<PAGE>

                                          
                                          
                         SECURITIES AND EXCHANGE COMMISSION

                              Washington, D.C.  20549

                               _____________________
                                          
                                          
                                          
                                     FORM 10-Q
                                          
                     QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                       OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended: December 31, 1997         Commission File Number:  0-19463
                   -----------------
                                          
                                  MICROPROSE, INC.
                                  ----------------
                Exact Name of registrant as specified in its charter


Delaware                                                          52-1728656
---------------------------------               ----------------------------
(State or other jurisdiction of                 (IRS Employer Identification
Incorporation or organization)                                       Number)


2490 Mariner Square Loop, Suite 100, Alameda, CA                      94501
------------------------------------------------                 ----------
(Address of Principal Executive Offices)                         (Zip Code)


                                  (510)864-4440  
                -----------------------------------------------------
                 Registrant's telephone number, including area code


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      
    ---      ---
 

     28,631,196 shares of Common Stock were outstanding as of January 30, 1998.

<PAGE>

                                          
                                  MICROPROSE, INC.
                                          
                                 TABLE OF CONTENTS
                                          


                                                                          Page
                                                                          ----
     
     PART I - FINANCIAL INFORMATION
          
     Item 1.   Consolidated Financial Statements

               Consolidated Balance Sheets at December 31 and 
                 March 31, 1997                                             3

               Consolidated Statements of Operations for the three and 
                 nine months ended December 31, 1997 and 1996               4

               Consolidated Statements of Cash Flows for the nine
                 months ended December 31, 1997 and 1996                    5

               Notes to Consolidated Financial Statements                   6

     
     Item 2.   Management's Discussion and Analysis of 
               Financial Condition and Results of Operations                9
     
     
     PART II - OTHER INFORMATION

     
     Item 1.   Legal Proceedings                                           20
     
     Item 6.   Exhibits and Reports on Form 8-K                            20
     
     Signatures                                                            22
     
     Exhibits                                                              23

     
                                      2

<PAGE>
                                  MICROPROSE, INC.
                                          
                            CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                         December 31,          March 31,
                                                                                            1997                 1997
                                                                                         ------------          ---------
                                                                                          (UNAUDITED)
<S>                                                                                      <C>                   <C>
Assets
  Current assets:
     Cash and cash equivalents                                                             $  24,130           $  47,110
     Accounts receivable, less allowances of $6,542 and $6,568 at December 31
       and March 31, 1997, respectively                                                        8,955               7,891
     Inventories                                                                               1,995               4,042
     Prepaid royalties                                                                         7,097               2,139
     Other current assets                                                                      2,055               1,958
                                                                                           ---------           ---------
        Total current assets                                                                  44,232              63,140
  Property, plant and equipment, net                                                           7,955               7,802
  Goodwill, net                                                                                  619                 892
  Investments                                                                                  3,871               6,050
  Other assets                                                                                 2,920               2,421
                                                                                           ---------           ---------
                                                                                           $  59,597           $  80,305
                                                                                           ---------           ---------
                                                                                           ---------           ---------
Liabilities, Redeemable Preferred Stock and Stockholders' Equity
  Current liabilities:
     Accounts payable                                                                       $  6,464            $  3,508
     Salaries, wages and related accruals                                                      4,535               6,337
     Royalties payable                                                                         1,330               1,840
     Current portion of redeemable preferred stock                                             2,940                   -
     Other current liabilities                                                                 8,271               7,122
                                                                                           ---------           ---------
        Total current liabilities                                                             23,540              18,807

  Other liabilities                                                                            1,266               1,280
  Long-term debt                                                                              32,408              32,739
                                                                                           ---------           ---------
        Total liabilities                                                                     57,214              52,826
                                                                                           ---------           ---------
Redeemable preferred stock (net of current portion), $0.001 par value, 4,000 
  shares designated Series A, outstanding shares and liquidation preference at
  December 31 and March 31, 1997, respectively, as follows:
     Issued and outstanding: 2,000 and 4,000 shares
     Redemption and liquidation amount: $2,735 and $5,260                                         --               5,881

Stockholders' equity:
  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, 28,631 and 28,287
     shares issued and outstanding at December 31 and March 31, 1997, 
     respectively                                                                                 30                  29
  Additional paid-in capital                                                                 144,274             142,558
  Accumulated deficit                                                                       (141,438)           (120,468)
  Foreign currency translation adjustment                                                       (483)               (521)
                                                                                           ---------           ---------
     Total stockholders' equity                                                                2,383              21,598
                                                                                           ---------           ---------
                                                                                           $  59,597           $  80,305
                                                                                           ---------           ---------
                                                                                           ---------           ---------

</TABLE>

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

                                      3
<PAGE>

                                 MICROPROSE, INC.
                                          
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share amounts)
                                    (UNAUDITED)
<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED             NINE MONTHS ENDED
                                                              DECEMBER 31,                   DECEMBER 31,
                                                        ------------------------      ------------------------
                                                           1997           1996           1997         1996
                                                        ----------     ----------     ---------     ----------
<S>                                                     <C>            <C>            <C>           <C>
Net revenue                                             $  14,853      $  35,888      $  47,632     $  76,373 
Cost of revenue                                            10,211         13,888         23,994        28,973 
                                                        ---------      ---------      ---------     ----------
Gross profit                                                4,642         22,000         23,638        47,400 

Operating expenses:
    Sales and marketing                                     4,223          5,086         13,118        14,679 
    General and administrative                              3,240          4,508          8,391        11,952 
    Research and development                                8,106          5,959         20,174        17,862 
                                                        ---------      ---------      ---------     ----------
         Total operating expenses                          15,569         15,553         41,683        44,493 
                                                        ---------      ---------      ---------     ----------
Operating income (loss)                                   (10,927)         6,447        (18,045)        2,907 

