<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: June 30, 1998           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
   -----   ----


    5,754,000 shares of Common Stock were outstanding as of August 3, 1998.

<PAGE>


                              MICROPROSE, INC.



                             TABLE OF CONTENTS


<TABLE>

                                                                         Page
                                                                         ----
  <S>                                                                    <C>
  PART I - FINANCIAL INFORMATION

  ITEM 1. FINANCIAL STATEMENTS

          Consolidated Balance Sheets at June 30 and
            March 31,  1998                                                 3

          Consolidated Statements of Operations for the three
            months ended June 30, 1998 and 1997                             4

          Consolidated Statements of Cash Flows for the three
            months ended June 30, 1998 and 1997                             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                                                21

  ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                 23

  SIGNATURES                                                               26

  EXHIBITS                                                                 27

</TABLE>


                                 2
<PAGE>


                              MICROPROSE, INC.
                        CONSOLIDATED BALANCE SHEETS
               (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                       JUNE 30,         MARCH 31,
                                                                         1998             1998
                                                                     --------------   -------------
                                                                      (UNAUDITED)
<S>                                                                   <C>             <C>
ASSETS                                                                
Current assets:
  Cash and cash equivalents                                            $   4,289       $  14,087
  Accounts receivable, less allowances of $4,634 and $5,077                           
   at June 30 and March 31, 1998, respectively                             7,076           7,506
  Inventories                                                              1,491           1,559
  Current portion of prepaid royalties                                     4,233           3,195
  Other current assets                                                     3,371           2,064
                                                                     --------------   -------------
  Total current assets                                                    20,460           28,411
 Property, plant and equipment, net of accumulated depreciation of                    
      $14,409  and $13,819 at June 30 and March 31, 1998, respectively     7,216           7,595
 Goodwill, net                                                               783             903
 Investments                                                               3,485           3,485
 Prepaid royalties                                                         2,565           2,565
 Other assets                                                                818             870
                                                                     --------------   -------------
                                                                       $  35,327       $  43,829
                                                                     --------------   -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:                                                                 
  Accounts payable                                                     $   4,603       $   6,153
  Salaries, wages and related accruals                                     4,810           5,059
  Royalties payable                                                        1,321             642
  Current portion of redeemable preferred stock                            2,940           2,940
  Other current liabilities                                                5,872           5,201
                                                                     --------------   -------------
  Total current liabilities                                               19,546          19,995
                                                                                      
Other liabilities                                                            907           1,028
Long-term debt                                                            32,340          32,348
                                                                     --------------   -------------
Total liabilities                                                         52,793          53,371
                                                                     --------------   -------------
Redeemable preferred stock (net of current portion) , $0.001 par                      
   value, 4,000 shares designated Series A, issued and outstanding,                   
   redemption and liquidation amount of $2,807 and $2,772 at                          
   June 30, 1998, and March 31, 1998, respectively.                            -               -
                                                                                      
Stockholders' Deficit:                                                                
 Preferred stock, $0.001 par value, 9,000 shares authorized                           
      (of which 4,000 shares have been designated Series A),                          
      no amounts were issued and outstanding at June 30, 1998                         
      or March 31, 1998                                                        -               -
 Common stock, $0.001 par value, 40,000 shares authorized,                            
      5,754 and 5,754 shares issued and outstanding at                                
      June 30 and March 31, 1998, respectively                                 6               6
 Additional paid-in capital                                              144,525         144,525
 Accumulated deficit                                                    (161,424)       (153,609)
 Accumulated other comprehensive income                                     (573)           (464)
                                                                     --------------   -------------
 Total stockholders' deficit                                             (17,466)         (9,542)
                                                                     --------------   -------------
                                                                       $  35,327       $  43,829
                                                                     --------------   -------------
                                                                     --------------   -------------
</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
                                                         June 30,
                                                 -------------------------
                                                      1998         1997
                                                 ----------    -----------
<S>                                              <C>           <C>
Net revenue                                       $  12,195      $  13,580
Cost of revenue                                       4,954          5,778
                                                 ----------    -----------
Gross profit                                          7,241          7,802

Operating expenses:                                             
 Sales and marketing                                  4,975          4,181
 General and administrative                           2,644          3,173
 Research and development                             6,238          5,863
 Restructuring  charges                                 431              -
                                                 ----------    -----------
  Total operating expenses                           14,288         13,217
                                                 ----------    -----------
Operating loss                                       (7,047)        (5,415)

Interest expense, net                                  (492)          (151)
Other income (expense), net                            (250)        (2,746)
                                                 ----------    -----------
Net loss before provision for income taxes           (7,789)        (8,312)
                                                 ----------    -----------
Provision for income taxes                               26              -
                                                 ----------    -----------
Net loss                                          $  (7,815)     $  (8,312)
                                                 ----------    -----------
                                                 ----------    -----------

                                                 ----------    -----------
Basic loss per share:                              $  (1.36)     $   (1.48)
                                                 ----------    -----------
                                                 ----------    -----------

                                                 ----------    -----------
Diluted loss per share:                            $  (1.36)     $   (1.48)
                                                 ----------    -----------

Weighted average shares used to calculate:                      
 Basic loss per share                                 5,754          5,661
 Diluted loss per share                               5,754          5,661
</TABLE>



