal 1997, the Company recognized
approximately $800,000 of licensing revenue under this agreement.  In connection

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with the license agreement, Spectrum Japan subcontracted all of its employees to
Mitsui and largely discontinued its operations. The Company recognized a        
restructuring charge of approximately $350,000 in fiscal 1996 to write down the 
net assets of Spectrum Japan to their estimated realizable values.              

6. INCOME TAXES                                                                 

 The provision for income taxes for the year ended March 31, 1997 consists
entirely of foreign taxes currently payable.                                    

 The differences between the federal statutory and effective tax rates for
the years ended March 31, 1997, 1996 and 1995 are as follows:                   

    1997      1996      1995
    ----------------------------

Federal statutory rate                                                          
(benefit)                 35.0%    (34.0)%   (34.0)%                      
State tax rate (benefit),                                                       
net of federal effect       5.6     (5.3)     (5.3)                       
Foreign tax rate (benefit)   (6.6)       0.2       1.0                          
Nondeductible items            4.8       0.7      12.1                          
Benefit of foreign net                                                          
operating loss           (52.2)     (0.5)     (1.0)                       
Loss producing no                                                               
current tax benefit        22.6      38.9      27.2                       
    ----------------------------
Effective tax rate            9.2%      0.0%       0.0%                         
    ----------------------------
    ----------------------------

  The components of deferred income taxes included in the consolidated balance
sheets at March 31, 1997 and 1996 are as follows (in thousands):                

               1997       1996
             ---------------------
Deferred income tax                                                             
liabilities                      $     -   $   (455)                      
Deferred income tax assets:                                                     
Net operating loss                                                          
carryforwards                     33,216    34,798                      
Research and experimentation                                                
tax credits                        3,696     3,519                      
Financial statement reserves                                                
and accruals not recognized                                             
for income tax purposes            4,602     5,125                      
Capitalized research and                                                    
experimentation costs                674         -                      
Other                                1,089       905                        
             ---------------------
            43,377    44,347
Valuation allowance                  (43,377)  (43,892)                         
             ---------------------
Net deferred income tax assets      $     -   $     -                           
             ---------------------
             ---------------------

Due to the uncertainty surrounding the realization of the favorable tax   
attributes in future years, the Company has placed a valuation allowance against
its net deferred tax assets.                                                    

 At March 31, 1997, the Company had federal, state and foreign net operating
loss carryforwards for income tax purposes of $82,506,000, $52,204,000 and      
$845,000, respectively, which expire at various dates from 1997 through 2012.   

At March 31, 1997, the Company had federal and state research and         
experimentation tax credits for income tax purposes of $3,021,000 and $675,000, 
respectively, which expire at various dates from 2003 through 2012.             

   The Company's ability to use its net operating loss carryforwards and credits
to offset future taxable income is subject to restrictions attributable to      
equity transactions that result in changes in ownership as defined by the       
Internal Revenue Code.                                                          

7. CREDIT FACILITY                                                              

The Company has an overdraft/line of credit facility in the UK that is  
based upon qualifying receivables and certain other bank requirements for       
amounts up to a maximum credit limit of 1,850,000 pounds sterling (approximately
$2.9 million at March 31, 1997).  This facility bears interest at the rate of   
2.75% over the bank's base rate, expires September 10, 1997 and is              
collateralized by substantially all the assets of MicroProse Ltd.               

8. OTHER CURRENT LIABILITIES                                                    

The components of other current liabilities at March 31, 1997 and 1996    
consist of the following (in thousands):                                        

                       1997           1996
                     -----------------------
Accrued customer promotion                                                      
and deferred revenue                $ 1,279        $   991                
Accrued accounts                                                                
payable--other                      3,000          2,551              
Other                                    2,843          2,486                   
                    ----------------------
                    $ 7,122        $ 6,028
                    ----------------------
                    ----------------------

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9. LONG-TERM DEBT                                                               

On October 2, 1995, the Company completed a private offering of $50.0   
million face value Convertible Subordinated Notes (the "Notes") pursuant to Rule
144A of the Securities Act of 1933. The Notes, which bear interest at the rate  
of 6.5 percent per annum, will mature on September 15, 2002, and are convertible
into shares of the Company's common stock at any time after 60 days following   
the latest date of original issuance at a conversion price of $15.84 per share, 
subject to adjustment based upon the occurrence of certain events. The Notes may
be redeemed at the option of the Company subsequent to September 17, 1998, in   
whole or in part, at various declining redemption prices together with accrued  
interest thereon. The Notes may also be redeemed at the option of the holder at 
100% upon the occurrence of certain events. Net proceeds to the Company were    
approximately $48.0 million, after associated issuance costs of approximately   
$2.0 million which are being amortized over the term of the Notes.              

 In June 1996, the Company issued 750,000 shares of Series B and 1,168,860
shares of Series B-1 convertible preferred stock in exchange for subordinated   
notes with a face value of approximately $14.9 million. An extraordinary gain of
approximately $2.7 million was realized on the retirement of the long-term debt.

  In July 1996, the Company repurchased subordinated notes with a face value
of $4.0 million for approximately $2.9 million. An extraordinary gain of        
approximately $0.9 million was realized on the retirement of the long-term debt.

 In June 1996, the Company assumed certain debt related to the acquisition
of real property and equipment from Leisuresoft GmbH (Note 3). These loans,     
which are denominated in German Deutsche Marks, bear interest at fixed rates of 
6.15 percent and 7.55 percent per annum, are payable in monthly installments,   
and expire in September 1998 and October 2009, respectively. The loans are      
collateralized by the assets acquired and certain other assets of the Company.  
The aggregate loan payments for the five years after March 31, 1997 are         
$266,000, $237,000, $179,000, $179,000 and $179,000, respectively.              

10. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)               

PREFERRED STOCK:                                                                

  The Company has authorized 9,000,000 shares of preferred stock, $0.001 par
value, of which 4,000,000 shares are designated Series A redeemable preferred   
stock (Series A Stock). At March 31, 1997 and 1996, there were 4,000,000 shares 
of Series A Stock outstanding. The Series A Stock is convertible into 196,078   
shares of common stock and accrues dividends at an annual rate of 7%. Preferred 
stockholders receive one vote for each common share into which their preferred  
shares are convertible. The Series A Stock has a liquidation preference of $1.00
per share plus all accumulated but unpaid dividends and is redeemable for $1.00 
per share plus all accumulated but unpaid dividends (i) at any time by the      
Company, (ii) commencing on September 24, 1997, for up to 50% of the Series A   
Stock until September 24, 1998, upon written demand of holders of the majority  
of Series A Stock, or (iii) in its entirety commencing on September 24, 1998,   
upon written demand of holders of the majority of Series A Stock.               

 Shares of Series B and Series B-1 preferred stock are convertible into an
equivalent number of common shares. Dividends on the Series B-1 preferred shares
are non-cumulative and non-accruing, and shall be paid only at such time and    
such rate as determined by the Board of Directors. As of March 31, 1997, no     
dividends had been declared. Subject to the liquidation preference of the Series
A preferred shares, the Series B-1 convertible preferred shares have a          
liquidation preference of $7.57 per share, plus all declared but unpaid         
dividends. Prior to March 31, 1997, 750,000 and 1,152,815 shares of Series B and
Series B-1 preferred stock, respectively, were converted into common shares.    

COMMON STOCK:                                                                   

 On April 6, 1994, the Company completed a secondary offering of 2,545,000
shares of common stock which generated proceeds of approximately $20.0 million, 
net of underwriters' commissions and offering expenses.                         

Beginning in November 1994 through December 13, 1994, the Company issued
2,070,039 shares of common stock pursuant to the exercise of warrants at prices 
ranging from $5.00 to $9.00 per share. This generated proceeds of approximately 
$10.2 million, net of associated issuance costs.                                

On March 7, 1995, the Company completed a private placement of 700,000  
shares of common stock pursuant to Regulation S of the Securities Act of 1933.  
This generated proceeds of approximately $8.2 million, net of associated        
issuance costs.                                                                 

  During fiscal 1996, the Company issued 1,497,414 shares of common stock in
a series of private placements which generated approximately $19.4 million in   
proceeds, net of associated issuance costs.                                     

   In June 1996, the Company completed a private placement of 1,818,367 shares
of common stock which generated approximately $9.7 million in proceeds, after   
discounts, commissions and other issuance costs.                                

TREASURY STOCK:                                                                 

  In connection with the Company's fiscal 1994 merger with MicroProse, Inc.,
the Company obtained an option to purchase up to 1,833,576 shares of common     
stock held by the former Chief Executive Officer of MicroProse, at $5.00 per    
share. The option was exercised on December 2, 1994, and the Company accounted  
for this transaction as an acquisition of treasury stock.                       

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COMMON STOCK WARRANTS:                                                          

  In fiscal 1994, the Company issued warrants to related parties to purchase
an aggregate of 125,000 shares of common stock. During fiscal 1995, these       
warrants were exercised. In fiscal 1993, the Company issued certain noteholders 
of Paragon Software, a former subsidiary of MicroProse, 20,400 seven-year       
warrants to purchase common stock at $13.88 per share. The warrants expire on   
July 13, 1999 and none of the warrants have been exercised. Effective August 17,
1991, Grotech Investors and Corporate Venture Partners, L.P. received six-year  
warrants from MicroProse entitling them to purchase 270,833 shares at $9.00 per 
share. These warrants remain outstanding at March 31, 1997.                     

STOCK OPTION PLANS:                                                             

The Company has reserved for the issuance of 5,536,506 shares of common 
stock under three plans under which options to purchase common stock may be     
granted to employees, directors and consultants.                                

In March 1993, the Company adopted the 1992 Stock Option Plan (the "1992
Plan"). Options under this plan are immediately exercisable. Any shares issued  
upon the exercise of options under the 1992 Plan, however, are                  
subject to repurchase by the Company at the original exercise price, upon the   
optionee's termination of employment prior to vesting in such shares. As of     
March 31, 1997, options on 86,746 shares are outstanding under the 1992 Plan. No
additional options may be granted under the 1992 Plan.                          

   The Company maintains the 1994 Stock Option Plan (the "1994 Plan"). Options
granted under the 1994 Plan may be granted either as incentive stock options, or
as non-statutory options, and generally remain exercisable over a maximum of    
seven or 10 years from the grant date. Options granted under the 1994 Plan      
generally vest ratably over 48 to 60 months beginning six months after the      
vesting commencement date.                                                      

 In fiscal 1997, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). Under the terms of the 1996 Plan, non-statutory options may be granted  
which generally vest ratably over 36 to 60 months beginning six months after the
vesting commencement date and which remain exercisable over a maximum of seven  
or 10 years from the grant date.                                                
Option activity under these plans during fiscal 1997, 1996 and 1995 was as      
follows:                                                                        

                                                        [Enlarge/Download Table]

