<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:  September 30, 1996          Commission File Number:  0-19463

                             SPECTRUM HOLOBYTE, 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) 522-3584 
               --------------------------------------------------
               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      
   -----    ----- 


  26,995,716 shares of Common Stock were outstanding as of October 31, 1996.  

<PAGE>


                             SPECTRUM HOLOBYTE, INC.


                                TABLE OF CONTENTS


                                                                           Page
                                                                           ----
   PART I - FINANCIAL INFORMATION
     
   ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS
     
            Consolidated Balance Sheets at September 30 and 
              March 31, 1996                                                 3
     
            Consolidated Statements of Operations for the three and
              six months ended September 30, 1996 and 1995                   4
     
            Consolidated Statements of Cash Flows for the six months
              ended September 30, 1996 and 1995                              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                                21
     
   SIGNATURES                                                               23
     
   EXHIBITS                                                                 24




                                       2

<PAGE>
                             SPECTRUM HOLOBYTE, INC.
                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                            September 30,   March 31,
                        ASSETS                                  1996           1996
                                                            -------------   ---------
                                                             (UNAUDITED)             
<S>                                                           <C>           <C>
Current assets:                                                                       
   Cash and cash equivalents                                  $  39,925     $  35,369
   Accounts receivable, less allowances                                             
     of $8,403 and $9,179                                         7,091         9,718
   Inventories                                                    3,796         3,673
   Prepaid royalties                                              3,082         2,126
   Other current assets                                           1,575         2,133
                                                              ---------     ---------
           Total current assets                                  55,469        53,019
                                                                                     
Property and equipment, net                                       8,375         5,670
Goodwill, net                                                       799           818
Investments                                                       5,945         4,300
Other assets                                                      1,172         2,115
                                                              ---------     ---------
                                                              $  71,760     $  65,922
                                                              ---------     ---------
                                                              ---------     ---------
                                                                                   
    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Notes and borrowings under lines of credit                 $    -        $     504
   Accounts payable                                               3,627         5,694
   Salaries, wages and related accruals                           4,667          3,909
   Royalties payable                                              2,987          1,703
   Current portion of capital lease obligations                     296            431
   Other current liabilities                                      5,797          5,093
                                                              ---------     ---------
           Total current liabilities                             17,374         17,334

Capital lease obligations                                           247            384
Other liabilities                                                 1,202          1,238
Long-term debt                                                   32,969         50,000
                                                              ---------     ---------
           Total liabilities                                     51,792         68,956

Redeemable preferred stock, $0.001 par value, 4,000,000 
   Series A shares issued and outstanding, redemption and 
     liquidation amount of $5,120 and $4,980                      5,881          5,881

Stockholders' equity (deficit):
   Preferred stock, $0.001 par value, 9,000,000 shares
     authorized (of which 4,000,000 shares have been 
     designated Series A):
       730,000 Series B convertible shares issued and
         outstanding at September 30, 1996                            1           -
       1,136,660 Series B-1 convertible shares issued and
         outstanding at September 30, 1996                            1           -
   Common stock, $0.001 par value, 40,000,000 shares
     authorized, 26,261,866 and 24,282,813 shares issued 
     and outstanding                                                 26             24
   Additional paid-in capital                                   141,780        119,923
   Accumulated deficit                                         (127,261)      (128,456)
   Foreign currency translation adjustment                         (460)          (406)
                                                              ---------     ---------
           Total stockholders' equity (deficit)                  14,087         (8,915)
                                                              ---------     ---------
                                                              $  71,760      $  65,922
                                                              ---------     ---------
                                                              ---------     ---------
</TABLE>

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

                                       3

<PAGE>
                             SPECTRUM HOLOBYTE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 Three Months Ended              Six Months Ended  
                                                                    September 30,                 September 30,
                                                               ---------------------         ----------------------
                                                                 1996          1995            1996          1995
                                                               -------       --------        -------       --------
<S>                                                            <C>           <C>             <C>           <C>     
Net revenue                                                    $27,413       $ 13,845        $40,485       $ 30,774
Cost of revenue                                                 10,186          9,177         15,085         16,880
                                                               -------       --------        -------       --------
  Gross profit                                                  17,227          4,668         25,400         13,894

Operating expenses:
  Sales and marketing                                            5,011          5,187          9,593         11,230
  General and administrative                                     3,772          4,246          7,444          8,190
  Research and development                                       6,215          6,277         11,903         14,544
                                                               -------       --------        -------       --------
    Total operating expenses                                    14,998         15,710         28,940         33,964
                                                               -------       --------        -------       --------
Operating income (loss)                                          2,229        (11,042)        (3,540)       (20,070)

Interest expense, net                                             (154)          (296)          (635)          (485)
Other income (expense), net                                       (244)          (253)         1,823           (434)
                                                               -------       --------        -------       --------
Net income (loss) before extraordinary item                      1,831        (11,591)        (2,352)       (20,989)
  Extraordinary item (note 5)                                      879              -          3,547              -
                                                               -------       --------        -------       --------
Net income (loss)                                              $ 2,710       $(11,591)       $ 1,195       $(20,989)
                                                               -------       --------        -------       --------
                                                               -------       --------        -------       --------
Net income (loss) per share:
  Net income (loss) before extraordinary item                  $  0.06       $  (0.49)       $ (0.09)      $  (0.92)
  Extraordinary item, net of tax effect                           0.03              -           0.13              -
                                                               -------       --------        -------       --------
  Net income (loss)                                            $  0.09       $  (0.49)       $  0.04       $  (0.92)
                                                               -------       --------        -------       --------
                                                               -------       --------        -------       --------
Shares used in per share computations                           28,214         23,666         26,674         23,037
                                                               -------       --------        -------       --------
                                                               -------       --------        -------       --------
</TABLE>