Interest and other income (expense), net                      (89)          (391)        (3,056)          797 
                                                        ---------      ---------      ---------     ----------
Income (loss) before provision (benefit) for income
  taxes and extraordinary item                            (11,016)         6,056        (21,101)        3,704 
Provision (benefit) for income taxes                         (131)           398           (131)          398 
                                                        ---------      ---------      ---------     ----------
Income (loss) before extraordinary item                   (10,885)         5,658        (20,970)        3,306 
Extraordinary item, net of tax effect                          --             --             --         3,547 
                                                        ---------      ---------      ---------     ----------
Net income (loss)                                       $( 10,885)     $   5,658      $( 20,970)    $   6,853 
                                                        ---------      ---------      ---------     ----------
                                                        ---------      ---------      ---------     ----------

Basic income (loss) per share:
  Income (loss) before extraordinary item               $   (0.38)     $    0.21      $   (0.75)    $    0.12
  Extraordinary item, net of tax effect                        --             --             --          0.14
                                                        ---------      ---------      ---------     ----------
  Net income (loss)                                     $   (0.38)     $    0.21      $   (0.75)    $    0.26
                                                        ---------      ---------      ---------     ----------
                                                        ---------      ---------      ---------     ----------

Diluted income (loss) per share:
  Income (loss) before extraordinary item               $   (0.38)     $    0.20      $   (0.75)    $    0.11
  Extraordinary item, net of tax effect                        --             --             --          0.13
                                                        ---------      ---------      ---------     ----------
  Net income (loss)                                     $   (0.38)     $    0.20      $   (0.75)    $    0.24
                                                        ---------      ---------      ---------     ----------
                                                        ---------      ---------      ---------     ----------


Weighted average shares used to calculate:
  Basic income (loss) per share                            28,593         26,837         28,422        25,797
  Diluted income (loss) per share                          28,593         28,470         28,422        27,281

</TABLE>


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


                                      4

<PAGE>

                                 MICROPROSE, INC.
                                          
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share amounts)
                                    (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                             Nine months ended      
                                                                                                December 31,        
                                                                                    --------------------------------
                                                                                        1997                1996    
                                                                                    -------------       ------------
<S>                                                                                 <C>                 <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                                    $  (20,970)        $    6,853
  Adjustments to reconcile net income (loss) to net cash provided by
  (used in) operating activities:
    Depreciation and amortization                                                           2,568              3,291
    Gain on the sale of investment in FASA                                                     --             (1,895)
    Loss on the write-down of investment in TEN                                             2,605                 --
    Extraordinary gain on extinguishment of long-term debt                                     --             (3,547)
    Changes in assets and liabilities:
      Accounts receivable                                                                    (865)            (3,907)
      Inventories                                                                           2,119               (967) 
      Prepaid royalties                                                                    (5,533)            (1,387)
      Other current assets                                                                   (123)             1,106 
      Other assets                                                                             89                118
      Accounts payable                                                                      2,869               (106)
      Salaries, wages and related accruals                                                 (1,662)             2,417 
      Royalties payable                                                                      (530)             1,291 
      Other current liabilities                                                             1,070              3,472 
      Other                                                                                   (98)               (36)
                                                                                       ----------         ----------
  Net cash provided by (used in) operating activities                                     (18,461)             6,703

Cash flows from investing activities:
  Acquisitions of property, plant and equipment                                            (2,056)            (1,992)
  Acquisition of certain net assets of Leisuresoft GmbH, net of cash acquired                  --               (447)
  Proceeds from sale of investment in FASA Interactive Technologies                            --                570 
  Equity investments                                                                         (426)              (570)
  Other                                                                                        --                145
                                                                                       ----------         ----------
  Net cash used in investing activities                                                    (2,482)            (2,294)

Cash flows from financing activities:
  Extinguishment of debt                                                                       --             (2,959)
  Proceeds from issuance of common stock, net of issuance costs                             1,507             10,058
  Repurchase of Series A preferred stock                                                   (2,730)                --
  Repayments under notes, lines of credit and capital lease obligations                      (512)            (1,095)
                                                                                       ----------         ----------
  Net cash provided by (used in) financing activities                                      (1,735)             6,004
Effect of exchange rate changes on cash                                                      (302)              (270)
                                                                                       ----------         ----------
Increase (decrease) in cash and cash equivalents                                          (22,980)            10,143
Cash and cash equivalents at beginning of period                                           47,110             35,369
                                                                                       ----------         ----------
Cash and cash equivalents at end of period                                             $   24,130         $   45,512
                                                                                       ----------         ----------
                                                                                       ----------         ----------

Supplemental disclosures of cash flow information:
  Cash paid for interest                                                                    1,012              1,148
  Cash paid for income taxes                                                                  296                 56

</TABLE>

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


                                      5

<PAGE>

                                MICROPROSE, INC.
                                          
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION

The consolidated financial statements are the unaudited historical financial 
statements of MicroProse, Inc. (formerly Spectrum HoloByte, Inc.) and 
subsidiaries (the "Company") and reflect all adjustments (consisting only of 
normal recurring accruals) that, in the opinion of management, are necessary 
for a fair presentation of interim period results.  The consolidated 
financial statements should be read in conjunction with the financial 
statements and notes thereto included in the Company's Annual Report on Form 
10-K for the fiscal year ended March 31, 1997, as filed with the Securities 
and Exchange Commission on June 30, 1997.  The March 31, 1997 consolidated 
balance sheet included herein was derived from audited financial statements, 
but does not include all disclosures, including notes, required by generally 
accepted accounting principles.

The results of operations for the current interim period are not necessarily 
indicative of results to be expected for the entire current year or other 
future interim periods.