                                                               OPTIONS OUTSTANDING      
                                           ---------------------------------------------
                                                                              WEIGHTED  
                                                                               AVERAGE  
                                             AVAILABLE      AGGREGATE   EXERCISE PRICE  
                                             FOR GRANT         NUMBER        PER SHARE  
                                           ---------------------------------------------
                                                                                        
Balance at March 31, 1994                     388,975      2,365,652        $     4.55  

  Increase in options available for grant   1,500,000              -                 -  
  Granted                                  (1,736,699)     1,736,699              9.36  
  Exercised                                         -       (659,177)            (4.55) 
  Canceled                                    504,544       (504,544)            (3.80) 
  Retired                                    (317,922)             -                 -  
                                           ---------------------------------------------
Balance at March 31, 1995                     338,898      2,938,630              7.52  

  Increase in options available for grant   1,500,000              -                 -  
  Granted                                  (1,811,200)     1,811,200             11.53  
  Exercised                                         -       (536,055)            (4.90) 
  Canceled                                    629,502       (629,502)            (8.09) 
  Retired                                    (111,810)             -                 -  
                                           ---------------------------------------------
Balance at March 31, 1996                     545,390      3,584,273              9.84  

  Granted                                  (3,137,416)     3,137,416              5.93  
  Exercised                                         -       (173,202)            (3.96) 
  Canceled                                  3,732,802     (3,732,802)           (10.20) 
  Retired                                     (54,222)             -                 -  
                                           ---------------------------------------------
Balance at March 31, 1997                   1,086,554      2,815,685        $     5.38  
                                           ---------------------------------------------
                                           ---------------------------------------------

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At March 31, 1997, options to purchase 1,104,492 shares were exercisable at 
prices ranging from $0.39 to $13.25 per share. The weighted average fair values 
of stock options granted during fiscal 1997 and 1996 were $2.85 and $5.58,      
respectively                                                                    

In August 1995, the Company entered into an employment agreement with the   
Company's Chief Executive Officer whereby options to purchase 500,000 shares of 
common stock were granted. Under the terms of that agreement, the Company may be
obligated to pay certain compensation to the Chief Executive Officer, contingent
upon his continued employment through March 31, 1999, and the market price of   
the Company's common stock as of that date. As of March 31, 1997, the Company   
has accrued a liability of $1,448,000 related to this agreement.                

In June 1996, the Board of Directors of the Company approved the            
cancellation of the majority of outstanding stock options with an exercise price
ranging from $6.50 to $19.13 per share and the re-grant of options to purchase  
an equivalent number of shares at $5.375 per share. A total of 1,927,408 options
were canceled and re-granted.                                                   

EMPLOYEE STOCK PURCHASE PLAN:                                                   

In fiscal 1995, the Company adopted the Employee Stock Purchase Plan (the   
"ESPP") under which employees may purchase shares of the Company's common stock 
at 85% of the lower of the fair market value of the common stock on either the  
first or last day of a six-month offering period. A total of 108,919, 68,059 and
55,970 shares of the Company's common stock were issued under the ESPP in fiscal
1997, 1996 and 1995, respectively, at prices ranging from $4.25 to $11.16 per   
share.                                                                          

PRO FORMA INFORMATION:                                                          

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based  
Compensation," which established a fair value-based method for stock-based      
compensation plans. The Company has elected to continue following the           
requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees"  
with disclosures of pro forma net income and earnings per share under the SFAS  
No. 123.  This information is required to be determined as if the Company had   
accounted for its employee stock option and ESPP share grants subsequent to     
March 31, 1995 under the fair value method of                                   
SFAS No. 123.                                                                   

The following table summarizes information with respect to stock options        
outstanding at March 31, 1997:                                                  

                                                        [Enlarge/Download Table]

                                             OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE         
                              -----------------------------------------------------  ----------------------------------
                                                    WEIGHTED            WEIGHTED                            WEIGHTED   
                                                     AVERAGE             AVERAGE                             AVERAGE   
                               NUMBER OF    CONTRACTUAL LIFE      EXERCISE PRICE       NUMBER OF       EXERCISE PRICE  
RANGE OF EXERCISE PRICES          SHARES              (YEARS)          PER SHARE          SHARES           PER SHARE   
-----------------------------------------------------------------------------------  ----------------------------------
                                                                                                                       
        $0.39-$3.78              77,064                6.04             $  0.48          71,693             $  0.46    
        $4.25-$5.00             333,640                8.90             $  4.63          34,652             $  4.51    
        $5.38-$5.38           2,150,144                7.89             $  5.38         888,079             $  5.38    
        $5.56-$6.50             113,350                8.62             $  5.98          15,212             $  6.28    
       $7.00-$13.25             141,487                6.40             $  9.38          94,856             $  9.71    
-----------------------------------------------------------------------------------  ----------------------------------
       $0.39-$13.25           2,815,685                7.92             $  5.38       1,104,492             $  5.41    
-----------------------------------------------------------------------------------  ----------------------------------
-----------------------------------------------------------------------------------  ----------------------------------

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 The fair value of options and ESPP shares granted in fiscal 1997 and 1996
has been estimated at the date of grant using a Black-Scholes option pricing    
model with the following weighted average assumptions:                          

EMPLOYEE        
                STOCK OPTIONS          ESPP SHARES
                ---------------      ---------------
                1997       1996     1997      1996
                ---------------      ---------------
Expected volatility rate        60%       60%       60%       60%               
Expected life                                                                   
(in years)                 4.0       4.0       0.5       0.5            
Expected forfeiture rate        50%       50%        -         -                
Average risk-free                                                               
interest rates             6.4%      5.9%      5.4%      5.4%           

For purposes of pro forma disclosures, the estimated fair value of the
options and stock participation shares is amortized to expense over the related 
vesting period.  The pro forma effects on net income (loss) and per share data  
are as follows (in thousands, expected per share data):                         

                                     1997             1996
                                  --------------------------
Pro forma net income (loss)                 $  6,005        $ (40,811)          
Pro forma net income (loss)                                                     
per share                               $   0.21        $   (1.74)      

The Black-Scholes option valuation model requires the input of highly   
subjective assumptions including the expected stock price volatility.  As such, 
changes in the subjective assumptions can materially affect the fair value      
estimates and related impact on pro forma net income (loss) and per share data. 