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



                                         4
<PAGE>

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



<TABLE>
<CAPTION>

                                                                      Three Months Ended
                                                                            June 30,
                                                                  --------------------------
                                                                      1998           1997
                                                                 -----------    -----------
<S>                                                               <C>            <C>
OPERATING ACTIVITIES:
Net loss                                                           $ (7,815)      $  (8,312)
Adjustments to reconcile net loss to net cash                                    
 used in operating activities:                                                   
 Depreciation and amortization                                          802           1,031
 Minority interest in joint venture losses                                -             (18)
 Loss on write-down of investment                                         -           2,605
 Changes in assets and liabilities:                                              
  Accounts receivable                                                   370           2,893
  Inventories                                                            54             854
  Prepaid royalties                                                  (1,038)         (1,812)
  Other current assets                                               (1,329)            684
  Accounts payable                                                   (1,517)           (868)
  Salaries, wages and related accruals                                 (240)         (2,133)
  Royalties payable                                                     681            (277)
  Other current liabilities                                             745             (23)
  Other liabilities                                                    (107)            132
                                                                 -----------    -----------
Net cash used in operating activities                                (9,394)         (5,244)
                                                                                 
INVESTING ACTIVITIES:                                                            
Acquisitions of property, plant and equipment                          (305)           (613)
                                                                 -----------    -----------
Net cash used in investing activities                                  (305)           (613)
                                                                                 
FINANCING ACTIVITIES:                                                            
Proceeds from issuance of common stock, net of issuance costs             -             181
Repayments under notes and lines of credit                               (9)           (122)
Principal payments on capital lease obligations                         (33)            (72)
                                                                 -----------    -----------
Net cash used in financing activities                                   (42)            (13)
                                                                                 
Effect of exchange rate changes on cash                                 (57)            (77)
                                                                 -----------    -----------
Decrease in cash and cash equivalents                                (9,798)         (5,947)
Cash and cash equivalents at beginning of period                     14,087          47,110
                                                                 -----------    -----------
Cash and cash equivalents at end of period                         $  4,289       $  41,163
                                                                 -----------    -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES:                              -----------    -----------
Cash paid for interest                                             $     39       $      41
Cash paid for income taxes                                               23              79
</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. 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, 
1998, as filed with the Securities and Exchange Commission on June 29, 1998, 
and amended on July 27, 1998.  The March 31, 1998, 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 June 30, 1998 and 1997, and its prior fiscal year 
as ended on March 31, 1998.  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 June 28, 1998, and June 27, 
1997, respectively, and the end of the prior fiscal year included herein 
represents amounts as of March 29, 1998.

The consolidated financial statements have been presented on a going-concern 
basis, which contemplates the realization of assets and the satisfaction of 
liabilities in the normal course of business. The Company has reported net 
losses of $7.8 million and $33.1 million for the quarter ended June 30, 1998, 
and fiscal 1998, respectively.   Moreover, the Company has generated an 
accumulated deficit of  $161.4 million at June 30, 1998.  In addition, the 
Company's cash and cash equivalents have declined by $33.0 million during 
fiscal 1998 and by $9.8 million for the quarter ended June 30, 1998.  There 
can be no assurance that the Company's business strategies and tactics will 
be successful and that the Company will be profitable in future periods.

As noted in the report of independent accountants for the year ended March 
31, 1998, the above issues and related liquidity concerns raise substantial 
doubt about the Company's ability to continue as a going concern.  

On May 19, 1998, the Company released fourth quarter and fiscal year 1998 
results.  In that press release, the Company's management indicated that they 
believe that the Company can perhaps best prosper and leverage its assets in 
combination with another Company or through a strategic partner.  As a 
result, the Company's Board of Directors has authorized management to 
investigate strategic alternatives for the Company.

NOTE 2.  REVERSE COMMON STOCK SPLIT

At a special meeting on May 11, 1998, the stockholders approved and made 
effective a one for five reverse stock split whereby each five shares of the 
Company's presently outstanding common stock were automatically converted 
into one share (the "Reverse Stock Split").  Common stock and additional 
paid-in capital as of March 31, 1998, have been restated to reflect this 
reverse split.  Par value will remain unchanged at $0.001 per share.  The 
number of common shares issued at June 30 and March 31, 1998, after giving 
effect to the split, was 5,753,800 (28,769,000 shares issued before the 
Reverse Stock Split).

The effect of the Reverse Stock Split has been retroactively reflected as of 
March 31, 1998, in the consolidated balance sheet.  All references to the 
number of common shares and per share amounts have been restated as 
appropriate to reflect the effect of the reverse split for all periods 
presented.


                                  6
<PAGE>

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



NOTE 3.  RESTRUCTURING

In June 1998, the Company approved a restructuring plan that called for the 
closure of its Austin, Texas studio. The Company is re-evaluating that 
studio's development projects but will retain all future rights and 
intellectual property related to those projects. In connection with this 
closure, the Company accrued a total of $431,000 for severance related to the 
elimination of approximately 35 positions plus amounts for facility shutdown 
and contract cancellation costs.

NOTE 4.  INVENTORIES

Inventories are stated at the lower of cost or market on a first-in, 
first-out (FIFO) basis.  Inventories consisted of the following:

<TABLE>
<CAPTION>
                                              JUNE 30,   MARCH 31,
                                               1998        1998
                                             --------------------
                                                (In thousands)
                                                --------------

     <S>                                     <C>          <C>
     Raw materials                            $  137      $  256
     Finished goods                            1,354       1,303
                                             ------------------
                                              $1,491      $1,559
                                             --------------------
                                             --------------------
</TABLE>


NOTE 5.  NET LOSS PER SHARE

In accordance with the disclosure requirements of SFAS 128, a reconciliation 
of the numerator and denominator of basic and diluted earnings per share 
(EPS) is provided below.  All references to the number of common shares and 
per share amounts have been restated as appropriate to reflect the effect of 
the one for five reverse split (see note 2).  The reconciliations for the 
three months ended June 30 are as follows (in thousands, except per share 
amounts):

<TABLE>
<CAPTION>

                                                    Three Months Ended
                                                          June 30,
                                                  ------------------------
                                                      1998          1997
                                                 -----------     ---------
<S>                                               <C>             <C>
Numerator - Basic and diluted EPS
 Net loss                                          $(7,815)       $(8,312)
 Preferred stock dividends                             (35)           (70)
                                                 -----------     ---------
 Net loss available to common shareholders         $(7,850)       $(8,382)
                                                 -----------     ---------
Denominator - Basic and diluted EPS
 Weighed average shares outstanding                  5,754          5,661
                                                 -----------     ---------

