<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   ----------
                                    FORM 10-Q
                                QUARTERLY REPORT
                     PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1999         Commission File No. 0-27338

                                           ----------


                          GT INTERACTIVE SOFTWARE CORP.
             (Exact name of registrant as specified in its charter)




                  DELAWARE                                13-3689915
      (State or other jurisdiction of                  (I.R.S. employer
       incorporation or organization)                  identification no.)


       417 FIFTH AVENUE, NEW YORK, NY                       10016
  (Address of principal executive offices)                (Zip code)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 726-6500


                                   ----------


         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
                                  ----                    ----

         As of August 10, 1999, there were 72,971,165 shares of the registrant's
Common Stock outstanding.
<PAGE>   2
                          GT INTERACTIVE SOFTWARE CORP.
                   JUNE 30, 1999 QUARTERLY REPORT ON FORM 10-Q
                                TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                    Page
Item 1.         Financial Statements (Unaudited):

<S>                                                                                                 <C>
                Consolidated Condensed Balance Sheets as of March 31, 1999 (audited)  and June         3
                30, 1999

                Consolidated Statements of Operations for the Three Months Ended
                June 30, 1998 and 1999                                                                 4

                Consolidated Statements of Comprehensive Income for the Three Months Ended June
                30, 1998 and 1999                                                                      5

                Consolidated Statements of Cash Flows for the Three Months Ended
                June 30, 1998 and 1999                                                                 6

                Notes to the Consolidated Financial Statements                                         7

Item 2.         Management's Discussion and Analysis of Financial Condition and Results of
                Operations                                                                             13


PART II - OTHER INFORMATION

Item 1.         Legal Proceedings                                                                      20

Item 2.         Changes in Securities and Use of Proceeds                                              20

Item 6.         Exhibits and Reports on Form 8-K                                                       21

Signatures                                                                                             22
</TABLE>
<PAGE>   3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                             MARCH 31,         JUNE 30,
                                                                                             ---------         --------
                                                                                                1999            1999
                                                                                                ----             ----
ASSETS
Current assets:
<S>                                                                                           <C>             <C>
   Cash, cash equivalents and short-term investments                                          $  13,512       $   7,830
   Receivables, net                                                                             185,042         181,559
   Inventories, net                                                                             131,889         131,808
   Income taxes receivable                                                                        1,973           1,973
   Other current assets                                                                          58,284          66,483
                                                                                              ---------       ---------
        Total current assets                                                                    390,700         389,653
Property and equipment, net                                                                      36,808          36,974
Goodwill, net                                                                                    34,194          33,019
Deferred income taxes
                                                                                                 12,664          12,664
Other assets                                                                                     13,249          13,393
                                                                                              ---------       ---------
        Total assets                                                                          $ 487,615       $ 485,703
                                                                                              =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                           $ 152,556       $ 170,545
   Accrued liabilities                                                                           84,205          59,136
   Revolving credit facility                                                                         --         109,500
   Royalties payable                                                                             18,515          15,138
   Income taxes payable                                                                           2,569           1,402
   Other current liabilities
                                                                                                  1,085           1,507
                                                                                              ---------       ---------
        Total current liabilities                                                               258,930         357,228
Long-term debt                                                                                   98,750              --
Other long-term liabilities                                                                       2,802           2,674
                                                                                              ---------       ---------
        Total liabilities                                                                       360,482         359,902
                                                                                              ---------       ---------

Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par, 5,000,000 shares authorized,
600,000 shares of Series A Convertible Preferred stock issued and outstanding,
stated at liquidation preference of $50.00 per share                                             30,000          30,000
Common stock, $0.01 par, 150,000,000 shares authorized, 72,775,868 and 72,937,476 shares
   issued and outstanding, respectively                                                             727             729
Additional paid-in capital                                                                      161,073         164,228
Retained earnings (deficit)                                                                     (64,667)        (69,156)
                                                                                              ---------       ---------
        Total stockholders' equity                                                              127,133         125,801
                                                                                              ---------       ---------
        Total liabilities and stockholders' equity                                            $ 487,615       $ 485,703
                                                                                              =========       =========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                     Page 3
<PAGE>   4
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                                                        June 30,
                                                                        --------
                                                                  1998           1999
                                                                  ----           ----
                                                                      (unaudited)
<S>                                                            <C>            <C>
Net revenues                                                   $ 116,391      $ 121,325
Cost of goods sold                                                55,898         62,143
Selling and distribution expenses                                 26,460         33,876
General and administrative expenses                               12,453         11,761
Research and development                                          16,597         16,366
Amortization of goodwill                                             871            888
                                                               ---------      ---------
     Operating income (loss)                                       4,112         (3,709)
Interest and other expense, net                                    1,176          2,252
                                                               ---------      ---------
     Income (loss) before income taxes                             2,936         (5,961)
Provision for (benefit from) income taxes                          1,133         (2,109)
                                                               ---------      ---------
    Net income (loss) before dividends on preferred stock          1,803         (3,852)

Less dividends on preferred stock                                     --            600
                                                               ---------      ---------
    Net income (loss) attributable to common stockholders      $   1,803      $  (4,452)



Basic net income (loss) per share                              $    0.03      $   (0.06)

    Weighted average number of shares outstanding                 68,056         72,869

Diluted net income (loss) per share                            $    0.03      $   (0.06)

    Weighted average number of shares outstanding                 68,988         72,869
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.



                                     Page 4
<PAGE>   5
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                  Three Months Ended
                                                        June 30,
                                                        --------
                                                   1998         1999
                                                   ----         ----
                                                      (unaudited)

<S>                                              <C>      <C>
Net income (loss)                                $ 1,803      $ (3852)

Other comprehensive income:
   Foreign currency translation adjustments          376         (636)

                                                 =======      =======
Comprehensive income (loss)                      $ 2,179      $(4,488)
                                                 =======      =======
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.