For the purposes of presentation, the Company has indicated its interim 
fiscal periods as ended on December 31, 1997 and 1996, and its prior fiscal 
year as ended on March 31, 1997.  As the Company's annual fiscal period is 
accounted for on a 52-53 week year, the interim period financial statements 
included herein represent interim results through December 28, 1997 and 
December 29, 1996, and the end of the prior fiscal year included herein 
represents amounts as of March 30, 1997. 

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 income (loss) or 
stockholders' equity.

NOTE 2.  TERMINATED MERGER

On October 5, 1997, the Company entered into a definitive agreement to merge 
with GT Interactive Software Corp. ("GT"), a Delaware corporation and a 
developer, publisher and distributor of entertainment software for personal 
computers and certain console platforms.  Under the terms of the proposed 
merger, the Company's outstanding shares of common and preferred stock were 
to be exchanged for a proportional number of shares of GT stock.  On December 
5, 1997, the Company and GT announced the mutual agreement to terminate the 
definitive merger agreement.  There were no breakup fees due to either 
company. The accompanying consolidated statements of operations for the three 
and nine-month periods ended December 31, 1997, include the write-off of 
approximately $700,000 of capitalized costs associated with the proposed 
merger.

NOTE 3.  INVENTORIES

Inventories are stated at the lower of cost or market on a first-in, first-out
(FIFO) basis.  Inventories at December 31 and March 31, 1997 consisted of (IN
THOUSANDS):

<TABLE>
<CAPTION>
                              December 31,        March 31, 
                                      1997             1997 
                         -----------------   ---------------
<S>                           <C>                 <C>       
    Raw materials             $   348             $   413   
    Finished goods              1,647               3,629   
                         -----------------   ---------------
                              $ 1,995             $ 4,042   
                         -----------------   ---------------
                         -----------------   ---------------
</TABLE>

NOTE 4.  INVESTMENT

In fiscal 1996 and 1997, the Company made minority equity investments of $2.6 
million in Total Entertainment Network, Inc. ("TEN").  These cost-basis 
investments were 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 conjunction with the 
planned refinancing of TEN, the Company recorded a $2.6 million charge in the 
first quarter of fiscal 1998 to write-down its investment as management 
estimated that a decline in fair value had occurred that was other than 


                                      6

<PAGE>

                                MICROPROSE, INC.
                                          
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

temporary in nature. The charge was included in other income and expense in 
the accompanying consolidated statement of operations for the nine month 
period ended December 31, 1997.

NOTE 5.  FOREIGN EXCHANGE

The Company enters into foreign exchange forward contracts to hedge certain 
foreign currency denominated balances against changes in rates of exchange. 
These contracts, which require the Company to exchange foreign currencies, 
generally mature within three months.  Contracts that are inversely 
correlated to the risk of the hedged item and are designated and effective as 
a hedge of transactions for which a firm commitment has been attained qualify 
for hedge accounting.  Gains and losses on these contracts are deferred and 
recognized in income in the same period that the underlying transactions are 
settled.  If an instrument ceases to qualify for hedge accounting, any 
subsequent gains and losses are recognized as income in the current period.  
The Company does not use any derivatives for trading or speculative purposes. 
Foreign currency transaction gains and losses, net of gains and losses on 
hedge contracts, were not material in the periods presented.

NOTE 6.  PREFERRED STOCK

During the three-month period ended December 31, 1997, the Company redeemed 
2,000,000 shares of the outstanding Series A preferred stock ("Series A 
Stock") for approximately $2.7 million.  The excess of the carrying value 
immediately prior to the redemption (approximately $2.9 million) over the 
redemption amount was credited to additional paid-in capital in the 
accompanying consolidated balance sheet.  The remaining 2,000,000 shares of 
Series A Stock outstanding will become redeemable in September 1998.

In September 1997, all outstanding shares of Series B-1 preferred stock 
(16,045) were converted into an equivalent number of common shares.  

NOTE 7.  INCOME (LOSS) PER SHARE

The Company has adopted the provisions of Statement of Financial Accounting 
Standards No. 128, "Earnings Per Share," ("SFAS 128") effective December 31, 
1997.  SFAS 128 requires the presentation of basic and diluted earnings per 
share ("EPS").  Basic EPS is computed by dividing income available to common 
shareholders by the weighted average number of common shares outstanding for 
the period.  Diluted EPS is computed giving effect to all dilutive potential 
common shares that were outstanding during the period.  Dilutive potential 
common shares consist of incremental shares issuable upon the conversion of 
convertible preferred stock (using the "if converted" method) and exercise of 
stock options and warrants.  All prior period earnings per share amounts have 
been restated to comply with SFAS 128.

In accordance with the disclosure requirements of SFAS 128, a reconciliation 
of the numerator and denominator of basic and diluted EPS is provided as 
follows (in thousands, except per share amounts):


                                      7

<PAGE>
                                MICROPROSE, INC.
                                          
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                           Three months ended       Nine months ended
                                                               December 31,            December 31,
                                                          --------------------      --------------------
                                                            1997        1996          1997        1996
                                                          --------    --------      --------    --------
<S>                                                       <C>         <C>           <C>         <C>
    Numerator - Basic and diluted EPS
         Net income (loss)                                $(10,885)   $  5,658      $(20,970)   $  6,853
         Less: preferred stock dividends                       (70)        (70)         (210)       (210)
                                                          --------    --------      --------    --------
         Income available to common stockholders          $(10,955)   $  5,588      $(21,180)   $  6,643
                                                          --------    --------      --------    --------
                                                          --------    --------      --------    --------
    Denominator - Basic EPS
         Weighed average shares outstanding                 28,593      26,837        28,422      25,797
                                                          --------    --------      --------    --------
         Basic earnings per share                         $  (0.38)   $   0.21      $  (0.75)   $   0.26
                                                          --------    --------      --------    --------
                                                          --------    --------      --------    --------
    Denominator - Diluted EPS
         Denominator - Basic EPS                            28,593      26,837        28,422      25,797
         Effect of dilutive securities:
           Common stock options                                 --         336            --         365
           Convertible preferred stock                          --       1,297            --       1,119
                                                          --------    --------      --------    --------
                                                            28,593      28,470        28,422      27,281
                                                          --------    --------      --------    --------
    Diluted earnings per share                            $  (0.38)   $   0.20      $  (0.75)   $   0.24
                                                          --------    --------      --------    --------
                                                          --------    --------      --------    --------
</TABLE>