 Basic and diluted earnings per share:
                                                 -----------     ---------
  Net loss                                        $  (1.36)        $(1.48)
                                                 -----------     ---------
                                                 -----------     ---------
</TABLE>

                                     7
<PAGE>


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


Options to purchase 799,731 and 567,789 shares of common stock were 
outstanding for the periods ended June 30, 1998 and 1997, respectively.  
These options were not included in the calculations of diluted EPS because 
their effect on reported losses would be anti-dilutive.  Preferred stock 
dividends relate to Series A convertible preferred stock.  These shares were 
not included in diluted EPS as their effect would be antidilutive.

NOTE 6.  COMPREHENSIVE INCOME

The Company has adopted the provisions of Statement of Financial Accounting 
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," effective April 
1, 1998.  This statement requires the disclosure of comprehensive income and 
its components in a full set of general-purpose financial statements.  
Comprehensive income is defined as net income plus revenues, expenses, gains 
and losses that, under generally accepted accounting principles, are excluded 
from net income.  The components of comprehensive income which are excluded 
from income are not significant, individually or in the aggregate, and 
therefore, no separate statement of comprehensive income has been presented.

NOTE 7.  RECENT PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 
No. 131, "Disclosures about Segments of an Enterprise and Related 
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments 
of a Business Enterprise."   SFAS No. 131 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 is effective for fiscal years beginning after December 15, 1997.  
The statement's interim reporting disclosures are not required until the 
first quarter immediately subsequent to the fiscal year in which SFAS 131 is 
effective.

In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative 
Instruments and Hedging Activities," which establishes accounting and 
reporting standards for derivative instruments and for hedging activities.  
It requires that an entity recognize all derivatives as either assets or 
liabilities in the statement of financial position and measure those 
instruments at fair value.  Management has not yet evaluated the effects of 
this change on its operations.  The Company will adopt SFAS No. 133 as 
required for its first quarterly filing of fiscal year 2000.

NOTE 8.  SUBSEQUENT EVENT

On July 14, 1998, subsequent to quarter end, the Company signed a binding 
letter of intent to allow Virtual World Entertainment Group, Inc. ("VWEG") to 
repurchase the Company's equity interest in VWEG in exchange for a promissory 
note in the amount of $1.8 million and credits totaling $1,570,000 in the 
form of an advance against royalties.  The advance is for a license to 
develop computer and video games based on VWEG's AEROTECH property.  The 
Company also agreed to terminate its affiliated label agreement with VWEG.

                                   8
<PAGE>

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, 1998, as filed with the 
Securities and Exchange Commission on June 29, 1998, and amended on July 27, 
1998.

This Quarterly Report on Form 10-Q contains forward-looking statements which 
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 issues 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. This software is generally published 
by the Company for the following platforms:

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

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

See additional discussion in "Risk Factors" below.

OPERATING RESULTS

Consolidated net revenue for the three-month periods ended June 30, 1998 and 
1997, consisted of the following

<TABLE>
<CAPTION>

                                                         % OF CONSOLIDATED 
                                AMOUNT                      NET REVENUE
                       --------------------              ----------------- 
                            1998       1997    % CHANGE     1998    1997
                       --------------------   ---------  ------------------
                          (In thousands)
                          --------------
<S>                    <C>        <C>          <C>        <C>       <C>
By Territory:
 North America          $  6,961   $  3,435    102.6 %     57.1%     25.3%
 International             5,234     10,145    (48.4)%     42.9%     74.7%
                       --------------------  ---------  ------------------
 Consolidated            $12,195    $13,580    (10.2)%    100.0%    100.0%
                       --------------------  ---------  ------------------
                                                                   
By Platform/Type:                                                  
 CD-ROM                 $  8,114   $10,845     (25.2)%     66.6%     79.9%
 Videogame                     2       276     (99.3)%      0.0%      2.0%
 Licensing/OEM             2,479     1,080     129.5 %     20.3%      8.0%
 Distribution                976     1,124     (13.2)%      8.0%      8.3%
 Floppy disk and other       624       255     144.7 %      5.1%      1.8%
                      --------------------   ---------  ------------------
 Consolidated            $12,195   $13,580     (10.2)%    100.0%    100.0%
                      --------------------   ---------  ------------------
                      --------------------   ---------  ------------------
</TABLE>


Consolidated net revenues for the three months ended June 30, 1998, decreased 
by 10.2 percent from the corresponding period in the prior fiscal year due in 
part to the release of 

                                      9
<PAGE>


MECHCOMMANDER only in North America rather than worldwide.  For marketing 
reasons, this title was released in Europe in the second fiscal quarter.  
With a partial release, MECHCOMMANDER accounted for more than 25 percent 
($3.2 million) of total net revenue for the quarter. A second title, X-COM 
INTERCEPTOR, also released in the first fiscal quarter, generated revenues in 
excess of $1.8 million or 15 percent of total net revenue.  In the prior 
year, the release of STAR TREK: GENERATIONS, which accounted for 34 percent 
of consolidated net revenue, combined with the strong sales of the 
back-catalogue titles GRAND PRIX II and SID MEIER'S CIVILIZATION II 
("CIVILIZATION II"), pushed consolidated net revenues to $13.6 million. The 
increase in North American net revenue was due principally to sales of 
MECHCOMMANDER.  In the prior year, international net revenue was buoyed by 
the success of STAR TREK: GENERATIONS and GRAND PRIX II; both titles did not 
experience the same level of market acceptance in North America. 