                                     Page 5
<PAGE>   6
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                             June 30,
                                                                                             --------
                                                                                       1998            1999
                                                                                       ----            ----
                                                                                            (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                  <C>             <C>
  Net income (loss)                                                                  $  1,803        $(3,852)
  Adjustments to reconcile net income to net cash used in operating activities:
       Depreciation and amortization                                                    3,244          4,095
       Deferred income taxes                                                            1,159         (2,510)
       Deferred income                                                                     16           (118)
       Changes in operating assets and liabilities:
          Receivables, net                                                            (27,310)         2,812
          Inventories, net                                                             (4,073)          (269)
          Royalty advances                                                              1,085          1,210
          Due to related party                                                            (46)           541
          Prepaid expenses and other current assets                                       251         (3,369)
          Accounts payable                                                              6,557         17,737
          Accrued liabilities                                                            (658)       (25,390)
          Royalties payable                                                            (8,598)        (3,379)
          Income taxes payable                                                         (1,605)        (1,020)
          Income taxes receivable                                                      (1,433)            --
          Long-term liabilities                                                            88           (128)
          Other                                                                          (672)          (121)
                                                                                     --------       --------
             Net cash used in operating activities                                    (30,192)       (13,761)
                                                                                     --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                                   (5,824)        (3,698)
                                                                                     --------       --------
             Net cash used in investing activities                                     (5,824)        (3,698)
                                                                                     --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings under revolving credit facility, net                                      26,600         10,750
  Proceeds from exercise of stock options                                                 348            345
                                                                                     --------       --------
             Net cash provided by financing activities                                 26,948         11,095
                                                                                     --------       --------

  Effect of exchange rates on cash and cash equivalents                                   504            682
                                                                                     --------       --------
  Net decrease in cash and cash equivalents                                            (8,564)        (5,682)
  Cash and cash equivalents - beginning of period                                      17,224         13,407
                                                                                     ========       ========
  Cash and cash equivalents - end of period                                          $  8,660       $  7,725
                                                                                     ========       ========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.



                                     Page 6
<PAGE>   7
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

         The accompanying interim consolidated financial statements of GT
Interactive Software Corp. and its subsidiaries (the "Company") are unaudited,
but in the opinion of management, reflect all adjustments consisting of normal
recurring accruals necessary for a fair presentation of the results for the
interim period in accordance with instructions for Form 10-Q. Accordingly, they
do not include all information and notes required by generally accepted
accounting principles for complete financial statements. These interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.

Reclassifications

         Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to classifications used in the
current period.

Net Income Per Share

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 requires dual presentation of basic earnings per share ("EPS")
and diluted EPS on the face of all statements of earnings for all entities with
complex capital structures. Basic EPS is computed as net earnings divided by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans, including stock options, restricted
stock awards, warrants and other convertible securities using the treasury stock
method.

Fiscal Year

         Effective January 1, 1998, the Company changed its fiscal year end from
December 31 to March 31.

NOTE 2 - ACQUISITIONS

         In January 1997, the Company acquired all of the outstanding capital
stock of Premier Promotion Limited, the parent company of One Stop Direct
Limited, for approximately $0.4 million in cash. This transaction was accounted
for as a purchase.

         In October 1997, the Company acquired SingleTrac Entertainment
Technologies, Inc. ("SingleTrac"), a software developer, for cash and stock.
Total consideration, including acquisition costs, was approximately $14.7
million, of which $5.4 million was cash and the balance of the purchase price
was the issuance of 0.7 million newly issued shares of the Company's common
stock, par value $0.01 per share ("Common Stock"), and the assumption of
approximately 0.3 million stock options. The acquisition was accounted for as a
purchase. The purchase price was allocated to net assets acquired, purchased
in-process research and development ("R&D"), and goodwill and other intangibles.
Purchased in-process R&D includes the value of products in the development stage
and not considered to have reached technological feasibility. In accordance with
the applicable accounting rules, purchased in-process R&D is required to be
expensed. Accordingly, $11.0 million of acquisition cost was expensed in the
fourth quarter of 1997. In connection with the reorganization of the Company's
Frontline business, the Company wrote-off $3.3 million of goodwill relating to
SingleTrac in the quarter ended March 31, 1999.



                                     Page 7
<PAGE>   8
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



NOTE 2 - ACQUISITIONS (CONTINUED)

         In November 1998, the Company acquired One Zero Media, Inc. ("OZM"), an
Internet entertainment content company, in exchange for approximately 2.3
million newly issued shares of the Company's Common Stock and approximately 0.6
million stock options to purchase the Company's Common Stock. Total
consideration, including acquisition costs, was approximately $17.2 million,
which was allocated to net assets acquired and goodwill. The acquisition was
accounted for as a purchase, because it was the Company's intention to sell an
ownership interest in OZM. At March 31, 1999, the Company decided to sell OZM
and therefore OZM is accounted for as a discontinued operation. This resulted in
an anticipated loss from discontinued operations of $19.0 million which includes
a provision of $5.0 million for operating losses during the phase-out period.
OZM is valued at anticipated sales proceeds less losses to be incurred through
the date of sale. The net assets of $1.0 million is included in prepaid expenses
and other current assets.

       In December 1998, the Company acquired Reflections Interactive Limited
("Reflections"), a developer of interactive entertainment software for computer
games, in exchange for approximately 2.3 million newly issued shares of the
Company's Common Stock. Total consideration, including acquisition costs, was
approximately $13.5 million. The acquisition was accounted for as a purchase.
The purchase price was allocated to net assets acquired, purchased in-process
R&D and goodwill. Accordingly, $5.0 million of acquisition cost was expensed in
the quarter ended December 31, 1998. Additionally, the Company acquired Prism
Leisure Tontragervertriebs GmbH ("Prism"), a distributor of value-priced
software based in Germany, for nominal consideration. The acquisition was
accounted for as a purchase. The purchase price was allocated to net assets
acquired and goodwill.

         In December 1998, the Company formed GT Interactive European Holdings
B.V., a European holding company, which acquired all of the outstanding capital
stock of Home Software Benelux B.V. ("Homesoft"), a distributor of entertainment
software, for approximately $1.0 million in cash. The acquisition was accounted
for as a purchase.

         In December 1998, the Company purchased the assets of Legend
Entertainment Company ("Legend"), a developer of entertainment software. Total
consideration, including acquisition costs, was approximately $2.0 million. The
purchase price was allocated to goodwill.