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


                                       4
<PAGE>
                             SPECTRUM HOLOBYTE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)  
<TABLE>
<CAPTION>
                                                                Six Months Ended
                                                                  September 30,
                                                              ---------------------
                                                                1996         1995
                                                              --------    ---------
<S>                                                           <C>         <C>
Cash flows from operating activities:                                              
  Net income (loss)                                           $ 1,195     $(20,989) 
  Adjustments to reconcile net income (loss)                                       
      to net cash provided by (used in)                                            
      operating activities:                                                        
    Depreciation and amortization                               2,021        1,775
    Gain on the sale of investment in FASA                     (1,895)          -
    Extraordinary gain on the extinguishment of debt           (3,547)          -
    Changes in assets and liabilities:                                           
      Accounts receivable                                       1,471        6,090
      Inventories                                               1,439          972
      Prepaid royalties                                          (933)         (59)
      Other current assets                                        921          139
      Other assets                                                166         (462)
      Accounts payable                                         (2,727)      (2,585)
      Salaries, wages and related accruals                        684        1,981
      Royalties payable                                         1,269        1,050
      Other current liabilities                                   362         (181)
      Other liabilities                                            -          (548)
                                                              -------     --------
        Net cash provided by (used in) operating activities       426      (12,817)
                                                                                   
Cash flows from investing activities:                                             
  Acquisitions of property and equipment, net                  (1,491)      (1,602)
  Acquisition of German distributor, net of cash acquired        (447)          -
  Investment in Virtual World Entertainment Group, Inc.          (570)          -
  Proceeds from the sale of investment in FASA                    570           -
                                                              -------     --------
      Net cash used in investing activities                    (1,938)      (1,602)
                                                                                  
Cash flows from financing activities:                                              
  Extinguishment of debt                                       (2,959)          - 
  Proceeds from issuance of common stock,                                        
    net of issuance costs                                      10,003       22,211
  Borrowings under notes and lines of credit                       -           751
  Repayments under notes and lines of credit                     (499)      (4,496)
  Principal payments on capital lease obligations                (275)        (405)
                                                              -------     --------
      Net cash provided by financing activities                 6,270       18,061
      Effect of exchange rate changes on cash                    (202)        (128)
                                                              -------     --------
      Increase in cash and cash equivalents                     4,556        3,514
Cash and cash equivalents at beginning of period               35,369        7,723
                                                              -------     --------
Cash and cash equivalents at end of period                    $39,925     $ 11,237
                                                              -------     --------
                                                              -------     --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid for interest                                      $ 1,106     $    533
  Cash paid for taxes                                              56           -

SUPPLEMENTAL SCHEDULE OF NON-CASH 
INVESTING AND FINANCING ACTIVITIES:
  Capital lease obligations incurred                          $    -      $    305
</TABLE>



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

                                       5
<PAGE>


                             SPECTRUM HOLOBYTE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION

The consolidated financial statements are the unaudited historical financial
statements of Spectrum HoloByte, Inc. and subsidiaries (the "Company") and
reflect all adjustments (consisting only of normal recurring accruals) that, in
the opinion of management, are necessary for a fair presentation of interim
period results.  The consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996,
as filed with the Securities and Exchange Commission on June 28, 1996.  The
March 31, 1996 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 ending on September 30, 1996 and 1995.  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 September
29, 1996 and October 1, 1995, respectively.

Certain amounts in the consolidated financial statements have been reclassified
to conform with the current period's presentation.  These reclassifications had
no effect on previously reported earnings or stockholders' equity (deficit).

NOTE 2.  NET INCOME (LOSS) PER SHARE OF COMMON STOCK

Net income (loss) per share has been computed by dividing the net income (loss)
by the weighted average number of common shares and dilutive common stock
equivalents outstanding for the period.  Net income (loss) has been adjusted for
cumulative but undeclared dividends on Series A preferred stock.

NOTE 3.  ACQUISITIONS AND INVESTMENTS 

OT SPORTS

The Company entered into a Limited Liability Company ("LLC") agreement with
Capital Cities/ABC, Inc. ("ABC") effective July 1, 1995.  The LLC (subsequently
named "OT Sports") was formed for the purpose of developing a sports-based line
of products. In May 1996, the Company sold its interest in OT Sports to ABC.
Under the terms of the agreement, the Company received a note for $250,000 which
was paid in full in November 1996.  The Company is not obligated to make future
contributions to OT Sports.

FASA AND VIRTUAL WORLD

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

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

GERMAN DISTRIBUTOR


                                       6
<PAGE>


                             SPECTRUM HOLOBYTE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


In June 1996, the Company entered into an agreement to acquire certain net 
assets of a German distributor of computer software and related products for 
DM1.2 million (approximately $0.8 million).  The transaction was accounted 
for as a purchase. Approximately $130,000 of goodwill was recorded 
representing the excess of the purchase price over the identifiable net 
assets acquired.  Goodwill is amortized on a straight-line basis over five 
years. The consolidated financial statements contain the operating results 
from the date of acquisition, which includes approximately $2.2 million in 
net revenue.

NOTE 4.  INVENTORIES

Inventories are stated at the lower of cost or market on a first-in, first-out
(FIFO) basis, net of allowances for write-downs.  Inventories at September 30,
1996 and March 31, 1996 consisted of (IN THOUSANDS):


                                           September 30,     March 31,
                                               1996            1996
                                           -------------     ---------
      Raw materials and work in process       $  899          $  705
      Finished goods                           2,897           2,968
                                              ------          ------
                                              $3,796          $3,673
                                              ------          ------
                                              ------          ------

NOTE 5.  LONG-TERM DEBT

In June 1996, the Company exchanged 1,918,860 shares of Series B and Series B-1
preferred stock for subordinated notes with a face value of approximately $14.9
million. An extraordinary gain of approximately $2.7 million was realized on the
retirement of the long-term debt. In July 1996, the Company repurchased
subordinated notes with a face value of $4.0 million for approximately $2.9
million.  An extraordinary gain of approximately $.9 million was realized on the
retirement of the long-term debt.