 The above pro forma effects on income (loss) may not be representative of
the effects on net income (loss) for future years as option grants typically    
vest over several years and additional options are generally granted each year. 

STOCKHOLDERS' RIGHTS PLAN:                                                      

In February 1996, the Board of Directors adopted a Stockholders' Rights 
Plan and declared a dividend of one preferred stock Purchase Right (a "Right")  
for each outstanding share of common stock. Such Rights only become exercisable,
or transferable apart from the common stock, 10 business days after a person or 
affiliated group (an "Acquiring Person") acquires beneficial ownership of, or   
commences a tender or exchange offer for, 15% or more of the Company's common   
stock (with an exception up to 20% for existing stockholders who have filed     
Reports on Form 13D or 13G to acquire a "Triggering Position").                 

Each Right may then be exercised to acquire one share of the Company's  
preferred stock at an exercise price of $35.00, subject to adjustment.          
Thereafter, upon the occurrence of certain events, the Rights entitle holders   
other than the Acquiring Person to acquire common stock having a value of twice 
the exercise price of the Rights.                                               

Alternatively, upon the occurrence of certain other events, the Rights  
entitle holders other than the Acquiring Person to acquire common stock of the  
Acquiring Person having a value of twice the exercise price of the Rights.      

The Rights may be redeemed by the Company at a redemption price of $.001
per Right at any time until the tenth business day following public announcement
that a Triggering Position has been acquired or 10 business days after          
commencement of a tender or exchange offer. The Rights will expire on February  
26, 2006.                                                                       

11. COMMITMENTS AND CONTINGENCIES                                               

LEASES:                                                                         

The Company leases office and warehouse space under non-cancelable      
operating leases expiring at various dates through the year 2004. Certain of the
Company's leases provide for free rent periods and scheduled rent increases.    
Under such leases, rent expense is recognized on a straight-line basis over the 
term of the related leases. The difference between rent expense on a            
straight-line basis and cash payments for rent is accounted for as deferred     
rent. Rent expense was $1,987,000, $1,919,000 and $1,899,000 for fiscal years   
1997, 1996 and 1995, respectively.                                              

At March 31, 1997, future minimum lease payments were as follows (in    
thousands):                                                                     

YEAR ENDING MARCH 31,                                                   
1998                      $   1,608                                     
1999                          1,047                                     
2000                            821                                     
2001                            703                                     
2002                            701                                     
Thereafter                      730                                     
---------           
$   5,610           
---------           
---------           

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UNITED SOFTWARE GMBH:                                                           

In March 1993, MicroProse acquired United Software, GmbH ("United"). In 
September 1993, MicroProse became aware of several non-disclosed liabilities of 
United, including a claim by a German bank of approximately $2,000,000.         
MicroProse also became aware of the deterioration of the financial condition of 
the seller and the seller's parent (which had guaranteed the seller's           
obligations under the United purchase agreement) and by October 29, 1993,       
determined that the seller and its parent were incapable of complying with the  
guarantees and warranties included in the purchase agreement. Therefore,        
primarily as a result of the seller's nondisclosure of the bank debt described  
above and the misrepresentations as to the financial condition of the seller and
its parent, MicroProse assessed its options and decided to rescind the agreement
as provided under German law. On October 29, 1993, MicroProse notified the      
seller and its parent of the rescission of the March 1993 agreement. This action
has resulted in a charge of approximately $4,900,000 which was recorded in the  
quarter ended September 30, 1993 (prior to MicroProse's merger with the         
Company). This charge consisted primarily of the original purchase price, asset 
write-offs of approximately $1.8 million and rescission-related liabilities of  
approximately $1.6 million. United and its parent company are now in            
receivership. The Company does not expect to incur material additional charges  
in connection with the rescission of the United purchase agreement or related   
matters.                                                                        

12. DEFINED CONTRIBUTION PLANS                                                  

The Company has defined contribution plans (the "Plans") in the United  
States pursuant to Section 401(a) of the Internal Revenue Code (the "Code") and 
in Europe. All eligible full and part-time employees of the Company who meet    
certain age requirements may participate in the Plans after three to six months 
of continuous service. Participants may contribute a percentage of their pre-tax
compensation, but not in excess of the maximum allowable under the Code. The    
Plans allow participants to make contributions and provide for a matching       
contribution by the Company as a percentage of employee contributions.          