NOTE 3 - INVENTORIES, NET

         Inventories consist of the following:

<TABLE>
<CAPTION>
                     March 31,     June 30,
                      1999          1999
                      ----          ----
                        (in thousands)

<S>                 <C>           <C>
Finished goods      $127,695      $126,958

Raw materials          4,194         4,850
                    --------      --------

                    $131,889      $131,808
                    ========      ========
</TABLE>



                                     Page 8
<PAGE>   9
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)


NOTE 4 - COMMITMENTS AND CONTINGENCIES

         On January 21, 1997, the Company entered into a revolving credit
agreement (as amended, the "Old Credit Agreement") with certain banks, expiring
on December 31, 1998. On September 11, 1998, the borrowings under the Old Credit
Agreement were repaid and the Old Credit Agreement was terminated.

         Simultaneously, on September 11, 1998, the Company entered, with First
Union National Bank, as agent for a syndicate of banks, into a new revolving
credit agreement (the "New Credit Agreement") expiring on September 11, 2001.
Under the New Credit Agreement, the Company can borrow up to $125 million (the
"Line"), depending on the borrowing base. These borrowings have been used to
refinance indebtedness under the Old Credit Agreement and will be used for
ongoing working capital requirements, letters of credit and other general
corporate purposes, including permitted acquisitions. Borrowing is limited to a
percentage of domestic accounts receivable and inventory, and is secured by
these and certain other assets.

         On June 29, 1999, the Company and the banks amended the New Credit
Agreement to increase the Company's borrowing base by an additional $20 million
until March 31, 2000 and to remove certain financial covenants under the New
Credit Agreement. The Company anticipates that under the New Credit Agreement,
as amended, substantially all of the Line should be available to the Company
through March 31, 2000. The termination date of the New Credit Agreement, as
amended, has been changed to June 30, 2000. Under the New Credit Agreement, as
amended, the borrowings bear interest at either the bank's reference rate (which
is generally equivalent to the published prime rate) plus 2.5% or LIBOR plus 4%
and the Company pays, on the unused portion of the Line, a commitment fee of
0.50% per annum. The amended New Credit Agreement also requires maintenance of
certain EBITDA levels and limits on capital expenditure amounts. To induce the
banks to amend the New Credit Agreement, the Company paid the banks an amendment
fee of 1.75% on the existing Line, as well as certain arrangement fees and
annual agent fees. As an additional inducement, the Company issued the banks
warrants to purchase, at an exercise price of $0.01 per share, an aggregate of
850,000 shares of the Company's Common Stock with varying vesting schedules for
exercisability. Of these, warrants to purchase 375,000 shares of Common Stock
were immediately exercisable and warrants to purchase the remaining 475,000
shares of Common Stock will become exercisable only upon the occurrence of
certain events. At June 30, 1999, the Company had outstanding debt of
approximately $109.5 million, representing borrowings under the New Credit
Agreement and letters of credit amounting to approximately $4.8 million.


                                     Page 9
<PAGE>   10
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

         On February 23, 1999, certain partnerships affiliated with General
Atlantic Partners, LLC (together with its affiliates, "General Atlantic")
purchased from the Company 0.6 million shares of the Company's Series A
Convertible Preferred Stock (the "Preferred Stock") for an aggregate purchase
price of $30.0 million. These shares of Preferred Stock are convertible into 6.0
million shares of the Company's Common Stock at a conversion price of $5.00 per
share.

         On June 29, 1999, as a further condition to the banks' agreement to
amend the New Credit Agreement, the Company received commitments from General
Atlantic and certain members of the Cayre family (together with General
Atlantic, the "Junior Debtholders") to loan to the Company an aggregate of $30.0
million (the "Junior Debt"). Certain members of the Cayre family and affiliates
of General Atlantic own, in the aggregate, a significant percentage of the
Company's Common Stock. Of the $30.0 million of Junior Debt, $20.0 million was
funded by General Atlantic and $10.0 million was funded by the Cayre family in
July 1999. The Junior Debt is evidenced by promissory notes (the "Notes") from
the Company to the Junior Debtholders. The Company used the borrowings under the
Notes to prepay a portion of the Line, which may be reborrowed.

         To induce General Atlantic to enter into the commitments, the Company
has amended the terms of the Certificate of Designation designating its Series A
Convertible Preferred Stock to provide that in the event of a change of control,
the holders of the Preferred Stock will receive, before any payment or
distribution is made on any other equity securities of the Company, an amount
equal to the liquidation preference set forth in the Certificate of Designation
plus all accrued and unpaid dividends thereon to the date fixed for such change
of control. Further, the Company issued to General Atlantic warrants (the
"Commitment Warrants") to purchase, at an exercise price equal to $0.01 per
share, an aggregate of 500,000 shares (subject to anti-dilution adjustments) of
the Company's Common Stock.

         The Cayre family has granted to General Atlantic an option to purchase
a total of 1,333,333 shares of Common Stock owned by them. In addition, the
Company will amend the Registration Rights Agreement, dated February 22, 1999
(the "Registration Rights Agreement"), between the Company and General Atlantic,
to extend those registration rights to the shares of Common Stock issuable upon
exercise of the Commitment Warrants and any additional warrants issued to
General Atlantic, as described below. The Notes will mature no later than July
29, 2000 (the "Maturity Date") and will bear cumulative interest, compounding
quarterly, at the rate of 9% per year until January 1, 2000, on which date the
rate will increase to 12% per year. All accrued and unpaid interest will be due
and payable in cash on the earlier of (i) the Maturity Date and (ii) the first
business day after the Line has been repaid in full. In the event of a change in
control of the Company, the Company is required to prepay the aggregate unpaid
principal amount of the Notes plus all accrued and unpaid interest thereon.
After the Line has been repaid in full, the Company may prepay the Notes in
whole or in part. The Notes, including all unpaid principal of and interest
thereunder, will be subordinate and junior in right of payment to all amounts
owed under the New Credit Agreement, as amended. Concurrently with the issuance
of the Notes, the Company issued to the Junior Debtholders warrants to purchase,
at an exercise price of $0.01 per share, an aggregate of 1,500,000 shares of the
Company's Common Stock. The Cayre family assigned their prorata share of the
warrants to General Atlantic. Under certain circumstances, the Company may be
obligated to issue additional warrants to the Junior Debtholders.