Weighted average options to purchase 2,759,329 and 2,870,291 shares of common 
stock were outstanding during the three months and nine months ended December 
31, 1997, respectively.  These options were not included in the calculations 
of diluted EPS because their effect on reported losses would be 
anti-dilutive. Weighted average options to purchase 3,016,158 and 3,108,241 
shares of common stock were outstanding during the three months and nine 
months ended December 31, 1996, respectively.  Certain of these options were 
not included in the calculations of diluted EPS because the options' exercise 
price was greater than the average fair market price of the common shares.

NOTE 8.  RECENT PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," 
which requires disclosure of all changes in stockholders' equity except those 
resulting from investments or contributions by stockholders.  SFAS No. 130 is 
effective for the Company for fiscal years beginning after December 15, 1997. 
The Company does not expect this pronouncement to materially impact the 
Company's results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an 
Enterprise and Related Information," which requires disclosure about 
operating segments in annual financial statements and selected information in 
interim financial reports. It also establishes standards for related 
disclosures about products and services, geographic areas and major 
customers.  This statement supersedes SFAS No. 14, "Financial Reporting for 
Segments of a Business Enterprise" and is effective for fiscal years 
beginning after December 15, 1997. The Company is evaluating the requirements 
of SFAS No. 131 and the effects, if any, on the Company's current reporting 
and disclosures.

During October 1997, the American Institute of Certified Public Accountants 
issued Statement of Position 97-2 ("SOP 97-2"), Software Revenue Recognition. 
This statement establishes requirements for revenue recognition for software 
companies for fiscal years beginning after December 15, 1997.  The Company is 
currently evaluating the impact of SOP 97-2 and has not yet determined the 
result, if any, on the Company's financial position, results of operations or 
cash flows.

                                      8

<PAGE>

                               MICROPROSE, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

The following information should be read in conjunction with the consolidated 
historical financial information and the notes thereto included in Item 1 of 
this Quarterly Report and Management's Discussion and Analysis of Financial 
Condition and Results of Operations contained in the Company's Annual Report 
on Form 10-K for the fiscal year ended March 31, 1997, as filed with the 
Securities and Exchange Commission on June 30, 1997.

This Quarterly Report on Form 10-Q contains forward-looking statements that 
involve risks and uncertainties. The Company may, from time to time, make 
oral forward-looking statements.  The factors discussed in "Risk Factors" 
below are important factors that could cause actual results to differ 
materially from those projected in any such forward-looking statements.

OVERVIEW

MicroProse, Inc. ("the Company") derives revenue primarily from publishing 
and distributing entertainment software for the personal computer ("PC") 
platform on Compact-Disc Read-Only Memory ("CD-ROM") media.  In addition, 
revenue is generated from CD-ROM products for videogame consoles (including 
32-bit "next-generation" systems), the licensing of products to third-party 
publishers and the distribution of third-party software and related products.

On October 5, 1997, the Company entered into a definitive agreement to merge 
with GT Interactive Software Corp. ("GT"), a Delaware corporation and a 
developer, publisher and distributor of entertainment software for personal 
computers and certain console platforms.  Under the terms of the proposed 
merger, the Company's outstanding shares of common and preferred stock were 
to be exchanged for a proportional number of shares of GT stock.  On December 
5, 1997, the Company and GT announced the mutual agreement to terminate the 
definitive merger agreement.  There were no breakup fees due to either 
company.

See additional discussion in "Risk Factors" below.


                                      9

<PAGE>
                               MICROPROSE, INC.

OPERATING RESULTS

Consolidated net revenue generated in North America and the rest of the world
consisted of the following (DOLLARS IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                                              % of Consolidated Net
                                                         Amount                                       Revenue
                                              -------------------------                       ----------------------
     Three months ended December 31:               1997           1996       % CHANGE           1997           1996
                                              -------------------------    ------------       ----------------------
<S>                                           <C>             <C>             <C>              <C>             <C>
        North America                           $  2,136      $  11,594       (81.6%)          14.4%           32.3%
        International                             12,717         24,294       (47.7%)          85.6%           67.7%
                                              -------------------------                       ----------------------
        Consolidated                            $  14,853     $  35,888       (58.6%)         100.0%          100.0%
                                              -------------------------                       ----------------------
                                              -------------------------                       ----------------------
     Nine months ended December 31:
        North America                           $  14,069     $  26,381       (46.7%)          29.5%           34.5%
        International                              33,563        49,992       (32.9%)          70.5%           65.5%
                                              -------------------------                       ----------------------
        Consolidated                            $  47,632     $  76,373       (37.6%)         100.0%          100.0%
                                              -------------------------                       ----------------------
                                              -------------------------                       ----------------------
</TABLE>