The Company's matching contributions under the Plans were $327,000,     
$820,000, and $435,000 in fiscal 1997, 1996 and 1995, respectively. Matching    
contributions vest based on the participant's length of service. In addition,   
the Company may make profit-sharing contributions at the discretion of the Board
of Directors. There were no discretionary contributions in the                  
three-year period ended March 31, 1997. All amounts contributed are deposited in
a trust fund which is administered by the Company under the custody of a        
national fund service company. The Company has no other retirement or pension   
programs.                                                                       

13. OTHER INCOME (EXPENSE), NET                                                 

The components of other income (expense), net, for the years ended March
31, 1997, 1996 and 1995 consist of the following (in thousands):                

      1997           1996           1995
   -------------------------------------
Interest income        $1,797         $1,118           $271                     
Interest expense       (2,631)        (2,495)          (814)                    
Gain on the sale of                                                             
investment in FASA    1,895              -              -                   
Equity share of joint                                                           
venture losses            -         (1,074)             -                   
Other income (expense)   (550)        (1,866)           619                     
   -------------------------------------
   $ 511        $(4,317)        $   76
   -------------------------------------
   -------------------------------------

14. RESTRUCTURING CHARGES                                                       

During the year ended March 31, 1996, the Company approved a plan to    
restructure certain operations and accrued expenses of approximately $1.1       
million estimated to be incurred in connection with this restructuring. The     
restructuring included severance costs related to the Company's downsizing      
efforts, reserves on inventories related to terminated affiliated label         
publishing agreements and charges to write down the net assets of the Company's 
wholly-owned Japanese subsidiary to their estimated realizable values.          

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15. SEGMENT INFORMATION                                                         

The Company operates in one business segment. The Company's current     
operations are located primarily in North America and Europe. Information       
regarding geographic operations for the years ended March 31, 1997, 1996 and    
1995 is as follows (in thousands):                                              

                                                        [Enlarge/Download Table]

-----------------------------------------------------------------------------------------------------
1997                      NORTH AMERICA         EUROPE          OTHER   ELIMINATIONS          TOTAL  
-----------------------------------------------------------------------------------------------------
                                                                                                     
Net revenue:                                                                                         
    Customer                  $  36,522      $  62,687       $  1,044       $      -      $ 100,253  
    Intercompany                 13,629          1,338              -        (14,967)             -  
-----------------------------------------------------------------------------------------------------
    Total net revenue            50,151         64,025          1,044        (14,967)       100,253  
Operating income (loss)          (4,445)         7,992            832              -          4,380  
Identifiable assets              54,606         25,072            627              -         80,305  


-----------------------------------------------------------------------------------------------------
1996                      NORTH AMERICA         EUROPE          OTHER   ELIMINATIONS          TOTAL  
-----------------------------------------------------------------------------------------------------
                                                                                                     
Net revenue:                                                                                         
    Customer                  $  30,351      $  28,281       $  1,062       $      -      $  59,694  
    Intercompany                  4,837          2,054              -         (6,891)             -  
-----------------------------------------------------------------------------------------------------
    Total net revenue            35,188         30,335          1,062         (6,891)        59,694  
Operating loss                  (34,383)          (356)          (785)             -        (35,524) 
Identifiable assets              53,147         12,260            515              -         65,922  


-----------------------------------------------------------------------------------------------------
1995                      NORTH AMERICA         EUROPE          OTHER   ELIMINATIONS          TOTAL  
-----------------------------------------------------------------------------------------------------
                                                                                                     
Net revenue:                                                                                         
    Customer                  $  60,249      $  23,395         $  706       $      -      $  84,350  
    Intercompany                  1,422          2,141              -         (3,563)             -  
-----------------------------------------------------------------------------------------------------
    Total net revenue            61,671         25,536            706         (3,563)        84,350  
Operating income (loss)         (18,116)           314           (325)             -        (18,127) 
Identifiable assets              46,288         12,186            876              -         59,350  

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REPORT OF INDEPENDENT ACCOUNTANTS                                               

To the Board of Directors and Stockholders                                      
Spectrum HoloByte, Inc.:                                                        

We have audited the accompanying consolidated balance sheets of Spectrum
HoloByte, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related  
consolidated statements of operations, stockholders' equity (deficit), and cash 
flows for each of the three years in the period ended March 31, 1997. These     
financial statements are the responsibility of the Company's management. Our    
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

We conducted our audits in accordance with generally accepted auditing  
standards. Those standards 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spectrum       
HoloByte, Inc. and subsidiaries as of March 31, 1997 and 1996, and the          
consolidated results of their operations and their cash flows for each of the   
three years in the period ended March 31, 1997, in conformity with generally    
accepted accounting principles.                                                 

/s/ Coopers & Lybrand LLP                                                       
--------------------------                                                      

San Jose, California                                                            
April 28, 1997                                                                  

ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND          
FINANCIAL DISCLOSURE                                            

None.                                                                           

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PART III                                                                        

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.                              

The following table lists the names, ages and position of all executive 
officers and directors of the Registrant Executive officers serve at the        
discretion of the Board of Directors.                                           

Name              Age                     Position          
------------------------    ---     ----------------------------------------    
Gilman G. Louie              36     Chairman of the Board                       

David C. Costine             56     Director                                    

Vinod Khosla                 42     Director                                    

Keith Schaefer               48     Director                                    

Stephen M. Race              47     Director, Chief Executive Officer           

Alden (Stretch) Andersen     47     Senior Vice President, Operations           

Charles (Ken) Balthaser      57     Senior Vice President, Studios              

Tim Christian                42     Managing Director, European Sales &         
    Distribution

Jeffrey J. Forestier         40     Senior Vice President, Sales                

Gregory S. Kennedy           35     Senior Vice President, Business and Legal   
             Affairs and Secretary

Derek W. McLeish             49     Senior Vice President, Marketing            

ITEM 11. EXECUTIVE COMPENSATION.                                                

The information required by this item is included under the caption     
"Executive Compensation and Related Information" in the Company's Proxy         
Statement for the 1997 Annual Meeting of Stockholders and is incorporated herein
by reference.                                                                   

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.        