                                    Page 10
<PAGE>   11
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

         On September 18, 1997, Scavenger, Inc. ("Scavenger"), a software
developer, filed a lawsuit against the Company in New York Supreme Court
claiming that the Company breached a software development contract between the
parties dated November 28, 1995. Scavenger alleges that the Company, after
paying $2.5 million in advances and accepting delivery of gold master disks for
two computer games, refused to pay any more advances, including advances
relating to the development of two additional games under the agreement.
Scavenger is suing for the remaining advances ($4.3 million) and for future
royalties ($5 million), and also seeks consequential damages for allegedly being
forced out of business ($100 million) and losing contracts with unspecified
third parties ($4 million) as a result of the Company's alleged breach. The
Company filed an answer and counterclaim, in which it denies any liability to
Scavenger and alleges, among other things, that the contract was lawfully
terminated when Scavenger failed to deliver the two remaining games after
receiving from the Company written notice to cure its material breaches. By its
counterclaim, the Company seeks damages and restitution for at least $5 million
on grounds of breach of contract and unjust enrichment. Pursuant to a
preliminary conference order dated February 11, 1998, the parties had until year
end 1998 to conduct discovery. On September 17, 1998, however, Scavenger's
counsel filed a motion seeking to be relieved as counsel, which the Court
granted on October 6, 1998. At a November 12, 1998 preliminary conference,
another attorney appeared as Scavenger's prospective new counsel, subject to
further discussions with Scavenger. New counsel thereafter filed a notice of
appearance in the case. At a December 1, 1998 compliance conference, the Court
reissued a discovery order, whereby discovery was to be completed by July 30,
1999. At a June 30, 1999 conference, the Court extended the discovery deadline
until September 15, 1999. At an August 5, 1999 conference the Court maintained
those deadlines but scheduled another compliance conference for September 7,
1999 at which time those deadlines might be reconsidered. Scavenger has now
moved for partial summary judgment on its first two causes of action for
remaining advances ($4.3 million), and the Company has opposed that motion and
asked the court to dismiss those two claims with prejudice. Scavenger has moved
to amend the complaint adding claims of fraud and prima facie tort seeking
punitive damages; the proposed amended complaint seeks $60 million and $100
million on the fraud claims and $10 million in punitive damages on the prima
facie tort claim. The Company has, at once, opposed the motion to amend and
cross moved to dismiss the additional claims if leave to amend is granted. The
Company intends to vigorously defend this action and pursue its counterclaim.

         In January, February, and March 1998, ten substantially similar
complaints were filed against the Company, its former Chairman and its former
Chief Executive Officer, and in certain actions, its former Chief Financial
Officer, in the United States District Court for the Southern District of New
York. The plaintiffs, in general, purport to sue on behalf of a class of persons
who purchased shares (and as to certain complaints, purchased call options or
sold put options) of the Company during the period from August 1, 1996 through
December 12, 1997. The plaintiffs allege that the Company violated the federal
securities laws by making misrepresentations and omissions of material facts
that allegedly artificially inflated the market price of the Company's common
stock during the class period. The plaintiffs further allege that the Company
failed to expense properly certain prepaid royalties for software products that
had been terminated or had failed to achieve technological feasibility, which
misstatements purportedly had the effect of overstating the Company's net income
and net assets. Motions were made by certain groups of plaintiffs for their
appointment as lead plaintiffs in the actions. On October 7, 1998, the Court
appointed lead plaintiffs and lead counsel to the plaintiffs in the actions. The
plaintiffs' consolidated and amended complaint was filed and served in early
January 1999. By order dated January 23, 1999, the plaintiffs were granted leave
to file a second consolidated and amended complaint, which added claims under
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against the
Company's independent auditor, Arthur Andersen LLP. The Company and Arthur
Andersen LLP have each filed motions to dismiss the second consolidated and
amended complaint. The Company believes that these complaints are without merit
and intends to defend itself vigorously against these actions.



                                    Page 11
<PAGE>   12
                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)


         On April 12, 1999, an action was commenced by the administrators for
three children who were murdered on December 1, 1997 by Michael Carneal at the
Heath High School in McCracken County, Kentucky. The action was brought against
25 defendants, including the Company and other corporations in the videogame
business; companies that produced or distributed the movie "The Basketball
Diaries;" and companies that allegedly provide obscene internet content. The
complaint alleges, with respect to the Company and other videogame corporations,
that Carneal was influenced by the allegedly violent content of certain
videogames and that the videogame manufacturers are liable for Carneal's
conduct. The complaint seeks $10 million in compensatory damages and $100
million in punitive damages. The Company and approximately ten other videogame
corporations have entered into a joint defense agreement, and have retained
counsel. The Court has stayed all discovery pending the briefing of motions to
discuss the complaint; reply briefs are due November 23, 1999. The Company
intends to vigorously defend this action.

         Additionally, the Company is involved in various claims and legal
actions arising in the ordinary course of business, the ultimate resolution of
which management believes will not be material to the Company's results of
operations or financial condition.


NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                               June 30,
                                                                               --------
                                                                           1998        1999
                                                                           ----        ----
                                                                             (in thousands)

<S>                                                                                  <C>
Warrants issued in connection with New Credit Agreement, as amended          --      $2,813
Cash paid for income taxes                                               $4,525       2,611
Cash paid for interest                                                      813       2,066
</TABLE>

NOTE 6 - RESTRUCTURING RESERVES

         Restructuring charges of approximately $17.5 million, recorded in the
fourth quarter of fiscal 1999, relate to a reorganization of the Company's
frontline publishing business, contemplated relocation of corporate headquarters
to California and outsourcing of the Company's distribution function. Management
expects to complete the reorganization by March 31, 2000. The following table
sets forth adjustments to the restructuring reserve:

<TABLE>
<CAPTION>

                                Balance,         Payments       Balance,
                                March 31,                       June 30,
                                 1999                             1999
                            ----------------  --------------   ------------
<S>                         <C>               <C>              <C>
Severance                             $8,357           $(301)       $7,792
Transition rent                          635               -           635
                            ----------------  ---------------  -----------
                                      $8,992           $(301)       $8,692
                            ----------------  ---------------  -----------
</TABLE>





                                    Page 12
<PAGE>   13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

         The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results or future events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
world-wide business and industry conditions, adoption of new hardware systems,
product delays, software development requirements and their impact on product
launches, company customer relations and other risks and factors detailed, from
time to time, in the Company's filings with the Securities and Exchange
Commission including, but not limited to, the factors described on pages 9
through 15 of the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999.