The decline in videogame revenue in the quarter ended June 30, 1998, was due 
to no significant releases or sales on console platforms. The increase in 
license/OEM ("Original Equipment Manufacturer") revenue was due in part to 
the settlement and licensing agreement with Activision (SEE PART II, ITEM 1) 
and back catalog licenses with other software publishers.

Distribution revenue includes shipments of computer software and related 
products published or manufactured by third parties and distributed by the 
Company.  Substantially all of the distribution revenue generated in the 
first quarter of fiscal 1999 related to shipments by Leisuresoft Vertiebs 
GmbH ("Leisuresoft"), a German distributor of computer software and related 
products.

Net revenue in the first quarter of fiscal 1999 was also negatively impacted 
by a percentage increase in the provisions recorded for returns and 
markdowns.  This increase was due largely to potential returns and discounts 
on prior year releases that did not achieve anticipated market acceptance.

Gross profit for the three-month periods ended June 30, 1998 and 1997, 
consisted of the following:

<TABLE>
<CAPTION>

                                                               % OF CONSOLIDATED 
                               AMOUNT                             NET REVENUE
                      ---------------------                    ----------------
                         1998          1997       % CHANGE       1998      1997
                      ---------------------      ---------     ----------------
                           (In thousands)
                           --------------

<S>                    <C>           <C>          <C>           <C>       <C>
Gross profit           $7,241        $7,802        (7.2)%       59.4%     57.5%
                      ---------------------      ---------     ----------------
                      ---------------------      ---------     ----------------
</TABLE>


Gross profit as a percent of consolidated net revenue increased slightly due 
to higher licensing revenue in the first quarter of fiscal 1999.  This 
increase is partially offset by higher provisions for returns and markdowns.  
Total gross profit, however, decreased consistent with lower net revenues.

                                           10
<PAGE>


The following table sets forth operating expenses, interest and other income 
(expense) for the three-month periods ended June 30, 1998 and 1997:

<TABLE>
<CAPTION>


                                                                  % OF CONSOLIDATED 
                                         Amount                       NET REVENUE
                                ---------------------             ------------------
                                    1998        1997    % CHANGE     1998     1997
                                ---------------------   --------  ------------------
                                    (In thousands)
                                    --------------
<S>                             <C>          <C>         <C>        <C>       <C>
Sales and marketing              $  4,975    $  4,181     19.0 %     40.8%    30.8%
General and administrative          2,644       3,173    (16.7)%     21.7%    23.3%
Research and development            6,238       5,863      6.4 %     51.2%    43.2%
Restructuring charges                 431           -        -        3.5%       -
                                ---------------------   --------  ------------------
     Total operating expenses     $14,288     $13,217       8.1%    117.2%    97.3%
                                ---------------------   --------  ------------------
                                ---------------------   --------  ------------------
Interest and other income 
(expense)                        $  (742)  $  (2,897)      74.4%    (6.1)%   (21.3)%
                                ---------------------   --------  ------------------
                                ---------------------   --------  ------------------
</TABLE>

The increase in sales and marketing expense in the first quarter of fiscal 
1999 was largely due to variable marketing costs in support of the three new 
quarterly releases (MECHCOMMANDER, X-COM INTERCEPTOR, and ADDICTION PINBALL) 
compared to one release in the first quarter fiscal 1998.  In addition, the 
Company incurred additional cooperative advertising expenses in fiscal 1999 
also in support of these releases.

The reduction in general and administrative spending in the first three 
months of fiscal 1999 was due primarily to decreased charges for bad debt 
expense ($380,000).  Reduced headcount and tighter controls on spending also 
contributed to this reduction. Research and development costs in the current 
year included additional quality assurance testing related to MECHCOMMANDER 
and X-COM INTERCEPTOR both released in the first quarter.

Restructuring charges related to management's decision to close the Austin 
development studio in June 1998. These charges include full severance payouts 
to employees, lease abandonment costs and amounts for various contract 
cancellation costs.

The change in other income (expense) in the prior year included a $2.6 
million charge to write-down the Company's investment in Total Entertainment 
Network, Inc. due to management's estimate that a decline in fair value had 
occurred that was other than temporary in nature.  The balance of the account 
is principally interest expense related to long-term debt.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreased to $914,000 and cash decreased $9.8 million for the 
quarter ended June 30, 1998, to approximately $4.3 million. The main uses of 
cash were to fund operating losses, short-term royalty advances and payments 
on accounts payable. Partially offsetting these decreases were increases in 
cash from strong collections of revenue for MECHCOMMANDER and increases in 
the amounts of royalties and other liabilities payable.

The Company recently renewed an overdraft/line of credit facility in the 
United Kingdom that is based upon qualifying receivables and certain other 
bank requirements for amounts up to a maximum credit limit of 1,640,000 
pounds sterling (approximately $2.7 million at June 30, 1998).  This facility 
bears interest at the rate of 1.75 percent over the bank's base rate, and 
expires June 30, 1999. As of June 30, 1998, total amount available based upon 
qualifying assets totaled approximately $2.0 million. However, as of June 30, 
1998 the Company had not utilized any part of this facility.  There can be no 
assurance that the Company will be able to renegotiate this facility upon its 

                                           11
<PAGE>


expiration or that any additional borrowing facilities will be made available 
to the Company on acceptable terms.

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 June 30, and March 31, 1998, there were 
2,000,000 shares of Series A Stock outstanding which are convertible into 
19,608 shares of common stock and which accrue dividends at an annual rate of 
7 percent. 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 $2.8 million as of June 30, 1998) (i) at any time by the 
Company, or (ii) in its entirety at any time on or after September 24, 1998, 
within 180 days of receipt of written demand from the majority of Series A 
Stock holders.