The information required by this item is included under the caption     
"Ownership of Securities" in the Company's Proxy Statement for the 1997 Annual  
Meeting of Stockholders and is incorporated herein by reference.                

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS13. CERTAIN              
RELATIONSHIPS AND RELATED TRANSACTIONS.                                         

The information required by this item is included under the caption     
"Certain Transactions" in the Company's Proxy Statement for the 1997 Annual     
Meeting of Stockholders and is incorporated herein by reference.                

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PART IV                                                                         

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM S-K       

(a) (1)  FINANCIAL STATEMENTS - See the Consolidated Financial Statements and   
      Financial Statement Schedule beginning on page 29 of this Form 10-K.

(2)  FINANCIAL STATEMENT SCHEDULE - See the Consolidated Financial      
     Statements and Financial Statement Schedule beginning on page 49 of
this Form 10-K.                                               

(3)  EXHIBITS - See Exhibit Index at page 51 of this Form 10-K.         

(b) Current report on Form 8-K dated December 31, 1996.                         

(c) See Exhibit Index at page 51 of this Form 10-K.                             

(d) See the Consolidated Financial Statements and Financial Statement Schedule  
beginning on page 29 of this Form 10-K.                                 

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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.                        

 SPECTRUM HOLOBYTE, INC.

  By:  /s/ Stephen M. Race
       -------------------
   Stephen M. Race
Date:  June 27, 1997              CHIEF EXECUTIVE OFFICER, ACTING CHIEF         
                  FINANCIAL OFFICER AND DIRECTOR

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PURSUANT TO THE REQUIREMENTS OF THE OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON  
THE DATES INDICATED.                                                            

Signature                      Title                              Date    
---------                      -----                              ----    

/s/ Stephen M. Race                                                             
-------------------     Chief Executive Officer, Acting Chief   June 27, 1997   
(Stephen M. Race)       Financial Officer and Director                          

WILLIAM E. MEYER*       Vice President, Corporate Controller    June 27, 1997   
-----------------                                                               
(William E. Meyer)                                                              

GILMAN G. LOUIE*        Chairman of the Board of Directors      June 27, 1997   
----------------                                                                
(Gilman G. Louie)                                                               

DAVID C. COSTINE*       Director                                June 27, 1997   
-----------------                                                               
(David C. Costine)                                                              

VINOD KHOSLA*           Director                                June 27, 1997   
-------------                                                                   
(Vinod Khosla)                                                                  

KEITH SCHAEFER*         Director                                June 27, 1997   
---------------                                                                 
(Keith Schaefer)                                                                

* By:/s/ Stephen M. Race                                                        
---------------------------------                                     
(Stephen M. Race, Attorney-in-Fact)                                     

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     SCHEDULE II

     SPECTRUM HOLOBYTE, INC.
     Valuation and Qualifying Accounts

      (in thousands)

ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS:                              
--------------------------------------------------                              

             Balance at                             Balance at
          Beginning     Charged to                 End
FISCAL YEAR ENDED:     of Period       Expense    Deductions  of Period         
             ----------     ----------   ---------- ----------

March 31, 1995          $  4,963      $  16,871    $  12,440   $  9,394         
March 31, 1996             9,394         20,821       21,036      9,179         
March 31, 1997             9,179         14,604       17,215      6,568         

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     REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders                                      
Spectrum HoloByte, Inc.                                                         

Our report on the consolidated financial statements of Spectrum HoloByte, Inc.  
and subsidiaries is included on page 44 of this Form 10-K.  In connection with  
our audits of such financial statements, we have also audited the related       
financial statement schedule on page 49 of this Form 10-K.                      

In our opinion, the financial schedule referred to above when considered in     
relation to the basic financial statements, taken as a whole, present fairly, in
all material respects, the information required to be included herein.          

                                               /s/ Coopers & Lybrand, L.L.P.
                                               -----------------------------
                                           COOPERS & LYBRAND, L.L.P.

San Jose, California                                                            
June 27, 1997                                                                   

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     INDEX TO FORM 10-K EXHIBITS

                                                        [Enlarge/Download Table]

EXHIBIT                                                                                           
NUMBER                                DESCRIPTION                                         PAGE NO.
-------                           -------------------                                     --------
                                                                                                  
 2.1     Agreement and Plan of Reorganization, dated as of July 14, 1993, as amended        +     
         as of November 15, 1993, by and among MicroProse, Inc., MicroProse                       
         Merger Sub, Inc. and Spectrum HoloByte, Inc. (incorporated by reference to               
         Exhibit 2 of MicroProse, Inc.'s Registration Statement on Form S-4, File No.             
         33-72216, filed on November 29, 1993). . . . . . . . . . . . . . . . . . . . . .         

 2.2     Amendment No. 1 to Amended and Restated Agreement and Plan of                      +     
         Reorganization, dated November 28, 1993. . . . . . . . . . . . . . . . . . . . .         

 2.3     Agreement and Plan of Reorganization, dated as of September 14, 1992, by           +     
         and between Spectrum HoloByte, Inc. and Sphere, Inc. . . . . . . . . . . . . . .         

 2.4     Stock Purchase and Exchange Agreement by and among Spectrum HoloByte,              +     
         Inc., SimTex Software Corporation, Stephen Barcia and Maria Barcia, dated                
         as of June 6, 1995 (incorporated by reference to Exhibit 2.1 of Spectrum                 
         HoloByte, Inc.'s Form 8-K filed on June 27, 1995). . . . . . . . . . . . . . . .         