The following table sets forth the components of net revenue in dollars and 
as a percentage of total net revenue (DOLLARS IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                                              % of Consolidated Net
                                                         Amount                                       Revenue
                                              -------------------------                       ---------------------
     Three months ended December 31:               1997           1996       % CHANGE           1997           1996
                                              -------------------------    ------------       ---------------------
<S>                                           <C>             <C>             <C>              <C>           <C>   
         Company-published titles:                                                                                     
            CD-ROM                           $   7,290       $ 26,233        (72.2%)          49.1%          73.1%
            Videogame                              283          3,031        (90.7%)           1.9%           8.5%
            Licensing/OEM                        1,351          1,197         12.9%            9.1%           3.3%
            Floppy disk and other                  251            725        (65.4%)           1.7%           2.0%
                                             -------------------------                       ---------------------
               Total published titles            9,175         31,186        (70.6%)          61.8%          86.9%
                                                                                                              
            Third-party distribution             5,678          4,702         20.8%           38.2%          13.1%
                                              -------------------------                       ---------------------
            Consolidated                      $ 14,853       $ 35,888        (53.4%)          100.0%         100.0%
                                              -------------------------                       ---------------------
                                              -------------------------                       ---------------------
                                                                                                                   
     Nine months ended December 31:                                                                                

         Company-published titles:                                                                                     
            CD-ROM                            $  32,961       $ 57,049        (42.2%)          69.2%          74.7%
            Videogame                             1,143          7,793        (85.3%)           2.4%          10.2%
            Licensing/OEM                         4,298          3,768         14.1%            9.0%           4.9%
            Floppy disk and other                   949            849         11.8%            2.0%           1.1%
                                              -------------------------                       ---------------------
               Total published titles            39,351         69,459        (43.3%)          82.6%          90.9%
                                                                                                                   
            Third-party distribution              8,281          6,914         19.8%           17.4%           9.1%
                                              -------------------------                       ---------------------
            Consolidated                      $  47,632       $ 76,373        (37.6%)         100.0%         100.0%
                                              -------------------------                       ---------------------
                                              -------------------------                       ---------------------
</TABLE>

Net revenue declined in both the three and nine-month periods due principally to
the prior year success of two Company-published products, GRAND PRIX II and SID
MEIER'S CIVILIZATION II.  These two titles combined for 37% and 53% of revenue
in the three and nine-month periods ended December 31, 1996, respectively.  Net
revenue in the 

                                      10
<PAGE>

                               MICROPROSE, INC.

December 1997 quarter was also adversely impacted by lower North American 
market acceptance of new product releases.  The Company released two new 
titles in the third quarter of both fiscal 1997 and 1998, although domestic 
shipments of new titles in the comparable third fiscal quarters declined from 
235,000 to 65,000 units.  Provisions for future returns and markdowns also 
increased due to lower holiday sell-through of these new releases and other 
previously released titles. 

The decline in videogame revenue in fiscal 1998 was due to the release of 
three console titles in the first three quarters of the prior fiscal year as 
compared to no titles released to date in fiscal 1998, as the Company has 
strategically focused on PC CD-ROM products in the current fiscal year.  The 
three fiscal 1997 titles (all for the SONY PLAYSTATION-Registered Trademark-) 
were TOP GUN: FIRE AT WILL, GUNSHIP 2000, and X-COM: TERROR FROM THE DEEP. 

Third-party distribution revenue includes shipments of computer software and 
related products published or manufactured by third parties and distributed 
by the Company.  This revenue is generally derived under either standard, 
low-margin distribution agreements (which include the purchase and resale of 
products) or high-margin, lower revenue agency relationships (under which the 
Company earns a commission or agency fee).  The increases in third party 
distribution revenue were due largely to the European release in the third 
quarter of fiscal 1998 of WORMS II, a distribution title which is being 
published in Europe by the third-party developer and marketed by the Company. 
 Partially offsetting these increases were declines in revenue due to a shift 
in strategic focus in Germany from distribution to higher-margin 
agency-related revenue.

Gross profit consisted of the following (DOLLARS IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                          % of Consolidated Net
                                          Amount                                 Revenue       
                                   --------------------                    --------------------
                                      1997      1996         % CHANGE         1997      1996   
                                   --------------------      --------      --------------------
<S>                                <C>        <C>             <C>             <C>       <C>    
Three months ended December 31     $  4,642    $ 22,000       (78.9%)         31.3%     61.3%  
                                   --------------------                    --------------------
                                   --------------------                    --------------------
Nine months ended December 31      $ 23,638    $ 47,400       (50.1%)         49.6%     62.1%  
                                   --------------------      --------      --------------------
                                   --------------------      --------      --------------------
</TABLE>

Gross profit as a percent of consolidated net revenue declined in the third 
quarter due to an increased proportion of revenue generated from third-party 
developed titles.  The Company's two most significant product releases in the 
December 1997 quarter were third-party developed products, one of which was a 
low-margin distribution title.  In addition, margins were adversely impacted 
by declining average selling prices for back catalog titles, mostly in 
Europe. Partially offsetting the decreases in gross profit in the third 
quarter and first nine months of fiscal 1998 was a reduction in shipments of 
Sony PlayStation titles which generally have lower margins than PC products. 

The following table sets forth operating expenses, interest and other income 
(expense) and extraordinary items (DOLLARS IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                          % of Consolidated Net
                                          AMOUNT                                 Revenue       
                                   --------------------                    --------------------
Three months ended December 31:       1997      1996         % CHANGE         1997      1996   
                                   --------------------      --------      --------------------
<S>                                <C>        <C>             <C>             <C>       <C>    
  Sales and marketing              $  4,223  $  5,086         (17.0%)          28.4%    14.2%  
  General and administrative          3,240     4,508         (28.1%)          21.8%    12.5%  
  Research and development            8,106     5,959          36.0%           54.6%    16.6%  
                                   --------------------                    --------------------
     Total operating expenses      $ 15,569  $ 15,553           0.1%          104.8%    43.3%  
                                   --------------------                    --------------------
                                   --------------------                    --------------------
  Interest and other income 
   (expense), net                  $    (89) $   (391)        (77.2%)          (0.6%)   (1.1%) 
                                   --------------------                    --------------------
                                   --------------------                    --------------------
  Provision (benefit) for 
   income taxes                    $   (131) $    398             --           (0.9%)    1.1%  
                                   --------------------                    --------------------
                                   --------------------                    --------------------
</TABLE>


                                       11
<PAGE>

                                     MICROPROSE, INC.