OVERVIEW

         The Company develops, publishes and distributes interactive
entertainment software for the children's education ("edutainment"), leisure
entertainment and gaming enthusiast's markets for a variety of platforms. The
Company employs a portfolio approach to achieve a broad base of published
products across most major consumer software categories. Since it commenced
operations in February 1993, the Company has experienced rapid growth and its
product and customer mix has changed substantially.

         Publishing and distribution are the two major activities of the
Company. Publishing is divided into front-line, leisure and children's
publishing. Because each of these product categories has different associated
costs, the Company's margins have depended and will depend, in part, on the
percentage of net revenues attributable to each category. In addition, a
particular product's margin may depend on whether it has been internally or
externally developed and on what platforms it is published. Further, the
Company's margins may vary significantly from quarter to quarter depending on
the timing of its new published product releases. To the extent that mass
merchants require greater proportions of third-party software products, some of
which may yield lower margins, the Company's operating results may be impacted
accordingly.

         The worldwide interactive entertainment software market is comprised
primarily of software for two distinct platforms: PCs and dedicated game
consoles. The market has grown dramatically in recent years with its growth
driven by the increasing installed base of multimedia PCs and current generation
game console systems. In addition, the development of enabling multimedia
technologies, the proliferation of software titles, the development of new and
expanding distribution channels and the emergence of a strong international
market for interactive entertainment software have spurred the rapid expansion
of the interactive entertainment market.

         The Company develops and publishes products for multiple platforms, and
this diversification continues to be a cornerstone of the Company's strategy. As
evidenced by the strong sales of these platforms, the Company believes that
significant growth opportunities exist across a variety of next generation
hardware platforms, in particular PlayStation ("PSX"), for which the Company
continues to create software products.

         There has been an increased rate of change and complexity in the
technological innovations affecting the Company's products, coupled with
increased competitiveness for shelf space and buyer selectivity. The market for
front-line titles has become increasingly hit-driven, which has led to higher
production budgets, more complex development processes, longer development
cycles and generally shorter product life cycles. The importance of the timely
release of hit titles, as well as the increased scope and complexity of the
product development and production process, have increased the need for
disciplined product development processes that limit cost and schedule overruns.
This in turn has increased the importance of leveraging the technologies,
characters or story-lines of such hit titles into additional interactive
entertainment software products in order to spread development costs among
multiple products. In this environment, the Company is determined to achieve a
balance between internal and external development, alliances and acquisitions,
and to reduce its relative dependence on third-party developers.


                                    Page 13
<PAGE>   14
         The distribution channels for interactive software have changed
significantly in recent years. Traditionally, consumer software was sold through
specialty stores. Today, consumer software is increasingly sold through mass
merchants such as Wal-Mart, Kmart and Target, as well as major retailers,
including Office Depot, Best Buy, CompUSA, AAFES, Sam's Club and Babbage's. The
Internet and on-line networks also present a new channel through which
publishers and distributors can distribute their products to end-users.

         In 1998, the Company acquired OZM, an Internet entertainment company,
Reflections and Legend, developers of entertainment software, and Homesoft, a
distributor of entertainment software. Financial results of these companies have
been included in the Company's Consolidated Financial Statements on a purchase
basis for the period since the acquisition. At March 31, 1999, the Company
intended to sell OZM, and therefore OZM was accounted for as a discontinued
operation. Except for OZM, these acquisitions did not have a material impact on
the financial condition or the results of operations of the Company in the year
acquired.

         The consumer software industry is seasonal. Net revenues are typically
highest during the fourth calendar quarter. This seasonality is primarily a
result of the increased demand for consumer software during the year-end holiday
buying season.



                                    Page 14
<PAGE>   15
RESULTS OF OPERATIONS

         The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for the three months ended June
30, 1998 and 1999.

<TABLE>
<CAPTION>
                                                                   THREE MONTHS
                                                                  ENDED JUNE 30,

                                                                1998        1999
                                                                ----        ----
<S>                                                             <C>         <C>
Net revenues                                                    100.0 %     100.0 %
Cost of goods sold                                               48.0        51.2
Selling and distribution expenses                                22.7        27.9
General and administrative expenses                              10.7         9.7
Research and development                                         14.3        13.5
Amortization of goodwill                                          0.7         0.7
                                                               ------       ------
     Operating income (loss)                                      3.6        (3.1)
Interest and other expense, net                                   1.0         1.9
                                                               ------       ------
     Income (loss) before income taxes                            2.6        (4.9)
Provision for (benefit from) income taxes                         1.0        (1.7)
                                                               ------       ------
    Net income (loss) before dividends on preferred stock         1.6        (3.2)
Less dividends on preferred stock                                  --          0.5
                                                               ------       ------
    Net income (loss) attributable to common stockholders         1.6%        (3.7)%
                                                               ======       ======
</TABLE>

THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

         Net revenues for the three months ended June 30, 1999 ("1999")
increased approximately $4.9 million, or 4.2%, to $121.3 million from $116.4
million in the three months ended June 30, 1998 ("1998"). This growth in net
revenues was primarily attributable to an 18% increase in frontline publishing
revenues, which includes both domestic and international frontline, to $50.9
million in 1999 from $43.2 million in 1998, and a 103% increase in children's
publishing to $6.8 million in 1999 from $3.4 million in 1998. This was offset by
a 20% decrease in leisure publishing net revenues to $8.2 in 1999 from $10.2
million in 1998 and a 7% decrease in distribution net revenues to $55.5 million
in 1999 from $59.6 million in 1998.