Management believes that existing cash and cash equivalents, together with 
cash generated from operations, will need to be supplemented in the near term 
by cash flows from new financing arrangements, including asset-based 
financing arrangements, to meet the Company's liquidity and capital needs for 
the next 12 months.  Limited new asset-based financing arrangements have 
recently been secured.  However, there can be no assurances that such 
asset-based financing will be sufficient to meet the Company's capital and 
liquidity needs for the next 12 months or that the Company's products will 
generate receivables and other assets sufficient to support an adequate level 
of financing.  The Company's ability to support an adequate level of 
financing depends on the timely release of new products in anticipated 
quantities.  Failure to secure and maintain adequate financing would have a 
material and adverse effect on the Company's business, financial condition 
and ability to continue as a going concern.

RISK FACTORS

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

OPERATING RESULTS.  The Company reported a net loss for the quarter ended 
June 30, 1998, of $7.8 million, or $1.36 per share with an accumulated 
deficit of $161.4 million.  For fiscal year 1998, the Company had reported a 
net loss of $33.1 million or $5.86 per share and had an accumulated deficit 
of $153.6 million at March 31, 1998.  There can be no assurance that the 
Company's business strategies and tactics will be successful and that the 
Company will be profitable in future quarterly or annual periods.

CASH FLOWS.  For the quarter ended June 30, 1998, the Company's cash and cash 
equivalents declined by $9.8 million.  Moreover, cash and cash equivalents 
declined by $33.0 million during fiscal 1998.  Management believes that 
existing cash and cash equivalents, together with cash generated from 
operations, will need to be supplemented in the near term by cash flows from 
new financing arrangements, including asset-based financing arrangements, to 
meet the Company's liquidity and capital needs for the next 12 months.  
Limited new asset-based financing arrangements have recently been secured.  
However, there can be no assurances that such asset-based financing will be 
sufficient to meet the Company's capital and liquidity needs for the next 12 
months or that the Company's products will generate receivables and other 
assets sufficient to support an adequate level of financing.  The Company's 
ability to support an adequate level of financing depends on the timely 
release of new products in anticipated quantities.  Failure to secure and 
maintain adequate financing would have a material and adverse effect on the 
Company's business, financial condition and ability to continue as a going 
concern.

                                    12
<PAGE>


TERMINATED BUSINESS COMBINATION.  In October 1997, the Company entered into 
an agreement to merge with GT Interactive Software Corp. ("GT").  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 their mutual 
agreement to terminate the merger.

The termination of the merger has had a material adverse impact on the 
Company including: (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/REVERSE SPLIT.  The Company was notified in February 1998 by 
the Nasdaq Stock Market ("Nasdaq") that the Company was no longer in 
compliance with the net tangible assets requirement or the alternative 
minimum bid price requirement for continued listing on the Nasdaq National 
Market.  Pursuant to National Association of Securities Dealers Marketplace 
Rules, the Company was given a period of 90 days to regain compliance with 
the minimum bid price requirement, which calls for a minimum common stock bid 
price of $5.00 per share. On May 11, 1998, the Company's stockholders 
approved a one for five reverse stock split whereby each five shares of the 
Company's outstanding common stock were automatically converted into one 
share (the "Reverse Stock Split").  During the fourth quarter of fiscal 1998, 
prior to the Reverse Stock Split, the Company's common stock traded between 
$2.75 and $1.50 per share.  On May 12, 1998, following the Reverse Stock 
Split, the Company's common stock opened at a bid price of $9.38 per share.  
Subsequently, the Company's common stock price continued to trade at a price 
above the $5.00 minimum bid price for a period of 18 days.

On May 19, 1998, and June 3, 1998, the Company received notice from Nasdaq 
that the Company was not in compliance with either the market capitalization 
requirement or the minimum bid price requirement for continued listing on the 
Nasdaq National Market. The Company has responded to Nasdaq with respect to 
both of these issues and is evaluating plans for compliance with the 
requirements for continued listing on the Nasdaq National Market.

There can be no assurance that the Company's minimum bid price or market 
capitalization will be sufficient to allow the Company to comply with the 
requirements for continued listing on the Nasdaq National Market.  If the 
Company is unable to maintain compliance with such requirements, the Company 
may be able to qualify for listing under the Nasdaq SmallCap Market.  
However, at the present time, the Company does not meet all of the 
requirements for listing on the Nasdaq SmallCap Market.  If for any reason 
the Company is unable to achieve and maintain compliance with the Nasdaq 
SmallCap Market listing requirements and is delisted from both the Nasdaq 
National Market and the Nasdaq SmallCap Market, the holders of the Company's 
6.5 percent Convertible Subordinated Notes Due 2002 (the "Notes") would be 
entitled to require the Company, within 55 days, 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, financial condition and ability to continue as a going concern 
would be materially and adversely affected.

FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY.  The Company's operating 
results have varied significantly in the past and are expected to vary 
significantly in the future.  This variability is a result of factors such 
as: 1) volume shipments of significant new products, 2) the degree of market 
acceptance of the Company's products, 3) the introduction of products 
competitive with those of the Company, 4) the timing and market acceptance of 
new hardware and software 


                              13
<PAGE>


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 June 30, 1998, the Company had outstanding 
indebtedness for borrowed funds of approximately $32.3 million and cumulative 
mandatorily 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; 
(iii) the Company's ability to withstand competitive pressures, adverse 
economic conditions and adverse changes in governmental regulations may be 
negatively impacted, and (iv) the Company's ability to comply with certain 
alternative listing requirements for the Nasdaq Stock Market may be adversely 
affected.

The Company has recently secured an asset based financing arrangement and may 
in the future obtain lines of credit or enter into 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 above), 
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 to provide continued 


                                   14
<PAGE>


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

The process of developing software products such as those offered by the 
Company is extremely complex and is expected to become more complex and 
expensive 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.

The Company's current production schedules contemplate that the Company will 
continue to ship a number of new products for the balance of 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 were scheduled to be introduced. 