NOTE 6.  ISSUANCE OF CONVERTIBLE PREFERRED STOCK

In June 1996, the Company issued 750,000 shares of Series B and 1,168,860 shares
of Series B-1 convertible preferred stock in exchange for the retirement of
subordinated notes with a face value of approximately $14.9 million.  Both the
Series B and Series B-1 preferred stock are convertible into an equivalent
number of common shares. In September 1996, 20,000 shares and 32,200 shares 
of Series B and Series B-1 preferred stock, respectively, were converted into 
common stock. Dividends on the Series B and Series B-1 preferred
stock are non-cumulative and non-accruing, and shall be paid only at such time
and such rate as determined by the Board of Directors.  As of September 30,
1996, no dividends had been declared. Subject to the liquidation preference of
the Series A preferred shares, the Series B and Series B-1 convertible preferred
stock have a liquidation preference of $8.00 per share and $7.57 per share,
respectively, plus all declared but unpaid dividends.

NOTE 7.  ISSUANCE OF COMMON STOCK

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

NOTE 8.  CANCELLATION AND RE-GRANT OF STOCK OPTIONS

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



                                       7
<PAGE>


                             SPECTRUM HOLOBYTE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 9.  LICENSE AGREEMENT WITH MITSUI & CO.

In April 1996, the Company's wholly-owned Japanese subsidiary ("Spectrum 
Japan") granted an exclusive license to Mitsui & Co., Ltd. ("Mitsui") for the 
localization, manufacturing, marketing and distribution of certain Company 
titles in Japan. The Company received an up-front license fee of 
approximately $300,000, and will earn royalties based upon revenue generated 
by Mitsui during the three-year term of the agreement. In connection with the 
license agreement, Spectrum Japan subcontracted all of its employees to 
Mitsui and largely discontinued its operations in Japan. During the six 
months ended September 30, 1996, the Company recognized net revenue of 
$406,000 related to the license agreement.

                                       8

<PAGE>


                             SPECTRUM HOLOBYTE, INC.


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

The following information should be read in conjunction with the consolidated
historical financial information and the notes thereto included in ITEM 1 of
this Quarterly Report and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996, as filed with the Securities
and Exchange Commission on June 28, 1996.

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 factors that could cause actual results to differ 
materially from those projected in any such forward-looking statements.

OVERVIEW

Spectrum HoloByte (the "Company") develops, publishes and distributes
interactive entertainment software. The entertainment software market primarily
consists of software products published for the following platforms:

-   Compact-Disc Read-Only Memory ("CD-ROM") for the personal computer ("PC").
-   Videogame consoles, which include 32-bit and 64-bit "next-generation"
    systems.

The Company primarily generates revenue from PC CD-ROM and next-generation, Sony
PlayStation products.  These products are distributed worldwide, although the
majority of revenue is generated in North America and Europe.


See additional discussion in "Risk Factors" below.











                                       9
<PAGE>
                             SPECTRUM HOLOBYTE, INC.

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

<TABLE>
<CAPTION>
                                            Net Revenue                     % of Total
     Three Months Ended September 30    -----------------                ----------------
                                          1996      1995      % CHANGE    1996     1995
                                        -----------------     --------   ----------------
      <S>                               <C>       <C>          <C>       <C>       <C>
          North America                  $7,541    $8,388      -10.1%     27.5%     60.6%
          International                  19,872     5,457      264.2%     72.5%     39.4%
                                        -----------------                ----------------
             Consolidated               $27,413   $13,845       98.0%    100.0%    100.0%
                                        -----------------                ----------------
                                        -----------------                ----------------
     Six Months Ended September 30                                                       
          North America                 $14,787   $19,519      -24.2%     36.5%     63.4%
          International                  25,698    11,255      128.3%     63.5%     36.6%
                                        -----------------                ----------------
             Consolidated               $40,485   $30,774       31.6%    100.0%    100.0%
                                        -----------------                ----------------
                                        -----------------                ----------------

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

                                            Net Revenue                     % of Total
     Three Months Ended September 30    -----------------                ----------------
                                          1996      1995      % CHANGE    1996     1995
                                        -----------------     --------   ----------------
          PC CD-ROM                     $22,182   $11,410       94.4%     80.9%     82.4%
          PlayStation ("PSX")             2,856      -            -       10.4%       -
          Other                           2,375     2,435       -2.4%      8.7%     17.6%
                                        -----------------                ----------------
             Consolidated               $27,413   $13,845       98.0%    100.0%    100.0%
                                        -----------------                ----------------
                                        -----------------                ----------------
     Six Months Ended September 30
          PC CD-ROM                     $31,130   $25,463       22.3%     76.9%     82.7%
          PlayStation ("PSX")             5,477      -            -       13.5%       -
          Other                           3,878     5,311      -27.0%      9.6%     17.3%
                                        -----------------                ----------------
              Consolidated              $40,485   $30,774       31.6%    100.0%    100.0%
                                        -----------------                ----------------
                                        -----------------                ----------------
</TABLE>

The increases in net revenue for the second quarter and first six months of
fiscal 1997 as compared with the same periods of the prior year are due
principally to the success of GRAND PRIX II and SID MEIER'S CIVILIZATION II,
both for PC CD-ROM. GRAND PRIX II accounted for $16.0 million of second quarter
net revenue. SID MEIER'S CIVILIZATION II accounted for $4.9 million and $13.6
million of net revenue for the second quarter and first six months of fiscal
1997, respectively.  

The decline in North American net revenue as compared to the second quarter 
and first six months of fiscal 1996 is due primarily to a decrease in the 
number of new titles introduced in North America.  This decrease reflects the 
shift in the Company's focus to produce fewer, but higher quality titles with 
broad consumer appeal. The Company released ten titles, including four 
affiliated label titles, in North America in the first six months of fiscal 
1996 (including STAR TREK: THE NEXT GENERATION "A FINAL UNITY"), which 
accounted for $8.5 million in net revenue. In the first six months of fiscal 
1997, the Company released three new titles in North America: TOP GUN: FIRE 
AT WILL (PSX), GUNSHIP 2000 (PSX) AND GRAND PRIX II (PC CD-ROM) which 
contributed $6.5 million of net revenue.  Partially offsetting this decrease 
was the success of SID MEIER'S CIVILIZATION II, which generated $7.2 million 
of net revenue in North America during the six-month period.