 3.1     Certificate of Incorporation of the Registrant . . . . . . . . . . . . . . . . .   +     

 3.2     Amended Bylaws of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . .   +     

 4.1     Specimen Common Stock Certificate of the Registrant. . . . . . . . . . . . . . .   +     

 4.2     Warrants issuable to the Grotech Investors and Corporate Venture Partners,         +     
         L.P., dated as of October 17, 1991 . . . . . . . . . . . . . . . . . . . . . . .         

 4.3     Form of Warrant issuable to Paragron Investors, dated July 1992. . . . . . . . .   +     

 4.4     Amended and Restated Investor Rights Agreement, dated December 8, 1993 . . . . .   +     

 4.5     Form of Warrant, issued to Ince & Co. (incorporated by reference to                +     
         Exhibit 4.8 of Spectrum HoloByte, Inc.'s Form 10-Q filed on                              
         December 31,1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.1     Sterling Overdraft and Barclays Tradeline Facilities between MicroProse            +     
         Limited and Barclays Bank PLC, dated July 2, 1993 (incorporated by                       
         reference to Exhibit of same number of MicroProse, Inc.'s Annual Report on               
         Form 10-K filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . .         

10.2     Sterling Overdraft and Barclays Tradeline Facilities between MicroProse            +     
         Limited and Barclays Bank PLC, dated July 2, 1993, as amended. . . . . . . . . .         

10.3     Agreement between MicroProse, Inc. and WordStar International                      +     
         Corporation, dated May 23, 1991 (incorporated by reference to Exhibit 10.6               
         of MicroProse, Inc.'s Registration Statement on Form S-1, File No. 33-42238,             
         filed on August 13, 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . .         

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EXHIBIT                                                                                           
NUMBER                                DESCRIPTION                                         PAGE NO.
-------                           -------------------                                     --------
                                                                                                  
10.4     MicroProse, Inc. 1991 Employee Stock Option Plan, as amended and restated. . . .   +     

10.5     Lease Agreement between MicroProse, Inc. and Lakefront Limited                     +     
         Partnership, dated July 9, 1987, as amended (incorporated by reference to                
         Exhibit 10.11 of MicroProse, Inc.'s Registration Statement on Form S-1, File             
         No. 33-42238, filed on August 13, 1991). . . . . . . . . . . . . . . . . . . . .         

10.6     Second Amendment to Lease Agreement between MicroProse, Inc. and                   +     
         Lakefront Limited Partnership III, dated June 12, 1992 (incorporated by                  
         reference to Exhibit 10.14 of MicroProse, Inc.'s Annual Report on Form 10-K              
         filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.7     Lease Agreement between MicroProse, Inc. and Saft America, Inc., dated             +     
         March 19, 1991 (incorporated by reference to Exhibit 10.12 of MicroProse,                
         Inc.'s Registration Statement on Form S-1, File No. 33-42238, filed on                   
         August 13, 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.8     Lease Agreement between Ashpalm PLC and MicroProse Unlimited, dated                +     
         June 9, 1993 (incorporated by reference to Exhibit 10.16 of MicroProse, Inc.'s           
         Annual Report on Form 10-K filed on July 14, 1993) . . . . . . . . . . . . . . .         

10.9     Lease Agreement by and between MicroProse Limited and ARC Limited,                 +     
         dated September 25, 1992 (incorporated by reference to Exhibit 10.17 of                  
         MicroProse, Inc.'s Annual Report on Form 10-K filed on July 14, 1993). . . . . .         

10.10    Underlease Agreement between MicroProse Limited and London and                     +     
         Metropolitan Investments Limited, dated May 11, 1993 (incorporated by                    
         reference to Exhibit 10.18 of MicroProse, Inc.'s Annual Report on Form 10-K              
         filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.11    Consulting and Product Development Agreement between MicroProse, Inc.              +     
         and Sidney K. Meier, dated August 12, 1991 (incorporated by reference to                 
         Exhibit 10.17 of MicroProse, Inc.'s Registration Statement on Form S-1, File             
         No. 33-42238, filed on August 13, 1991). . . . . . . . . . . . . . . . . . . . .         

10.12    Option Agreement and Irrevocable Proxy by and among Spectrum HoloByte,             +     
         Inc., John W. Stealey, Sr. and MicroProse, Inc. (incorporated by reference to            
         Exhibit 99.2 of MicroProse, Inc.'s Report on Form 8-K filed on July 7, 1993) . .         

10.13    Consulting Services Agreement between MicroProse, Inc. and John W.                 +     
         Stealey, Sr., dated June 22, 1993 (incorporated by reference to Exhibit 10.38            
         of MicroProse, Inc.'s Annual Report on Form 10-K filed on July 14, 1993) . . . .         

10.14    Master Lease Agreement between General Electric Capital Corporation and            +     
         MicroProse, Inc., dated December 31, 1992 (incorporated by reference to                  
         Exhibit 10.41 of MicroProse, Inc.'s Annual Report on Form 10-K filed on                  
         July 14, 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.15    Lease Agreement between Ashpalm PLC and MicroProse Unlimited, dated                +     

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EXHIBIT                                                                                           
NUMBER                                DESCRIPTION                                         PAGE NO.
-------                           -------------------                                     --------
                                                                                                  
         August 8, 1989 (incorporated by reference to Exhibit 10.13 to MicroProse,                
         Inc.'s Registration Statement on Form S-1, File No. 33042238, filed on                   
         August 13, 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.16    Lease Agreement between Paragon Alameda Gateway Associates, Ltd. and               +     
         Sphere, Inc., dated May 5, 1992. . . . . . . . . . . . . . . . . . . . . . . . .         