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


                                     15
<PAGE>


inventory of its new products. As a result, significant production delays 
would have a material and adverse effect on the Company's business and 
operating results. Further, if demand for a particular product is greater 
than anticipated, the Company may not have sufficient inventory to meet 
customer demands.

COMPETITION.  The entertainment software industry is intensely competitive 
and in the process of consolidation. The Company's competitors vary in size 
from very small companies with limited resources to very large corporations 
with greater financial, marketing and product development resources than 
those of the Company. The Company competes primarily with other developers of 
PC entertainment and video game entertainment software. Significant 
competitors of the Company in the entertainment software industry include 
Electronic Arts, Inc., Cendant Corporation, Lucas Arts, Interplay 
Entertainment Corporation, GT Interactive Software Corporation, Activision, 
Acclaim Entertainment, Inc., Hasbro Interactive, Inc., 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 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 , 
promotional support or be available at an affordable cost.

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, on-line 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 


                                  16
<PAGE>


such access or that the Company's access will allow the Company to maintain 
its historical levels of sales volume.

CONCENTRATION OF CUSTOMER BASE; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT 
RETURNS.  The Company principally sells its products to retailers and 
distributors, who in turn resell the products to consumers. During the year 
ended March 31, 1998, sales to the top ten such customers represented 
approximately 53 percent 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. Certain of the Company's 
distributors and retailers have recently experienced financial difficulties 
and the Company has increased its reserves accordingly.  However, the 
business failure of a significant distributor or customer could have a 
material and adverse effect on the Company's business, operating results and 
financial condition.

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

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

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

CHANGES IN TECHNOLOGY AND PRODUCT PLATFORMS.  The market for entertainment 
software, including entertainment software platforms, is undergoing rapid 
technological change. As a result, the Company must continually anticipate 
and adapt its products to emerging platforms and evolving consumer 
preferences. The introduction of new platforms and technologies can render 
existing products obsolete and unmarketable. Development of entertainment 
software products for new hardware platforms requires substantial investments 
in research and 


                                     17
<PAGE>


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

RISK OF SOFTWARE ERRORS OR FAILURES.  Software products as complex as those 
offered by the Company may contain undetected errors when first introduced or 
when new versions are released. In the past, the Company has discovered 
software errors in certain of its product offerings after their introduction 
and has experienced delays or lost revenue during the period required to 
correct these errors. The Company's products must maintain compatibility with 
certain hardware, software and accessories. Any changes that result in 
incompatibility could result in significant product returns and customer 
service costs. In particular, the PC hardware environment is characterized by 
a wide variety of nonstandard peripheral equipment (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 


                                      18
<PAGE>


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

INTERNATIONAL REVENUE.  International net revenue represented approximately 
42 percent, 67 percent, and 64 percent of the Company's net revenue for first 
quarter of fiscal 1999 and for the fiscal years 1998, and 1997, respectively. 
The Company expects that international net revenue will continue to account 
for a significant portion of its net revenue in future periods. International 
revenue is subject to inherent risks, including unexpected changes in 
regulatory requirements, tariffs and other economic barriers, fluctuating 
exchange rates, difficulties in staffing and managing foreign operations and 
the possibility of difficulty in accounts receivable collection. For example, 
the Company has attempted to minimize its exposure to currency fluctuations 
by entering into forward currency contracts, however, there can be no 
assurance that the Company will be successful at mitigating currency risks. 
In some markets, localization of the Company's products is essential to 
achieve market penetration. The Company may incur substantial costs and 
experience delays in localizing its products, and there can be no assurance 
that any localized product will ever generate significant revenue. These or 
other factors could have a material and adverse effect on the Company's 
future international revenue and, consequently, on the Company's business, 
operating results and financial condition.

RECOVERY OF PREPAID ROYALTIES AND GUARANTEES.  The Company, from time to 
time, enters into agreements with licensors of intellectual property and 
developers of games that involve royalty advances and guaranteed minimum 
royalty payments. If the sales volumes of products subject to such 
arrangements are not sufficient to recover such advances and guarantees, the 
Company provides a reserve for the anticipated portion of such payments that 
will not be recovered. If 


                                    19
<PAGE>


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 
and trademarks and U.S and international, trade secret, patent and trademark 
laws, and nondisclosure agreements to protect its proprietary rights to its 
products. It is the Company's current policy that employees and third-party 
developers sign nondisclosure agreements. 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 and trademark laws to prevent unauthorized 
distribution of its software. There can be no assurance that these measures 
will be sufficient to protect the Company's intellectual property rights 
against infringement. 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. To date, other than the cost of litigation, no such 
claims have had a materially adverse effect on the Company's ability to 
develop, market or sell its products. However, there can be no assurance that 
future infringement claims against the Company will not result in further 
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.


                                20
<PAGE>

PART II -  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ACTIVISION, INC.:

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 the Avalon Hill Game Company 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.

On April 7, 1998, the Company amended its answer and filed counterclaims on 
behalf of the Company and its two subsidiaries, MicroProse Software, Inc. and 
Hartland Trefoil, Ltd., asking for declaratory relief and seeking to enforce 
the intellectual property rights of these entities in both board games and 
computer games under the CIVILIZATION name.

All of the related actions involving CIVILIZATION trademarks or games have 
now been settled in their entirety.  Under the terms of the settlement, the 
Company will retain ownership of the CIVILIZATION trademarks and copyrights 
for computer and board games.  Activision and Avalon Hill have recognized the 
Company's ownership of the property, and Avalon Hill has transferred all of 
its rights in CIVILIZATION trademarks, board games, and computer games to the 
Company.  Activision will publish its CIVILIZATION: CALL TO POWER game and 
related add-on product and conversions under license from the Company.  
Activision will also publish the PlayStation version of CIVILIZATION II under 
license from the Company for territories outside of Japan.  Under the 
provisions of the settlement, all financial terms, including advances and 
royalties under the license to Activision, remain confidential.