International net revenue increased substantially from the second quarter and 
first six months of fiscal 1996 due primarily to shipments of GRAND PRIX II, 
which generated net revenue outside of the U.S. of $14.9 million for the 
September 1996 

                                       10
<PAGE>

                             SPECTRUM HOLOBYTE, INC.

quarter. Also contributing to the increase was the consolidation of the 
operations of Leisuresoft, a German distribution company acquired in June 1996. 
Net revenue from this distribution company accounted for 8% of consolidated 
net revenue for the second quarter of fiscal 1997.

Partially offsetting the increased net revenue was a decline in revenue from
products published by affiliated label partners. This revenue accounted for 7%
of total net revenue for the second quarter and 2% for the first six months of
fiscal 1997, as compared to 22% and 15% of total net revenue for the second
quarter and the first six months of fiscal 1996, respectively.

The following table sets forth cost of revenue and gross profit in dollars and
as a percentage of net revenue (DOLLARS IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                         % of Net Revenue
                                                                         ----------------
     Three Months Ended September 30      1996     1995       % CHANGE    1996      1995
                                        -----------------     --------   ----------------
      <S>                               <C>       <C>          <C>       <C>       <C>
          Net Revenue                   $27,413   $13,845       98.0%    100.0%    100.0%
          Cost of Revenue                10,186     9,177       11.0%     37.2%     66.3%
                                        -----------------                ----------------
             Gross profit               $17,227    $4,668      269.0%     62.8%     33.7%
                                        -----------------                ----------------
                                        -----------------                ----------------

     Six Months Ended September 30
          Net Revenue                   $40,485   $30,774       31.6%    100.0%    100.0%
          Cost of Revenue                15,085    16,880      -10.6%     37.3%     54.9%
                                        -----------------                ----------------
             Gross profit               $25,400   $13,894       82.8%     62.7%     45.1%
                                        -----------------                ----------------
                                        -----------------                ----------------
</TABLE>

The increases in gross profit as a percent of net revenue in the second quarter
and first six months of fiscal 1997 as compared to the same periods in the prior
year were primarily due to reduced product costs and a shift away from lower-
margin, affiliated label products.  In addition, product write-offs decreased as
provisions were made in the quarter ended September 1995 to write-off older,
back catalog floppy disk and 8/16-bit cartridge inventories.

Partially offsetting the increase in gross profit was the shipment of lower-
margin PSX titles and the consolidation of the lower-margin operations of
Leisuresoft. Additionally, royalties paid to third-party developers were 13% of
net revenue in the first six months of fiscal 1997, up from 11% of net revenue
in the comparable period of fiscal 1996 due to higher net revenue from
externally-developed products such as GRAND PRIX II, which generate third-party
royalty costs.

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

<TABLE>
<CAPTION>
                                        Costs and Expenses               % of Net Revenue
                                        -----------------                ----------------
     Three Months Ended September 30      1996     1995       % CHANGE    1996      1995
                                        -----------------     --------   ----------------
      <S>                               <C>       <C>          <C>       <C>       <C>
          Sales and marketing           $ 5,011   $ 5,187       -3.4%     18.3%     37.5%
          General and administrative      3,772     4,246      -11.2%     13.8%     30.7%
          Research and development        6,215     6,277       -1.0%     22.7%     45.3%
                                        -----------------                ----------------
             Total operating expenses   $14,998   $15,710       -4.5%     54.7%    113.5%
                                        -----------------                ----------------
                                        -----------------                ----------------
    Interest and other expense          ($  398)  ($  549)     -27.5%     -1.5%     -4.0%
                                        -----------------                ----------------
                                        -----------------                ----------------
</TABLE>

                                       11
<PAGE>

                             SPECTRUM HOLOBYTE, INC.

<TABLE>
<CAPTION>
                                        Costs and Expenses               % of Net Revenue
                                        -----------------                ----------------
     Six Months Ended September 30        1996     1995       % CHANGE    1996      1995
                                        -----------------     --------   ----------------
      <S>                               <C>       <C>          <C>       <C>       <C>
          Sales and marketing           $9,593    $11,230      -14.6%     23.7%     36.5%
          General and administrative      7,444     8,190       -9.1%     18.4%     26.6%
          Research and development       11,903    14,544      -18.2%     29.4%     47.3%
                                        -----------------                ----------------
             Total operating expenses   $28,940   $33,964      -14.8%     71.5%    110.4%
                                        -----------------                ----------------
                                        -----------------                ----------------
  Interest and other income (expense)  $  1,188   ($  919)        -        2.9%     -3.0%
                                        -----------------                ----------------
                                        -----------------                ----------------
</TABLE>

Sales and marketing expenses decreased in the second quarter and first six 
months of fiscal 1997 as compared to the same periods in the prior year.  
These decreases were a result of the centralization of the Company's domestic 
marketing and sales functions, a reduction in distributor and retailer 
cooperative marketing costs, and lower variable marketing spending.  The 
decrease in variable marketing expense was primarily due to the introduction 
of fewer new titles and more than $400,000 of costs related to the release of 
STAR TREK: THE NEXT GENERATION "A FINAL UNITY" in fiscal 1996. 

The decreases in general and administrative expenses in the second quarter and
first six months of fiscal 1997 as compared to the same periods in the prior
year were primarily due to the consolidation of the Company's domestic finance
and administration function.  Additionally, the declines were due to decreased
legal, accounting and recruiting fees.  Partially offsetting this decrease was
an increased bad debt provision of $.9 million and $1.7 million in the second
quarter and first six months of fiscal 1997, respectively, due to concerns
regarding the credit-worthiness of certain domestic distributors and retailers.