<TABLE>
<CAPTION>
                                                                          % of Consolidated Net
                                          AMOUNT                                 Revenue       
                                   --------------------                    --------------------
Nine months ended December 31:        1997      1996         % CHANGE         1997      1996   
                                   --------------------      --------      --------------------
<S>                                <C>        <C>             <C>             <C>       <C>    

  Sales and marketing              $ 13,118   $ 14,679         (10.6%)        27.6%     19.2%  
  General and administrative          8,391     11,952         (29.8%)        17.6%     15.7%  
  Research and development           20,174     17,862          12.9%         42.3%     23.4%  
                                   --------------------                    --------------------
     Total operating expenses      $ 41,683   $ 44,493          (6.3%)        87.5%     58.3%  
                                   --------------------                    --------------------
                                   --------------------                    --------------------
  Interest and other income 
   (expense), net                  $ (3,056)  $    797        (483.4%)        (6.4%)     1.0%  
                                   --------------------                    --------------------
                                   --------------------                    --------------------
  Provision (benefit) for 
   income taxes                    $   (131)  $    398             --         (0.3%)     0.5%  
                                   --------------------                    --------------------
                                   --------------------                    --------------------
  Extraordinary item, net of 
   tax effect                      $     --   $  3,547        (100.0%)           --      4.6%  
                                   --------------------                    --------------------
                                   --------------------                    --------------------
</TABLE>

Sales and marketing expenses declined in fiscal 1998 due mostly to declining 
net revenue and associated variable marketing and selling costs.  

General and administrative costs were down in fiscal 1998 due mostly to a 
decline in bad debt charges ($0.6 million and $2.5 million for the three and 
nine-month periods, respectively) related to the improved stability of 
certain customers, and to a  $1.0 million reduction in incentive compensation 
due to lower operating profits.  Partially offsetting these amounts was a 
$0.7 million charge in the December 1997 quarter to write-off costs 
associated with the proposed merger with GT Interactive, which was terminated 
during the quarter. 

Research and development costs were up in the most recent three-month and 
nine-month periods due to a $2.0 million charge in the quarter ended December 
31, 1997, to write-off unrealizable third-party royalty advances.  This 
write-off was made primarily due to lower than anticipated holiday 
sell-through, mostly due to one third-party developed title.  

The change in other income and expense for the nine-month period ended 
December 31, 1997, was due to the following factors: 1) in the first quarter 
of fiscal 1998, a $2.6 million charge was recorded to write-down the 
Company's equity investment in Total Entertainment Network, Inc. due to 
management's determination that a decline in fair value had occurred that was 
other than temporary in nature, 2) a $1.9 million gain was recorded in the 
first quarter of the prior year related to the sale of the Company's 
investment in FASA Interactive Technologies, Inc., and 3) lower interest 
costs were incurred in the first nine months of fiscal 1998 due to a 
reduction in indebtedness outstanding.

The changes in the tax provision (benefit) during fiscal 1998 are due to the 
net losses generated.  The extraordinary item recorded in the prior year 
reflects the gains realized upon the repurchase and the conversion to equity 
of a portion of the Company's notes payable at a discount from face value.

LIQUIDITY AND CAPITAL RESOURCES

Cash decreased to $24.1 million and working capital decreased to $20.7 
million during the first nine months of fiscal 1998.  The main uses of cash 
and cash equivalents in fiscal 1998 to date were to fund operating losses, 
royalty advances, bonuses earned in fiscal 1997 and a Series A preferred 
stock repurchase.

                                      12

<PAGE>
                               MICROPROSE, INC.

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").  During the quarter ended December 31, 1997, 
2,000,000 of the outstanding shares of Series A Stock were redeemed for 
approximately $2.7 million.  At December 31, 1997, there were 2,000,000 
shares of Series A Stock outstanding which are convertible into 98,039 shares 
of common stock and which accrue 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 is redeemable for $1.00 
per share plus all accumulated but unpaid dividends (total redemption of $2.7 
million as of December 31, 1997) (i) at any time by the Company, or (ii) in 
its entirety commencing on September 24, 1998, upon written demand of holders 
of the majority of Series A Stock.  

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 at least the next 12 months.

RISK FACTORS

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

TERMINATED BUSINESS COMBINATION.  In October 1997, the Company entered into a 
definitive agreement to merge with GT Interactive Software Corp.  Under the 
terms of the proposed merger, the Company's outstanding shares of common and 
preferred stock were to be exchanged for a proportional number of shares of 
GT stock. On December 5, 1997, the Company and GT announced the mutual 
agreement to terminate the definitive merger agreement. 

The termination of the merger agreement has had an adverse impact on (a) the 
Company's sales and operating results, (b) the Company's ability to attract 
and retain key sales and administrative personnel, (c) the progress of 
certain development projects and (d) the trading price of the Company's 
Common Stock. There can be no assurance that the termination of the merger 
will not continue to adversely impact the Company's business and results of 
operations in future periods.