10.17    Underlease Agreement between MicroProse Limited and Thamsedown                     +     
         Computer Supplies Limited, dated 1993. . . . . . . . . . . . . . . . . . . . . .         

10.18    Merchandising License Agreement between Paramount Pictures Corporation             +*    
         and Sphere, Inc. dated October 1, 1991 . . . . . . . . . . . . . . . . . . . . .         

10.19    License Agreement between V/O Electronorgtechnica, Moscow and Sphere,              +*    
         Inc., dated June 1, 1990, and all amendments thereto . . . . . . . . . . . . . .         

10.20    Super Tetris License Agreement between A/O Elorg and Sphere, Inc., dated           +*    
         September 1, 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.21    Master Lease Agreement between General Electric Corporation and                    +     
         MicroProse Software, Inc., dated December 31, 1992 (incorporated by                      
         reference to Exhibit 10.44 to MicroProse, Inc.'s Annual Report on Form 10-K              
         filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.22    First Amendment to Lease between Paragon Alameda Gateway Associates,               +     
         Ltd. and Sphere, Inc., dated July 28, 1992 . . . . . . . . . . . . . . . . . . .         

10.23    Master Lease Agreement between Comdisco, Inc. and Spectrum HoloByte,               +     
         Inc., dated December 16, 1992. . . . . . . . . . . . . . . . . . . . . . . . . .         

10.24    Security and Loan Agreement among Spectrum HoloByte, Inc., MicroProse              +     
         Software, Inc. and Imperial Bank, dated as of December 30, 1993. . . . . . . . .         

10.25    Security and Loan Agreement among Spectrum HoloByte, Inc., MicroProse              +     
         Software, Inc. and Imperial Bank, dated as of December 30, 1993, as                      
         amended (incorporated by reference to Exhibit 10.89 and 10.90 of Spectrum                
         HoloByte, Inc.'s Form 10-Q filed on December 31, 1994) . . . . . . . . . . . . .         

10.26    Spectrum HoloByte, Inc. 1992 Stock Option Plan . . . . . . . . . . . . . . . . .   +     

10.27    MicroProse, Inc. 1994 Employee Stock Purchase Plan . . . . . . . . . . . . . . .   +     

10.28    401(k) Plan of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   +     

10.29    Form of Indemnification Agreement between the Company and each of its              +     
         officers and directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

10.30    Amended and Restated Employment and Consulting Agreement between                   +     
         Patrick S. Feely and the registrant, dated December 13, 1994 (incorporated by            
         reference to Exhibit 10.90 of Spectrum HoloByte, Inc.'s Form 10-Q filed on               

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EXHIBIT                                                                                           
NUMBER                                DESCRIPTION                                         PAGE NO.
-------                           -------------------                                     --------
                                                                                                  
         December 31, 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

11.1     Statement Re: Computation of Earnings Per Share. . . . . . . . . . . . . . . . .         

16.1     Letter from Ernst & Young regarding change in certifying accountant                +     
         (incorporated by reference to Exhibit 7(c)(3) of the Company's Amendment                 
         No. 2 to Form 8-K filed on March 22, 1994) . . . . . . . . . . . . . . . . . . .         

21.1     Subsidiaries of Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . .         

23.1     Consent of Coopers & Lybrand, L.L.P. . . . . . . . . . . . . . . . . . . . . . .         

27.1     Statement Re: Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . .         


+   Incorporated by reference to an exhibit to the Company's Registration       
Statement on Form S-1 (Registration No. 33-75408), as amended.                  

*   Confidential treatment granted as to certain portions of these exhibits.    

      54

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		2/26/06		41
		9/15/02		20		38
		7/13/99		39
		3/31/99		40
		9/24/98		38
		9/17/98		20		38
		3/31/98		41					10-K,  10-K405/A
		12/31/97		35					10-Q
		12/15/97		35
		9/24/97		38
		9/18/97		1					DEF 14A,  PRE 14A
		9/10/97		20		37
Filed on:		6/30/97							10-Q,  S-8
		6/27/97		47		50
		6/18/97		1		13
		5/31/97		12
		4/30/97		12
		4/28/97		44
For Period End:		3/31/97		1		44
		3/30/97		34
		2/18/97		12
		1/23/97		12
		12/31/96		46					10-Q
		11/4/96		12
		9/20/96		12
		7/12/96		27					8-K
		7/9/96		12
		6/30/96		27					10-Q
		3/31/96		29		44
		1/1/96		26
		10/2/95		20		38
		7/1/95		36
		6/27/95		51
		6/12/95		36
		6/6/95		51
		4/2/95		34
		3/31/95		30		49
		3/7/95		38
		12/31/94		53		54
		12/13/94		38		53
		12/2/94		38
		4/6/94		38
		3/31/94		31
		3/22/94		54
		12/30/93		53
		12/8/93		51
		11/29/93		51
		11/28/93		51
		11/15/93		51
		10/29/93		42
		9/30/93		42
		7/14/93		51		53
		7/7/93		52
		7/2/93		51
		6/22/93		52
		6/9/93		52
		5/11/93		52
		12/31/92		52		53
		12/16/92		53
		9/25/92		52
		9/14/92		51
		7/28/92		53
		6/12/92		52
		5/5/92		53
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