Research and development expenses decreased slightly in the second quarter of
fiscal 1997 as compared to the same period in the prior year.  The decline in
expenses for the first six months of fiscal 1997 was due principally to
reductions in development personnel.  Additionally, in fiscal 1996, the Company
recognized a $500,000 increased charge to write-off development advances of
discontinued products and $400,000 of additional outside labor costs related
mostly to the development of STAR TREK: THE NEXT GENERATION "A FINAL UNITY".

The decrease in interest and other expense in the second quarter of fiscal 1997
reflects lower interest expense due to the retirement of $18.9 million in debt.
Interest and other income for the first six months of fiscal 1997 includes a
$1.9 million gain from the sale of the Company's investment in FASA and reduced
interest costs.

No income tax provision was recorded for the second quarter and the first six
months of fiscal 1997 due to the utilization of net operating loss carryforwards
generated in prior periods.  

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by approximately $4.6 million during the
six-month period.  This increase was principally due to a $9.7 million equity
financing in June 1996 offset partially by the repurchase of subordinated notes,
the acquisition of capital equipment, and the purchase of certain net assets of
Leisuresoft.

As of September 30, 1996, the Company's working capital was $38.1 million
compared to $35.7 million at March 31, 1996.  Net accounts receivable decreased
due to increased collections coupled with $0.8 million of write-offs of
uncollectible accounts.  Reserves for bad debts and sales returns as a
percentage of gross accounts receivable increased from 49% at March 31, 1996 to
54% at September 30, 1996, due to the deteriorating financial condition of
certain U.S. distributors and retailers.

Inventories decreased primarily due to the success of GRAND PRIX II and SID
MEIER'S CIVILIZATION II, the return of excess inventories to a former
affiliated label partner, and the Company's focus on fewer products.

                                       12
<PAGE>

                             SPECTRUM HOLOBYTE, INC.

As of September 30, 1996, the Company's primary source of liquidity included
cash and cash equivalents of $39.9 million.  The Company uses working capital to
finance ongoing operations, fund the development and marketing of new products
and acquire capital equipment.  Periodically, the Company may evaluate other
business, product or technology opportunities that are complimentary to those of
the Company.

In October 1996, a UK facility was obtained consisting of an overdraft/line 
of credit facility based upon qualifying receivables and certain other bank 
requirements for amounts up to a maximum credit limit of approximately $2.9 
million, bears interest at the rate of 2.75% over the bank's base rate, and 
expires September 1997. The acquisition of Leisuresoft provided a German 
facility consisting of an overdraft/line of credit facility based upon 
certain bank requirements for amounts up to a maximum credit limit of 
approximately $325,000, bears interest at the German equivalent of the prime 
rate, and expires March 1997.

Management believes the existing cash and cash equivalents will be sufficient to
meet the Company's liquidity and capital needs for the foreseeable future.

RISK FACTORS

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

OPERATING LOSSES.  Although the Company reported net income for the quarter and
first six months ended September 30, 1996 of $2.7 million or $.09 per share, and
$1.2 million or $.04 per share, respectively, the Company had net losses of
approximately $1.5 million, $39.8 million, $18.1 million and $58.5 million for
the first quarter of fiscal 1997 and the fiscal years 1996, 1995 and 1994,
respectively. Since the merger with MicroProse in December 1993, the Company has
not been able to achieve profitability on an annual basis. There can be no
assurance that any of the Company's business strategies and tactics will be
successful or that the Company will be able to sustain profitability.

SIGNIFICANT LEVERAGE.  As of September 30, 1996, the Company had outstanding
indebtedness for borrowed funds of approximately $32.9 million, cumulative
manditorily redeemable preferred stock of $5.9 million, and certain additional
indebtedness. This substantial leverage will have several important consequences
for the Company's future operations, including the following: (i) a substantial
portion of the Company's cash flows from operations will be dedicated to the
payment of interest on, and principal of, its indebtedness; (ii) the Company's
ability to obtain additional financing in the future for capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired; and
(iii) the Company's ability to withstand competitive pressures, adverse economic
conditions and adverse changes in governmental regulations and to make
acquisitions or otherwise take advantage of significant business opportunities
that may arise may be negatively impacted. 

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


                                       13
<PAGE>


                             SPECTRUM HOLOBYTE, INC.

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

In the first quarter of fiscal 1997, management implemented tactics to achieve
compliance with the net tangible assets listing requirement. These actions
enabled the Company to regain compliance with the Nasdaq National Market listing
requirements as of the end of the fiscal quarter ended June 30, 1996. There can
be no assurance that the Company will be able to maintain compliance with the
listing requirements of the Nasdaq National Market in the future.  If the
Company is unable to maintain compliance, it may qualify for listing under the
Nasdaq SmallCap Market.  If for any reason the Company is unable to achieve and
maintain compliance with the SmallCap listing requirements and is delisted from
both the Nasdaq National Market and the Nasdaq SmallCap Market, the holders of
the Company's 6 1/2 % Convertible Subordinated Notes Due 2002 (the "Notes")
would be entitled to require the Company to repurchase all or any portion of
such holders' Notes for cash at a price equal to the principal amount plus
accrued interest.  In such event, the Company's business, results of operations
and financial condition would be materially and adversely affected.

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) the
commencement of volume shipments of significant new products, 2) the degree of
market acceptance of the Company's products, 3) the introduction of products
competitive with those of the Company, 4) the timing and market acceptance of
new hardware and software product introductions, 5) the size and rate of growth
of the consumer software market, 6) development and promotional expenses
relating to the introduction of new products or new versions of existing
products, 7) product returns and markdowns, 8) changes in pricing policies by
the Company and its competitors, 9) the accuracy of retailers' forecasts of
consumer demand, 10) the timing of orders from major customers, 11) order
cancellations, 12) delays of shipment, and 13) 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.


                                       14
<PAGE>
                             SPECTRUM HOLOBYTE, INC.