         The increase in revenues of frontline publishing is primarily due to
the release of Driver for PSX, and Total Annihilation: Kingdoms for the PC.
International frontline publishing revenues rose 40%, from $23.4 million in 1998
to $32.7 million in 1999, while domestic frontline publishing revenues decreased
8% in 1999 from $19.8 million in 1998 to $18.1 million in 1999. The increase in
Children's publishing is primarily due to the continued strong sales of Blue's
Clues related titles. Leisure publishing net revenues are down due to the
slippage of certain new releases into future quarters. Distribution net revenues
decreased primarily because Wal-Mart began purchasing consumer software direct
from several publishers whose software was previously sold to Wal-Mart through
the Company.

         Cost of goods sold for 1999 increased approximately $6.2 million, or
11.2%, to $62.1 million from $55.9 million in 1998. Cost of goods sold as a
percentage of net revenues increased to 51.2% in 1999 as compared to 48.0% in
1998. The increase, as a percentage of net revenues, was due primarily to the
increased sale of console products, which generally have a higher overall cost
than PC products. The Company's revenues from console products, as a percentage
of frontline revenues, increased in 1999 to 66% from 41% in 1998.


                                    Page 15
<PAGE>   16
         Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During 1999 these expenses increased
approximately $7.4 million, or 28.0%, to $33.9 million from $26.5 million in
1998. Selling and distribution expenses as a percentage of net revenues for 1999
increased to 27.9% as compared to 22.7% in 1998. The increase, as a percentage
of net revenues, was primarily attributable to the increase of advertising
worldwide to support the new and existing releases of the Company's published
products and increased cooperative advertising. Continued inefficiencies in the
Company's warehousing operations and the incremental additional expense of trade
shows in 1999 contributed to the increase in selling and distribution expenses
in 1999.

         General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses in 1999 decreased approximately $0.7 million, or 5.6%, to $11.8
million from $12.5 million in 1998. General and administrative expenses as a
percentage of net revenues decreased to 9.7% in 1999 from 10.7% in 1998. This
decrease was due to general corporate expense reductions.

         Research and development primarily includes payment for royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title, such as
salaries and related costs. These expenses in 1999 decreased approximately $0.2
million, or 1.4%, to $16.4 million from $16.6 million in 1998. Research and
development as a percentage of net revenues decreased to 13.5% in 1999 from
14.3% in 1998. The decrease is primarily due to the Company entering into fewer
contracts with external developers than in 1998, partially offset by increased
spending on internally developed products. Research and development of the
Company's internal development studios, which, during the relevant periods,
primarily included Cavedog Entertainment, Humongous, Legend Entertainment and
Reflections increased from $7.1 million in 1998 to $10.7 million in 1999.

         Interest and other expense, net, increased approximately $1.1 million
during 1999 to $2.3 million from $1.2 million in 1998. This increase was
primarily attributable to the increase in interest costs associated with
increased borrowings under the New Credit Agreement.

         The Company's effective tax rate for 1999 was 35% compared to 39% in
1998. This decreased rate was attributable to higher international tax expense.



                                    Page 16
<PAGE>   17
LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 1999, the Company's working capital was $32.4 million
compared to $131.8 million at March 31, 1999. The decrease is primarily
attributable to the classification of $109.5 million of borrowings under the New
Credit Agreement to current liabilities. Cash and cash equivalents were $7.7
million at June 30, 1999 compared to $13.4 million at March 31, 1999.

         The primary source of cash during the three months ended June 30, 1999
was cash provided by financing activities of $11.1 million. These externally
generated funds and the existing cash balance at March 31, 1999 of $13.4 million
were primarily used to fund prepaid expenses and other current assets of $3.4
million, royalties of $3.4 million and the purchase of property and equipment of
$3.7 million. The increase in prepaid expenses and other current assets was due
to the capitalization of amendment fees, certain arrangement fees and annual
agent fees in connection with the New Credit Agreement. The increase in property
and equipment is primarily due to additional investments in computer hardware
and software and leasehold improvements. Payables increased by $17.7 million as
a result of slower payment. Accrued liabilities decreased by $25.4 million
primarily as a result of actual returns exceeding accrued returns and because
certain accruals were either paid or became payable.

         On January 21, 1997, the Company entered into a revolving Credit
Agreement (as amended, the "Old Credit Agreement") with certain banks expiring
on December 31, 1998. On September 11, 1998, the borrowings under the Old Credit
Agreement were repaid and the Old Credit Agreement was terminated.

          Simultaneously, on September 11, 1998, the Company entered, with First
Union National Bank, as agent for a syndicate of banks, into a new revolving
Credit Agreement (the "New Credit Agreement") expiring on September 11, 2001.
Under the New Credit Agreement, the Company can borrow up to $125 million (the
"Line"), depending on the borrowing base. Borrowing is limited to a percentage
of domestic accounts receivable and inventory, and is secured by these and
certain other assets.

         On June 29, 1999, the Company and the banks amended the New Credit
Agreement to increase the Company's borrowing base by an additional $20 million
until March 31, 2000 and to remove certain financial covenants under the New
Credit Agreement. The Company anticipates that under the New Credit Agreement,
as amended, substantially all of the Line should be available to the Company
through March 31, 2000. The termination date of the New Credit Agreement, as
amended, has been changed to June 30, 2000. Under the New Credit Agreement, as
amended, the borrowings bear interest at either the bank's reference rate (which
is generally equivalent to the published prime rate) plus 2.5% or LIBOR plus 4%
and the Company pays, on the unused portion of the Line, a commitment fee of
0.50% per annum. The amended New Credit Agreement also requires maintenance of
certain EBITDA levels and limits on capital expenditure amounts. To induce the
banks to amend the New Credit Agreement, the Company paid the banks an amendment
fee of 1.75% on the existing Line, as well as certain arrangement fees and
annual agent fees. As an additional inducement, the Company issued the banks
warrants to purchase, at an exercise price of $0.01 per share, an aggregate of
850,000 shares of the Company's Common Stock with varying vesting schedules for
exercisability. Of these, warrants to purchase 375,000 shares of Common Stock
were immediately exercisable and warrants to purchase the remaining 475,000
shares of Common Stock will become exercisable only upon the occurrence of
certain events. At June 30, 1999, the Company had outstanding debt of
approximately $109.5 million, representing borrowings under the New Credit
Agreement, and letters of credit amounting to approximately $4.8 million.