UNITED SOFTWARE GmbH:

In March 1993, MicroProse acquired United Software, GmbH ("United"). In 
September 1993, MicroProse became aware of several non-disclosed liabilities 
of United, including a claim by a German bank of approximately $2,000,000. 
MicroProse also became aware of the deterioration of the financial condition 
of the seller and the seller's parent (which had guaranteed the seller's 
obligations under the United purchase agreement) and by October 29, 1993, 
determined that the seller and its parent were incapable of complying with 
the guarantees and warranties included in the purchase agreement. Therefore, 
primarily as a result of the seller's nondisclosure of the bank debt 
described above and the misrepresentations as to the financial condition of 
the seller and its 


                                  21
<PAGE>


parent, MicroProse assessed its options and decided to rescind the agreement 
as provided under German law.

On October 29, 1993, MicroProse notified the seller and its parent of the 
rescission of the March 1993 agreement. This action resulted in a charge of 
approximately $4.9 million, which was recorded in the quarter ended September 
30, 1993. This charge consisted primarily of the original purchase price, 
asset write-offs of approximately $1.8 million and rescission-related 
liabilities of approximately $1.6 million. United and its parent company are 
now in receivership. The Company has maintained an accounting reserve in 
order to meet any remaining liabilities under German law as a result of the 
receivership proceeding.

On March 18, 1998, the Company received a demand from the receiver in the 
insolvency proceeding for payment of 1.95 million DM (approximately $1.1 
million), based on the receiver's position that MicroProse is liable for 
contribution of share capital to the insolvent company.  On approximately May 
28, 1998, the Company's U.K. subsidiary was served with a legal action by the 
receiver seeking enforcement of the demand.  The Company is represented by 
German counsel and intends to defend itself vigorously in this action.


                                  22
<PAGE>


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)  THE FOLLOWING EXHIBITS ARE FILED HEREWITH:

<TABLE>

 Exhibit                                                                   Page
 Number    Description                                                      No.
-------    -----------                                                   ------
<S>        <C>                                                           <C>
 2.1       Agreement and Plan of Reorganization, dated as of July 14,
           1993, as amended as of November 15, 1993, by and among
           MicroProse, Inc., MicroProse Merger Sub, Inc. and Spectrum
           HoloByte, Inc. (incorporated by reference to Exhibit 2 of
           MicroProse, Inc.'s Registration Statement on Form S-4, File
           No. 33-72216, filed on November 29, 1993)                       +
 2.2       Amendment No. 1 to Amended and Restated Agreement and Plan
           of Reorganization, dated November 28, 1993                      +
 2.3       Agreement and Plan of Reorganization, dated as of
           September 14, 1992, by and between Spectrum HoloByte, Inc.
           and Sphere, Inc.                                                +
 2.4       Stock Purchase and Exchange Agreement by and among Spectrum
           HoloByte, Inc., SimTex Software Corporation, Stephen Barcia
           and Maria Barcia, dated as of June 6, 1995 (incorporated by
           reference to Exhibit 2.1 of Spectrum HoloByte, Inc.'s Form
           8-K filed on June 27, 1995)                                     +
 3.1       Certificate of Incorporation of the Registrant                  +
 3.2       Amended Bylaws of Registrant                                    +
 4.1       Specimen Common Stock Certificate of the Registrant             +
 4.2       Warrants issuable to the Grotech Investors and Corporate
           Venture Partners, L.P., dated as of October 17, 1991            +
 4.3       Form of Warrant issuable to Paragron Investors, dated
           July 1992                                                       +
 4.4       Amended and Restated Investor Rights Agreement, dated
           December 8, 1993                                                +
 4.5       Form of Warrant, issued to Ince & Co. (incorporated by
           reference to Exhibit 4.8 of Spectrum HoloByte, Inc.'s Form
           10-Q filed on December 31,1994)                                 +
 10.1      Sterling Overdraft and Barclays Tradeline Facilities between
           MicroProse Limited and Barclays Bank PLC, dated July 2, 1993
           (incorporated by reference to Exhibit of same number of
           MicroProse, Inc.'s Annual Report on Form 10-K filed on
           July 14, 1993)                                                  +
 10.2      Sterling Overdraft and Barclays Tradeline Facilities between
           MicroProse Limited and Barclays Bank PLC, dated July 2,
           1993, as amended                                                +
 10.3      Agreement between MicroProse, Inc. and WordStar
           International Corporation, dated May 23, 1991 (incorporated
           by reference to Exhibit 10.6 of MicroProse, Inc.'s
           Registration Statement on Form S-1, File No. 33-42238, filed
           on August 13, 1991)                                             +
 10.4      MicroProse, Inc. 1991 Employee Stock Option Plan, as amended
           and restated                                                    +
 10.5      Lease Agreement between MicroProse, Inc. and Lakefront
           Limited Partnership, dated July 9, 1987, as amended
           (incorporated by reference to Exhibit 10.11 of MicroProse,
           Inc.'s Registration Statement on Form S-1, File No. 33-
           42238, filed on August 13, 1991)                                +
 10.6      Second Amendment to Lease Agreement between MicroProse, Inc.
           and Lakefront Limited Partnership III, dated June 12, 1992
           (incorporated by reference to Exhibit 10.14 of MicroProse,
           Inc.'s Annual Report on Form 10-K filed on July 14, 1993)       +
 10.7      Lease Agreement between MicroProse, Inc. and Saft America,
           Inc., dated March 19, 1991 (incorporated by reference to
           Exhibit 10.12 of MicroProse, Inc.'s Registration Statement
           on Form S-1, File No. 33-42238, filed on August 13, 1991)       +