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS.  A significant portion
of the Company's fiscal year revenue is generated by products introduced during
that fiscal year. The Company depends on both the timely introduction of
successful new products or sequels to existing products to replace declining
revenue from older products and continued revenue from back-catalog products. If
for any reason revenue from new products or other activities fails to replace
declining revenue from existing products, or if revenue from back-catalog titles
declines significantly, the Company's business, operating results and financial
condition may be materially and adversely affected.  In order to maintain or
grow its current revenue levels, the Company believes it will be necessary to
develop or obtain rights to new products that achieve market acceptance, are
developed for the appropriate platforms, are introduced in a timely manner and
are able to sustain market acceptance. The Company is continuing to devote
considerable resources toward the development of new products and has secured
rights to intellectual properties owned by third parties. As is typical in the
industry, 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 adversely affected. In
addition, as access to distribution channels and retail shelf space becomes
increasingly competitive, the Company's ability to produce and bring to market
new and compelling products in a timely fashion plays an increasingly important
role in the Company's ability to retain adequate access to these channels.

The Company's current production schedules contemplate that the Company will
commence shipments of a number of new products in fiscal 1997. As with any
software product, however, until all aspects of the development and initial
distribution of a game are completed, there can be no assurance of its release
date. Release dates will vary depending on quality assurance testing and other
development factors. If the Company were unable to commence volume shipments of
a significant new product during the scheduled quarter, the Company's revenue
and earnings would likely be materially and adversely affected in that quarter.
In the past, the Company has experienced significant delays in the introduction
of certain new products. It is likely in the future that certain new products
will not be released in accordance with the Company's internal development
schedule or the expectations of public market analysts and investors. A
significant delay in the introduction of, or the presence of a defect in, one or
more new products could have a material adverse effect on the ultimate success
of such products and on the Company's business, operating results and financial
condition, particularly in the quarter in which such products were scheduled to
be introduced. 

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

UNCERTAINTY OF MARKET ACCEPTANCE; UNPREDICTABLE PRODUCT LIFE CYCLES.  Consumer
preferences for entertainment software products are continually and rapidly
changing and are extremely difficult to predict. Few entertainment software
products achieve sustained market acceptance, for example, beyond one holiday
buying season. There can be no assurance that new products introduced by the
Company will achieve any significant degree of market acceptance, or that
acceptance, if achieved, will be sustained for any significant period. Further,
there can be no assurance that such products will not be subject to changes in
consumer preferences or that product life cycles will be sufficient to permit
the Company to recover development and other associated costs. In addition,
sales of any single title of the Company's entertainment software products will
decline over time. A majority of the unit sales for a product typically occurs
in the first 90 to 120 days after the product is introduced. Therefore, the
Company cannot rely on the sales of current products to sustain its business in
the future. Failure of new products or platforms to achieve or sustain market
acceptance would have a material and adverse effect on the Company's business,
operating results and financial condition. In addition, the Company does not
carry significant inventory of its new products. As a result, significant
production delays would have a material and adverse effect on the Company's
business and operating results. Further, if demand for a particular product is
greater than anticipated, 
                                       15

<PAGE>

                             SPECTRUM HOLOBYTE, INC.

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,
Sierra On-Line, Lucas Arts, Interplay, GT Interactive, Maxis, Acclaim
Entertainment, and Broderbund Software, along with Virgin Interactive in Europe.
Additionally, the entry and participation of new industries and companies,
including diversified entertainment companies, in markets in which the Company
competes may adversely affect the Company's performance in such markets. The
availability of significant financial resources has become a major competitive
factor in the entertainment software industry, principally as a result of the
technical sophistication of advanced multimedia computer game products requiring
substantial investments in research and development and the increasing need to
license products and rights to use other intellectual properties from third
parties. Also, competitors with large product lines and popular titles typically
have greater leverage with retailers and distributors and other customers who
may be willing to promote titles with less consumer appeal in return for access
to such competitors' most popular titles.

The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft, are increasing their focus on the interactive entertainment market,
which will result in greater competition for the Company. In particular, many of
the Company's competitors are developing on-line interactive computer games and
interactive networks 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 be able 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 price discounts and product return policies. Retailers often require
software publishers to pay fees in exchange for preferred shelf space. The
Company's products constitute a relatively small percentage of a retailer's
sales volume, and there can be no assurance that retailers will continue to
purchase the Company's products or provide the Company's products with adequate
levels of shelf space and promotional support. 

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

CONCENTRATION OF CUSTOMER BASE; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT
RETURNS.  The Company principally sells its products to retailers and
distributors, who in turn resell the products to consumers. During the quarter
and first six months ended September 30, 1996, sales to the top ten such
customers represented approximately 48% and 47% of the Company's net revenue,
respectively. Sales are typically made on credit, with terms that vary depending
upon the customer and the nature of the product. The Company does not hold
collateral to secure 
                                       16

<PAGE>

                             SPECTRUM HOLOBYTE, INC.

payment. Retailers and distributors compete in a volatile industry and are 
subject to the risk of business failure. Certain of the Company's 
distributors and retailers have recently experienced financial difficulties 
and the Company has increased its reserves accordingly.  However, the 
business failure of a significant distributor or customer could have a 
material and adverse effect on the Company's business, operating results and 
financial condition.

The Company is exposed to the risk of product returns from distributors and
retailers. The Company currently maintains a stock balancing policy that allows
distributors and retailers to return products subject to certain conditions. The
Company provides reserves for returns that it believes are adequate, and the
Company's agreements with various customers place certain limits on product
returns. However, new product introductions by the Company or its competitors,
or changes in consumer demand from that anticipated, could cause customers to
seek to return inventory to the Company. Due to the unpredictability of consumer
demand and the uncertainties associated with a rapidly changing market, there
can be no assurance that the Company or its customers will be able to forecast
demand accurately. Consistent with industry trends, the Company has accepted
substantial increased product returns and markdowns on products in the last
fiscal year and the Company could continue to be forced to accept such returns
and markdowns in the distribution channel to maintain its relationships with
retailers and its access to distribution channels. These returns and markdowns
are likely to increase in periods in which the Company does not have a
significant number of new product introductions. Any significant amount of
product returns or markdowns could have a material and adverse effect on the
Company's business, operating results and financial condition.