         On February 23, 1999, certain partnerships affiliated with General
Atlantic Partners, LLC (together with its affiliates, "General Atlantic")
purchased from the Company 0.6 million shares of the Company's Series A
Convertible Preferred Stock (the "Preferred Stock") for an aggregate purchase
price of $30.0 million. These shares of Preferred Stock are convertible into 6.0
million shares of the Company's Common Stock at a conversion price of $5.00 per
share.

         On June 29, 1999, as a further condition to the banks' agreement to
amend the New Credit Agreement, the Company received commitments from General
Atlantic and certain members of the Cayre family (together with General
Atlantic, the "Junior



                                    Page 17
<PAGE>   18
Debtholders") to loan to the Company an aggregate of $30.0 million (the "Junior
Debt"). Certain members of the Cayre family and affiliates of General Atlantic
own, in the aggregate, a significant percentage of the Company's Common Stock.
Of the $30.0 million of Junior Debt, $20.0 million was funded by General
Atlantic and $10.0 million was funded by the Cayre family in July 1999. The
Junior Debt is evidenced by promissory notes (the "Notes") from the Company to
the Junior Debtholders. The Company used the borrowings under the Notes to
prepay a portion of the Line, which may be reborrowed.

         To induce General Atlantic to enter into the commitments, the Company
has amended the terms of the Certificate of Designation designating its Series A
Convertible Preferred Stock to provide that in the event of a change of control,
the holders of the Preferred Stock will receive, before any payment or
distribution is made on any other equity securities of the Company, an amount
equal to the liquidation preference set forth in the Certificate of Designation
plus all accrued and unpaid dividends thereon to the date fixed for such change
of control. Further, the Company issued to General Atlantic warrants (the
"Commitment Warrants") to purchase, at an exercise price equal to $0.01 per
share, an aggregate of 500,000 shares (subject to anti-dilution adjustments) of
the Company's Common Stock.

         The Cayre family has granted to General Atlantic an option to purchase
a total of 1,333,333 shares of Common Stock owned by them. In addition, the
Company will amend the Registration Rights Agreement, dated February 22, 1999
(the "Registration Rights Agreement"), between the Company and General Atlantic,
to extend those registration rights to the shares of Common Stock issuable upon
exercise of the Commitment Warrants and any additional warrants issued to
General Atlantic, as described below. The Notes will mature no later than July
29, 2000 (the "Maturity Date") and will bear cumulative interest, compounding
quarterly, at the rate of 9% per year until January 1, 2000, on which date the
rate will increase to 12% per year. All accrued and unpaid interest will be due
and payable in cash on the earlier of (i) the Maturity Date and (ii) the first
business day after the Line has been repaid in full. In the event of a change in
control of the Company, the Company is required to prepay the aggregate unpaid
principal amount of the Notes plus all accrued and unpaid interest thereon.
After the Line has been repaid in full, the Company may prepay the Notes in
whole or in part. The Notes, including all unpaid principal of and interest
thereunder, will be subordinate and junior in right of payment to all amounts
owed under the New Credit Agreement, as amended. Concurrently with the issuance
of the Notes, the Company issued to the Junior Debtholders warrants to purchase,
at an exercise price of $0.01 per share, an aggregate of 1,500,000 shares of the
Company's Common Stock. The Cayre family assigned their prorata share of the
warrants to General Atlantic. Under certain circumstances, the Company may be
obligated to issue additional warrants to the Junior Debtholders.

         The Company expects continued volatility in the use of cash due to
seasonality and varying receivable and payment cycles, quarterly working capital
needs to finance its growing publishing businesses and funding of its corporate
plan of reorganization.

         The Company believes that existing cash, cash equivalents and
short-term investments, together with cash expected to be generated from
operations and cash available through the New Credit Agreement and the Junior
Debt, will be sufficient to fund the Company's anticipated operations until June
30, 2000.


YEAR 2000 COMPLIANCE

         Many currently installed operating systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields need additional digits to distinguish dates after the year 1999. As a
result, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Failure to correct
systems to become "Year 2000 Compliant," may result in systems failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Year 2000 issue also may affect the
Company's products. The Company's review of its Year 2000 compliance issues
encompasses three principal areas: critical information systems (including
information technology) ("IT"), such as financial and order entry systems, and
non-information technology ("Non-IT") systems, such as facilities; third party
customers, vendors and others with whom the Company does business; and the
Company's products. The Company has conducted