NASDAQ LISTING.  As of December 31, 1997, the Company is not in compliance 
with the current net tangible assets requirement of The Nasdaq Stock Market 
("NASDAQ") for continued listing on The Nasdaq National Market.  However, new 
listing requirements taking effect February 23, 1998, include alternative 
requirements for continued listing.  The Company is considering a number of 
options for meeting the new requirements, including a reverse stock split, 
and has been proactive in initiating a dialog with NASDAQ with respect to 
these new requirements.  Until the Company completes the steps necessary to 
address this situation and those steps have been approved by NASDAQ, there 
can be no assurance that the Company will be in compliance with the National 
Market listing requirements.  

If the Company is unable to comply with the new National Market listing 
requirements, the Company believes that it will 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 likely be materially and 
adversely affected.

COMPUTER SYSTEMS AND YEAR 2000

Many currently installed computer systems and software products are coded to 
accept only two digit entries in the date code field.  These date code fields 
will need to accept four digit entries to distinguish twenty-first century 
dates from twentieth century dates.  As a result, many companies' software 
and computer systems may need to be upgraded or replaced in order to comply 
with such "Year 2000" requirements.  Although the Company is planning to 
upgrade its systems before the Year 2000 to be Year 2000 compliant, the 
Company currently utilizes third-party equipment and software that is not 
Year 2000 compliant. Failure of the Company's third-party equipment or 
software to meet the Company's Year 2000 system requirements by the Year 2000 
would require the Company to incur unanticipated expenses to remedy any 
problems, which would have a material adverse effect on the Company's 
business, operating results and financial condition.

Operating Results.  The Company reported net losses for the third quarter and 
first nine months of fiscal 1998 of $10.9 million, or $0.38 per diluted 
common share, and $21.0 million, or $0.75 per diluted common share, 
respectively. 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, $18.1 million and $58.5 million for fiscal 
years 1996, 1995 and 1994, respectively.  There can be no assurance that the 
Company's business strategies and tactics will be successful or that the 
Company will be able to generate profitability in future quarterly or annual 
periods. 

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 

                                      13
<PAGE>
                               MICROPROSE, INC.

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 December 31, 1997, the Company had outstanding 
indebtedness for borrowed funds of approximately $32.4 million and cumulative 
manditorily redeemable preferred stock of $2.9 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 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-catalogue 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-catalogue 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 

                                      14
<PAGE>

                               MICROPROSE, INC.

secured rights to intellectual properties and technologies 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, that third 
party technology will be delivered or completed on schedule, or that the 
Company's 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 and 
retail shelf space.

The Company's current production schedules contemplate that the Company will 
commence shipments of a number of new products in the fourth quarter of 
fiscal 1998 and in fiscal 1999.  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 are 
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.

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.  In addition, a 
majority of the unit sales for a product typically occurs in the first 90 to 
120 days after the product is introduced, and, therefore, the Company cannot 
rely on the sales of current products to sustain its business in the future.  
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. 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.  
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, Cendant (formerly 
CUC International), Lucas Arts, Interplay, GT Interactive, Acclaim 
Entertainment, Broderbund Software, Activision and Virgin Interactive. 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 


                                      15

<PAGE>

                               MICROPROSE, INC.

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.

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 on-line 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 resell the products to consumers. During the three and 
nine-month periods ended December 31, 1997, sales to the top ten such 
customers represented approximately 46% and 51%, respectively, 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 not require collateral to secure payment.  Retailers and distributors 
compete in a volatile industry and are subject to the risk of business 
failure.  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.


                                      16

<PAGE>

                               MICROPROSE, INC.

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.  The Company is also in negotiations for 
extension or renewal of certain licenses that have expired or are about to 
expire.  There can be no assurance that the Company's 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 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 


                                      17

<PAGE>

                               MICROPROSE, INC.

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 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. 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 
in whole or in part 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. In addition, there can 
be no assurance that future products which incorporate software developed by 
third parties will be released in accordance with internal delivery schedules 
or at all.

INTERNATIONAL REVENUE.  International net revenue represented approximately 
86%, 70%, 64%, and 49% of the Company's net revenue for the three and 
nine-month periods ended December 31, 1997, and for fiscal years 1997 and 
1996, 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. 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 


                                      18

<PAGE>

                               MICROPROSE, INC.

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 future anticipated sales volumes of products 
subject to such arrangements are not sufficient to recover such advances and 
guarantees, the Company provides a reserve for the anticipated portion of 
such payments that will not be recovered.  If existing advances are 
determined to be unrecoverable in future periods, the Company's 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 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. The Company relies 
largely 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 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.

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 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.


                                      19

<PAGE>

                               MICROPROSE, INC.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Other than as set forth below, no material developments occurred with regard 
to legal proceedings in this quarter.

On November 12, 1997, a lawsuit entitled Activision, Inc. and The Avalon Hill 
Game Company v. MicroProse Software, Inc., MicroProse, Inc., and Spectrum 
HoloByte, Inc., Case No. 97-8302ER, was filed in the United States District 
Court for the Central District of California.  The complaint alleged causes 
of action for trademark infringement, trademark dilution, false designation 
of origin, false advertising, unfair competition, and deceptive trade 
practices in connection with the Company's publication of certain 
CIVILIZATION computer game products.

On January 21, 1998, the Company and its Maryland subsidiary, MicroProse 
Software, Inc., filed an action against Activision, Inc. and The Avalon Hill 
Game Company in the United States District Court for the Central District of 
California.  The Company's complaint alleges that the defendants have engaged 
in false advertising, trademark infringement, and unfair business practices 
in connection with announced plans to develop and publish CIVILIZATION 
computer games under a claimed licensing relationship between Activision and 
Avalon Hill. The Company also seeks cancellation of Avalon Hill's related 
trademark registration.

On February 4, 1998, Activision and Avalon Hill filed a First Amended 
Complaint, correcting certain statements in their original complaint and 
adding claims for declaratory relief and cancellation of the Company's 
related trademark registration.  The action was served upon the Company for 
the first time on February 5, 1998.