DEPENDENCE UPON STRATEGIC RELATIONSHIPS.  The Company's business strategy relies
to a significant extent on its strategic relationships with other companies and
on its alliances with key developers. Certain agreements allow third parties to
approve a product prior to its release, and therefore, subject the product to
delay. There can be no assurance that these relationships will be successful or
that the Company will continue to maintain and develop strategic relationships,
or that licenses between the Company and any third party will be renewed or
extended at their expiration dates. For example, the Company's licenses from
Paramount Pictures Corporation for the STAR TREK: THE NEXT GENERATION property
expire on December 31, 1998, and for the TOP GUN property on April 30, 1998. In
addition, these agreements may be terminated at Paramount's option in the event
that the Company fails to meet certain specified milestone 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.







                                       17
<PAGE>
                             SPECTRUM HOLOBYTE, INC.

CHANGES IN TECHNOLOGY AND PRODUCT PLATFORMS.  The market for entertainment
software, including entertainment software platforms, is undergoing rapid
technological change. As a result, the Company must continually anticipate and
adapt its products to emerging platforms and evolving consumer preferences. The
introduction of new platforms and technologies can render existing products
obsolete and unmarketable. Development of entertainment software products for
new hardware platforms requires substantial investments in research and
development for technologies such as enhanced sound, digitized speech, music and
video and requires the Company to anticipate and develop products for those
platforms that will ultimately be successful. Such research and development
efforts, which generally require 12 to 24 months, must occur well in advance of
the release of new platforms in order to introduce products on a timely basis
following the release of such platforms. In addition, the Company expects that
the trend toward more complex multimedia products and increasing product
development costs will continue for the foreseeable future.

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

The Company is heavily dependent on the success of the entertainment software
developed for use on the PC. However, there are multiple, competing and
incompatible formats being introduced in this new market.  PlayStation, Sega
Saturn, 3DO Multiplayer and Nintendo's Ultra 64 are currently available. There
can be no assurance that the Company's strategy of developing primarily for the
PC or the other platforms the Company chooses to support ultimately will be
successful. The development, marketing and distribution of products for game
consoles the Company chooses to support will involve substantial investment and
risks. The Company believes that the principal target audience for game consoles
may be younger than the Company's traditional customers, and there can be no
assurance that the Company's products will be successful with this different
audience. In addition, the Company anticipates that products in the game console
market will require substantially greater expenditures for marketing,
advertising and inventory buildup, often before the market acceptance of a
product is known. Inventory will be two or more times more expensive as a result
of license fees that are required to be prepaid to the manufacturers of the
hardware platforms. Further, game console products will be sold through channels
that overlap with, but are somewhat different from, the retail channels
currently utilized by the Company, and the Company will be competing in
distribution against much larger organizations with greater financial resources.
There can be no assurance that the Company will be successful in marketing and
distributing software for game consoles.

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

                                       18
<PAGE>
                             SPECTRUM HOLOBYTE, INC.

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. Sid Meier, the Company's former Executive
Vice President of Product Development, resigned in May 1996. He will continue as
a consultant until the completion of MAGIC: THE GATHERING. Since January 1,
1996, the Company has hired a new Senior Vice President of Sales, Senior Vice
President of Operations, Senior Vice President of Marketing, and a Senior Vice
President of Development Studios and intends to hire other senior management
positions including a new Chief Financial Officer. The Company has also hired a
financial consultant to advise the Chief Executive Officer on financial
planning, controls and reporting structures. The Chief Executive Officer and
other officers and senior managers of the Company can be expected to expend
significant time and effort in the transition process as new officers assume
their positions with the Company and become integrated into the Company, its
operations and its culture. There can be no assurance that qualified personnel
can be readily identified and hired wherever necessary, that any new personnel
will be successfully integrated into the Company, its operations and culture, or
that new personnel, if hired, will improve the Company's business, operations or
operating results. The Company does not currently have key person life insurance
on any employees.

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

INTERNATIONAL REVENUE.  International net revenue represented approximately 64%,
49%, and 29% of the Company's net revenue for the first six months of fiscal
1997, and for fiscal years ended March 31, 1996 and 1995, respectively. The
Company expects that international net revenue will continue to account for a
significant portion of its net revenue in future periods. International revenue
is subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and other economic barriers, fluctuating exchange rates,
difficulties in staffing and managing foreign operations and the possibility of
difficulty in accounts receivable collection. Because the Company does not
believe exposure to foreign currency losses is currently material, the Company
currently has no formal financial instruments in place as a hedge against
foreign 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 advance payments of royalties and guaranteed minimum royalty
payments. If the sales volumes of products subject to such arrangements are not
sufficient to recover such advances and guarantees, the Company will be required
to write-off unrecovered portions of such payments. The Company has been
required to write-off a material portion of these advances in past fiscal
quarters and, if the Company must write-off additional portions of such advances
or ultimately accrue for the guarantees, its results of operations may be
materially and adversely affected.

                                       19
<PAGE>

                             SPECTRUM HOLOBYTE, INC.

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

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

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

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>


                             SPECTRUM HOLOBYTE, INC.

Part II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

     On November 4, 1996, the Company, MicroProse and Acclaim entered into an 
agreement settling the lawsuit.  Under the terms of the settlement, the 
Company is not required to make any monetary payment or alter its computer 
game product. The parties have agreed to differentiate their respective titles 
in the marketplace.  Acclaim will market its product for Windows 95 under the 
name MAGIC: THE GATHERING-BATTLEMAGE.  The title will be positioned as a 
real-time, multi-player  strategy game, based on the characters and scenarios 
of the fantasy adventure world of MAGIC:THE GATHERING.  The Company's title 
will be released under the MicroProse brand name and will be positioned as an 
interactive version of the MAGIC:THE GATHERING card game.  The Company's 
title will feature a fantasy world developed by the Company to simulate the 
features of the MAGIC:THE GATHERING card game, including card collection, 
deck-building and dueling.