                                    Page 18
<PAGE>   19
a comprehensive review of its critical information systems, created a plan for
reviewing its products for Year 2000 compliance and begun implementing that
plan. A plan has also been developed, and is now being implemented, to remedy
any deficiencies in the Company's critical information systems. The Company is
resolving Year 2000 compliance issues primarily through normal upgrades of its
software or, when necessary, through replacement of existing software or
affected non-IT systems with Year 2000 compliant applications or systems.
Presently, the Company is in the process of testing the enhancements to its
critical information systems and is developing and implementing a plan to
identify time sensitive components in its products currently under development.
In addition, the Company is in the process of asking vendors and other third
parties with whom the Company has relevant relationships to certify that they
are Year 2000 compliant or, if they are not yet so compliant, to provide a
description of their plans to become so. The Company expects to complete its
programs for Year 2000 compliance with respect to critical information systems
and vendor and other third parties by September 30, 1999 and intends to complete
such process with respect to its products in advance of January 1, 2000. There
can be no assurance that such upgrades and replacements can be completed on
schedule or within estimated costs or can successfully address the Year 2000
compliance issues. If the Company's present efforts to address the Year 2000
compliance issues are not successful, or if vendors and other third parties with
which the Company conducts business do not successfully address such issues, the
Company's business, operating results and financial position could be materially
and adversely affected. For example, failure to achieve Year 2000 compliance for
the Company's internal critical information systems could delay its ability to
manufacture and ship products, disrupt customer service and technical support
facilities, or interrupt customer access to online products and services. The
Company also relies heavily on third parties such as vendors, suppliers, service
providers and a large retail distribution channel. If these or other third
parties experience Year 2000 failures or malfunctions, there could be a material
adverse impact on the Company's ability to conduct ongoing operations. For
example, the ability to manufacture and ship products (both the Company's and
third parties' for which the Company acts as distributor) into the retail
channel, to receive retail sales information necessary to maintain proper
inventory levels, or to complete online transactions dependent upon third party
service providers could be affected. Moreover, should third party products
distributed by the Company fail to be Year 2000 compliant, retail customers of
the Company might return such products or seek redress from the Company, which
in turn would require the Company to seek redress from the publisher of the
product. In addition, because of the number of products sold by the Company
currently and in the past, the Company could face litigation relating to Year
2000 compliance of products that the Company no longer sells and/or supports,
although the Company believes that any such exposure should not be material. The
Company has budgeted $0.8 million for the cost of upgrading, replacing, testing
and implementing its Year 2000 compliance, and has currently spent approximately
$0.7 million to date. Additionally, the Company has not yet established a
contingency plan and will continue to evaluate whether one is necessary,
depending upon its progress in implementing its Year 2000 compliance measures as
set forth above. The above discussion regarding costs, risks and estimated
completion dates for the Year 2000 is based on the Company's best estimates
given information that is currently available, and is subject to change. Actual
results may differ materially from these estimates.




                                    Page 19
<PAGE>   20
PART II.  OTHER  INFORMATION

Item 1.  Legal Proceedings

         With respect to the action brought against the Company by Scavenger,
Inc., previously described in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 (the "1999 Annual Report"), at a June 30, 1999
conference, the Court extended the discovery deadline until September 15, 1999.
At an August 5, 1999 conference, the Court maintained those deadlines but
scheduled another compliance conference for September 7, 1999 at which those
deadlines might be reconsidered. Scavenger has now moved for partial summary
judgment on its first two causes of action for remaining advances ($4.3
million), and the Company has opposed that motion and asked the court to dismiss
those two claims with prejudice. Scavenger has moved to amend the complaint
adding claims of fraud and prima facie tort seeking punitive damages; the
proposed amended complaint seeks $60 million and $100 million on the fraud
claims and $10 million in punitive damages on the prima facie tort claim. The
Company has, at once, opposed the motion to amend and cross moved to dismiss the
additional claims if leave to amend is granted.

         With respect to the litigations between Midway Games, Inc. and related
entities and the Company, pending in the Supreme Court of the State of New York,
New York County, and the District Court of Navarro County, Texas, previously
described in the 1999 Annual Report, the parties have entered into a settlement
agreement whereby; (a) all claims and counterclaims between the parties will be
dismissed with prejudice and the parties have exchanged full, mutual releases;
(b) all existing agreements and licenses between the parties have been
terminated, subject to a sell-off period for certain products currently under
license; and (c) Midway paid $8.5 million to the Company.

         With respect to the action brought against the Company by the
administrators for three children who were murdered on December 1, 1997 by
Michael Carneal at the Heath High School in McCracken County, Kentucky,
previously described in the 1999 Annual Report, the Court has stayed all
discovery pending the briefing of motions to dismiss the complaint; reply briefs
are due November 23, 1999.

Item 2.  Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

         On June 29, 1999, the Company and its lenders amended the New Credit
Agreement to increase the Company's borrowing base by an additional $20 million
until March 31, 2000 and to remove certain financial covenants under the New
Credit Agreement. To induce the lenders to amend the New Credit Agreement, the
Company issued the lenders warrants to purchase, at an exercise price of $0.01
per share, an aggregate of 850,000 shares of the Company's Common Stock with
varying vesting schedules of exercisability. Of these, warrants to purchase
375,000 shares of Common Stock were immediately exercisable and warrants to
purchase the remaining 475,000 shares of Common Stock will become exercisable
only upon the occurrence of certain events. The securities issued in this
transaction were not registered under the Securities Act of 1933, as amended,
pursuant to the exemption provided under Section 4(2) thereof for transactions
not involving a public offering.

         On June 29, 1999, the Junior Debtholders committed to loan the Company
an aggregate of $30 million. In connection with such commitments, the Company
issued warrants to purchase, at an exercise price of $0.01 per share, an
aggregate of 500,000 shares of the Company's Common Stock to the Junior
Debtholders. In addition, the Company agreed to issue additional warrants to
purchase 1,500,000 shares of Common Stock on the funding of the commitments,
which warrants were issued on such funding. The Cayre family assigned their pro
rata share of these warrants to General Atlantic. The securities issued in this


                                    Page 20
<PAGE>   21
transaction were not registered under the Securities Act of 1933, as amended,
pursuant to the exemption provided under Section 4(2) thereof for transactions
not involving a public offering.

Item 6. Exhibits and Reports on Form 8-K

(a)      Exhibits

         The following exhibits are filed as part of this report:

         Exhibit No.                        Description

                  3.1 Amended and Restated Certificate of Incorporation, as
                  amended (incorporated by reference to the exhibit with the
                  corresponding number filed as part of the Company's Quarterly
                  Report on Form 10-Q for the quarter ended June 30, 1998).

                  3.2 Amended and Restated By-laws, as amended (incorporated by
                  reference to the exhibit with the corresponding number filed
                  as part of the Company's Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 1998).

                  27.1 Financial Data Schedule

(b)      Reports on Form 8-K

         On April 9, 1999, the Company filed a Current Report on Form 8-K to
file a press release announcing the Company's expected losses during the fourth
fiscal quarter of 1999.



                                    Page 21
<PAGE>   22
                                   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.




                                          GT INTERACTIVE SOFTWARE CORP.





                                          By:      /s/    JOHN T. BAKER IV
                                                   ------------------------
                                                   John T. Baker IV
                                                   President and
                                                   Chief Operating Officer
                                                   Date:  August 16, 1999



                                    Page 22