Both the Company and opposing parties are seeking damages and injunctive 
relief with respect to publication of future CIVILIZATION products.

The Company intends to defend itself and pursue its claims vigorously in 
these actions.  However, in the event that the Company should not prevail in 
the lawsuit filed by Activision and Avalon Hill, the Company may not be able 
to ship or sell certain of its products and may be required to pay damages, 
both of which would have a material adverse effect on the business, operating 
results, and financial condition of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)  THE FOLLOWING EXHIBITS ARE FILED HEREWITH:

<TABLE>
<CAPTION>
Exhibit
 Number   Description                                                          
-------   ---------------------------------------------------------------------
<S>       <C>                                                                  
 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 Paragon Investors, dated July 1992
 4.4+     Form of Warrant, issued to Ince & Co. (incorporated by reference to
          Exhibit 2.3 of Spectrum HoloByte, Inc.'s Quarterly Report on 
          Form 10-Q, File No. 0-19463, filed on December 31, 1994) 
 4.5+     Registration Rights Agreement, dated June 12, 1995 by and among
          Spectrum HoloByte, Inc. and Stephen Barcia and Maria Barcia
          (incorporated by reference to Exhibit 2.3 of Spectrum HoloByte, Inc.'s
          Current Report on Form 8-K, File No. 0-19463, filed on June 27, 1995)
 4.6+     Registration Rights Agreement, dated as of May 16, 1995, by and among
          Spectrum HoloByte, Inc. and IPWEL LTD (incorporated by reference to
          Exhibit 4.7 of Spectrum HoloByte, Inc.'s Registration on Form S-3,
          File No. 33-94580, filed October 24, 1995)
</TABLE>

                                      20

<PAGE>
                               MICROPROSE, INC.

<TABLE>
<CAPTION>
Exhibit
 Number   Description                                                          
-------   ---------------------------------------------------------------------
<S>       <C>                                                                  
 4.7+     Registration Rights Agreement, dated as of May 16, 1995, by and among
          Spectrum HoloByte, Inc. and GFL Advantage Fund Limited (incorporated
          by reference to Exhibit 4.8 of Spectrum HoloByte, Inc.'s Registration
          on Form S-3, File No. 33-94580, filed October 24, 1995)
 4.8+     Registration Rights Agreement, dated as of August 28, 1995, by and
          among Spectrum HoloByte, Inc. and GFL Advantage Fund Limited
          (incorporated by reference to Exhibit 4.9 of Spectrum HoloByte, Inc.'s
          Registration on Form S-3, File No. 33-94580, filed October 24, 1995)
 4.9+     Registration Rights Agreement, dated as of June 27, 1995, by and among
          Spectrum HoloByte, Inc. and Banque Scandinave en Suisse (incorporated
          by reference to Exhibit 4.10 of Spectrum HoloByte, Inc.'s Registration
          on Form S-3, File No. 33-94580, filed October 24, 1995)
 4.10+    Registration Rights Agreement, dated as of August 25, 1995, by and
          among Spectrum HoloByte, Inc. and PJP International, Ltd.
          (incorporated by reference to Exhibit 4.11 of Spectrum HoloByte,
          Inc.'s Registration on Form S-3, File No. 33-94580, filed October 24,
          1995)
 4.11+    Registration Rights Agreement, dated as of May 16, 1995, by and among
          Spectrum HoloByte, Inc. and Tanner, Owen & Co. Incorporated
          (incorporated by reference to Exhibit 4.12 of Spectrum HoloByte,
          Inc.'s Registration on Form S-3, File No. 33-94580, filed October 24,
          1995)
 4.12+    Registration Rights Agreement, dated as of September 6, 1995, by and
          among Spectrum HoloByte, Inc. and Tanner, Owen & Co. Incorporated
          (incorporated by reference to Exhibit 4.13 of Spectrum HoloByte,
          Inc.'s Registration on Form S-3, File No. 33-94580, filed October 24,
          1995)
 4.13+    Indenture, dated as of September 15, 1995, between Spectrum HoloByte,
          Inc. and Chemical Trust Company of California (incorporated by
          reference to Exhibit 3 of Spectrum HoloByte, Inc.'s Current Report on
          Form 8-K, File No. 0-19463, filed October 17, 1995)
 4.14+    Registration Rights Agreement, dated as of September 26, 1995, by and
          among Spectrum HoloByte, Inc. and Robertson, Stephens & Company, L.P.,
          Jefferies & Company, Inc. and Piper Jaffray Inc. (incorporated by
          reference to Exhibit 4 of Spectrum HoloByte, Inc.'s Current Report on
          Form 8-K, File No. 0-19463, filed October 17, 1995)
 4.15+    Certificate of Designation for Series B Convertible Preferred Stock
 4.16+    Certificate of Designation for Series B-1 Convertible Preferred Stock
10.1+     Form of Purchase Agreement, by and between Spectrum HoloByte, Inc. and
          certain investors, effective June 26, 1996 (incorporated by reference
          to Exhibit 4.3 of Spectrum HoloByte, Inc.'s Registration on Form S-3,
          File No. 333-08385, filed July 18, 1996)
27.1      Statement Re: Financial Data Schedule
</TABLE>

+ Previously filed.

(b)  REPORTS ON FORM 8-K:

     October 15, 1997 - Item 5 - Other events - Reporting that MicroProse,
     Inc. had entered into an Agreement and Plan of Merger with GT
     Interactive Software Corp. and Swan Acquisition Corp. (a wholly owned
     subsidiary of GT Interactive Software Corp.).

                                      21
<PAGE>

                               MICROPROSE, INC.

                                  SIGNATURES

Pursuant to the requirements 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, on October 13, 1997.

                                      MICROPROSE, INC.



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


                                      22