                                23
<PAGE>


Exhibit                                                                   Page
Number     Description                                                     No.
-------    -----------                                                   ------
 10.8      Lease Agreement between Ashpalm PLC and MicroProse
           Unlimited, dated June 9, 1993 (incorporated by reference to
           Exhibit 10.16 of MicroProse, Inc.'s Annual Report on
           Form 10-K filed on July 14, 1993)                               +
 10.9      Lease Agreement by and between MicroProse Limited and ARC
           Limited, dated September 25, 1992 (incorporated by reference
           to Exhibit 10.17 of MicroProse, Inc.'s Annual Report on Form
           10-K filed on July 14, 1993)                                    +
 10.10     Underlease Agreement between MicroProse Limited and London
           and Metropolitan Investments Limited, dated May 11, 1993
           (incorporated by reference to Exhibit 10.18 of MicroProse,
           Inc.'s Annual Report on Form 10-K filed on July 14, 1993)       +
 10.11     Consulting and Product Development Agreement between
           MicroProse, Inc. and Sidney K. Meier, dated August 12, 1991
           (incorporated by reference to Exhibit 10.17 of MicroProse,
           Inc.'s Registration Statement on Form S-1, File No. 33-
           42238, filed on August 13, 1991)                                +
 10.12     Option Agreement and Irrevocable Proxy by and among Spectrum
           HoloByte, Inc., John W. Stealey, Sr. and MicroProse, Inc.
           (incorporated by reference to Exhibit 99.2 of MicroProse,
           Inc.'s Report on Form 8-K filed on July 7, 1993)                +
 10.13     Consulting Services Agreement between MicroProse, Inc. and
           John W. Stealey, Sr., dated June 22, 1993 (incorporated by
           reference to Exhibit 10.38 of MicroProse, Inc.'s Annual
           Report on Form 10-K filed on July 14, 199                       +
 10.14     Master Lease Agreement between General Electric Capital
           Corporation and MicroProse, Inc., dated December 31, 1992
           (incorporated by reference to Exhibit 10.41 of MicroProse,
           Inc.'s Annual Report on Form 10-K filed on July 14, 1993)       +
 10.15     Lease Agreement between Ashpalm PLC and MicroProse
           Unlimited, dated August 8, 1989 (incorporated by reference
           to Exhibit 10.13 to MicroProse, Inc.'s Registration
           Statement on Form S-1, File No. 33042238, filed on
           August 13, 1991)                                                +
 10.16     Lease Agreement between Paragon Alameda Gateway Associates,
           Ltd. and Sphere, Inc., dated May 5, 1992                        +
 10.17     Underlease Agreement between MicroProse Limited and
           Thamsedown Computer Supplies Limited, dated 1993                +
 10.18     Merchandising License Agreement between Paramount Pictures
           Corporation and Sphere, Inc. dated October 1, 1991              +*
 10.19     License Agreement between V/O Electronorgtechnica, Moscow
           and Sphere, Inc., dated June 1, 1990, and all amendments
           thereto                                                         +*
 10.20     Super Tetris License Agreement between A/O Elorg and Sphere,
           Inc., dated September 1, 1991                                   +*
 10.21     Master Lease Agreement between General Electric Corporation
           and MicroProse Software, Inc., dated December 31, 1992
           (incorporated by reference to Exhibit 10.44 to MicroProse,
           Inc.'s Annual Report on Form 10-K filed on July 14, 1993)       +
 10.22     First Amendment to Lease between Paragon Alameda Gateway
           Associates, Ltd. and Sphere, Inc., dated July 28, 1992          +
 10.23     Master Lease Agreement between Comdisco, Inc. and Spectrum
           HoloByte, Inc., dated December 16, 1992                         +
 10.24     Security and Loan Agreement among Spectrum HoloByte, Inc.,
           MicroProse Software, Inc. and Imperial Bank, dated as of
           December 30, 1993                                               +


                                24
<PAGE>


Exhibit                                                                   Page
Number     Description                                                     No.
-------    -----------                                                   ------

 10.25     Security and Loan Agreement among Spectrum HoloByte, Inc.,
           MicroProse Software, Inc. and Imperial Bank, dated as of
           December 30, 1993, as amended (incorporated by reference to
           Exhibit 10.89 and 10.90 of Spectrum HoloByte, Inc.'s
           Form 10-Q filed on December 31, 1994)                           +
 10.26     Spectrum HoloByte, Inc. 1992 Stock Option Plan                  +
 10.27     MicroProse, Inc. 1994 Employee Stock Purchase Plan              +
 10.28     401(k) Plan of the Company                                      +
 10.29     Form of Indemnification Agreement between the Company and
           each of its officers and directors                              +
 10.30     Amended and Restated Employment and Consulting Agreement
           between Patrick S. Feely and the registrant, dated
           December 13, 1994 (incorporated by reference to
           Exhibit 10.90 of Spectrum HoloByte, Inc.'s Form 10-Q filed
           on December 31, 1994)                                           +
 16.1      Letter from Ernst & Young regarding change in certifying
           accountant (incorporated by reference to Exhibit 7(c)(3) of
           the Company's Amendment No. 2 to Form 8-K filed on March 22,
           1994)                                                           +
 27        Financial Data Schedule for the Three Months Ended June 30,
           1998

</TABLE>

+ Incorporated by reference to an exhibit to the Company's Registration 
  Statement on Form S-1 (Registration No. 33-75408), as amended. 
* Confidential treatment granted as to certain portions of these exhibits.

(B) REPORTS ON FORM 8-K:

No reports on Form 8-K were filed during the quarter ended June 30, 1998.


                                  25
<PAGE>

                           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 August 12, 1998.



                                      MICROPROSE, INC.



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


                                          /s/ John M. Belchers
                                          --------------------------
                                          John M. Belchers
                                          CHIEF FINANCIAL OFFICER


                                         26