     The parties have also agreed to coordinate the release dates for their
respective products.  Acclaim will have the right to release its title on or
before January 10, 1997, and the Company has agreed not to release its product
until after such date.  In the event Acclaim releases its title on or before
January 10, 1997, then the Company will release its title no earlier than
February 1, 1997.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)  THE FOLLOWING EXHIBITS ARE FILED HEREWITH:

EXHIBIT
NUMBER       DESCRIPTION                                          
-------      ------------------------------------------------------------------
 3.1+        Certificate of Incorporation of the Registrant

 3.2         Amended Bylaws of Registrant

 4.1+        Specimen Common Stock Certificate of the Registrant

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

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

 4.4+        Form of Warrant, issued to Ince & Co. (incorporated by reference to
             Exhibit 2.3 of Spectrum HoloByte, Inc.'s Quarterly Report on Form 
             10-Q, File No. 0-19463, filed on December 31, 1994)

 4.5+        Registration Rights Agreement, dated June 12, 1995 by and among 
             Spectrum HoloByte, Inc. and Stephen Barcia and Maria Barcia 
             (incorporated by reference to Exhibit 2.3 of Spectrum HoloByte,
             Inc.'s Current Report on Form 8-K, File No. 0-19463, filed on 
             June 27, 1995)

 4.6+        Registration Rights Agreement, dated as of May 16, 1995, by and 
             among Spectrum HoloByte, Inc. and IPWEL LTD (incorporated by 
             reference to Exhibit 4.7 of Spectrum HoloByte, Inc.'s Registration 
             on Form S-3, File No. 33-94580, filed October 24, 1995)

 4.7+        Registration Rights Agreement, dated as of May 16, 1995, by and 
             among Spectrum HoloByte, Inc. and GFL Advantage Fund Limited 
             (incorporated by reference to Exhibit 4.8 of Spectrum HoloByte,
             Inc.'s Registration on Form S-3, File No. 33-94580, filed October 
             24, 1995)

 4.8+        Registration Rights Agreement, dated as of August 28, 1995, by and 
             among Spectrum HoloByte, Inc. and GFL Advantage Fund Limited 
             (incorporated by reference to Exhibit 4.9 of Spectrum HoloByte, 
             Inc.'s Registration on Form S-3, File No. 33-94580, filed 
             October 24, 1995)

 4.9+        Registration Rights Agreement, dated as of June 27, 1995, by and 
             among Spectrum HoloByte, Inc. and Banque Scandinave en Suisse 
             (incorporated by reference to 


                                       21
<PAGE>


                             SPECTRUM HOLOBYTE, INC.

EXHIBIT
NUMBER       DESCRIPTION                                          
-------      ------------------------------------------------------------------
             Exhibit 4.10 of Spectrum HoloByte, Inc.'s Registration on Form S-3,
             File No. 33-94580, filed October 24, 1995)

 4.10+       Registration Rights Agreement, dated as of August 25, 1995, by and 
             among Spectrum HoloByte, Inc. and PJP International, Ltd. 
             (incorporated by reference to Exhibit 4.11 of SpectrumHoloByte, 
             Inc.'s Registration on Form S-3, File No. 33-94580, filed 
             October 24, 1995) 

 4.11+       Registration Rights Agreement, dated as of May 16, 1995, by and 
             among Spectrum HoloByte, Inc. and Tanner, Owen & Co. Incorporated 
             (incorporated by reference to Exhibit 4.12 of Spectrum HoloByte, 
             Inc.'s Registration on Form S-3, File No. 33-94580, filed October
             24, 1995)

 4.12+       Registration Rights Agreement, dated as of September 6, 1995, by 
             and among Spectrum HoloByte, Inc. and Tanner, Owen & Co. 
             Incorporated (incorporated by reference to Exhibit 4.13 of 
             Spectrum HoloByte, Inc.'s Registration on Form S-3, File No. 
             33-94580, filed October 24, 1995)

 4.13+       Indenture, dated as of September 15, 1995, between Spectrum 
             HoloByte, Inc. and Chemical Trust Company of California 
             (incorporated by reference to Exhibit 3 of Spectrum HoloByte,
             Inc.'s Current Report on Form 8-K, File No. 0-19463, filed October
             17, 1995)

 4.14+       Registration Rights Agreement, dated as of September 26, 1995, 
             by and among Spectrum HoloByte, Inc. and Robertson, Stephens &
             Company, L.P., Jeffries & Company, Inc. and Piper Jaffray Inc. 
             (incorporated by reference to Exhibit 4 of Spectrum HoloByte, 
             Inc.'s Current Report on Form 8-K, File No. 0-19463, filed 
             October 17, 1995)

 4.15+       Certificate of Designation for Series B Convertible Preferred Stock

 4.16+       Certificate of Designation for Series B-1 Convertible Preferred 
             Stock

10.1+        Form of Purchase Agreement, by and between Spectrum HoloByte, 
             Inc. and certain investors, effective June 26, 1996 (incorporated 
             by reference to Exhibit 4.3 of Spectrum HoloByte, Inc.'s 
             Registration on Form S-3, File No. 333-08385, filed July 18, 1996)

11.1         Statement Re: Computation of Net Income (Loss) Per Share

27.1         Statement Re: Financial Data Schedule

   +  Previously filed.


(B)  REPORTS ON FORM 8-K:

None.

                                       22
<PAGE>


                             SPECTRUM HOLOBYTE, INC.

                                   SIGNATURES
     
     Pursuant to the requirements of the Securities Exchange Act of 1934,
     the registrant has duly caused this report to be signed on its behalf
     by the undersigned, thereunto duly authorized, on November 13, 1996.


                              SPECTRUM HOLOBYTE, INC.



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
















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