<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 December 31, 1998 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 February 11, 1999, there were 72,775,868 shares of the registrant's 
Common Stock outstanding.
<PAGE>   2
                          GT INTERACTIVE SOFTWARE CORP.
                 DECEMBER 31, 1998 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, 1998 and
                December 31, 1998                                                                      3

                Consolidated Statements of Operations for the Three and Nine Months Ended
                December 31, 1997 and 1998                                                             4

                Consolidated Statements of Comprehensive Income for the Three and Nine Months                
                Ended December 31, 1997 and 1998                                                       5

                Consolidated Condensed Statements of Cash Flows for the Nine Months Ended
                December 31, 1997 and 1998                                                             6

                Notes to the Consolidated Financial Statements                                         7

Item 2.         Management's Discussion and Analysis of Financial Condition and Results of                   
                Operations                                                                             10


PART II - OTHER INFORMATION

Item 1.         Litigation                                                                             17

Item 2.         Changes in Securities and Use of Proceeds                                              17

Item 5.         Other                                                                                  17

Item 6.         Exhibits and Reports on Form 8 - K                                                     18

Signatures                                                                                             19
</TABLE>
<PAGE>   3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

                 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             March 31,      December 31,
                                                                               1998             1998
                                                                              --------        --------
                                                                                             (unaudited)
<S>                                                                         <C>              <C> 
ASSETS
Current assets:
  Cash, cash equivalents and short-term investments                           $ 17,329        $ 19,171
  Receivables, net                                                             134,815         279,889
  Inventories, net                                                              98,469         160,126
  Income taxes receivable                                                       10,684           1,789
  Other current assets                                                          34,103          39,229
                                                                              --------        --------

     Total current assets                                                      295,400         500,204
Property and equipment, net                                                     29,049          37,560
Goodwill, net                                                                   28,043          54,165
Other assets                                                                    13,379          15,273
                                                                              --------        --------
          Total assets                                                        $365,871        $607,202
                                                                              ========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                            $103,062        $187,687
  Accrued liabilities                                                           49,414          79,629
  Revolving credit facility                                                     28,000              --
  Royalties payable                                                             40,395          35,997
  Income taxes payable                                                           3,449          17,751
  Other current liabilities                                                      1,086           1,509
                                                                              --------        --------
     Total current liabilities                                                 225,406         322,573
Long-term debt                                                                      --          95,000
Other long-term liabilities                                                      1,576           2,341
                                                                              --------        --------
          Total liabilities                                                    226,982         419,914
                                                                              --------        --------

Commitments and contingencies

Stockholders' equity:
Common stock, $0.01 par, 150,000,000 shares authorized, 67,991,926 and
    72,701,379 shares issued and outstanding, respectively                         680             727
Additional paid-in capital                                                     131,382         159,447
Retained earnings                                                                6,827          27,114
                                                                              --------        --------
          Total stockholders' equity                                           138,889         187,288
                                                                              --------        --------
          Total liabilities and stockholders' equity                          $365,871        $607,202
                                                                              ========        ========
</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)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                            Three Months Ended                   Nine Months Ended 
                                                                December 31,                       December 31,
                                                         ---------------------------        ---------------------------
                                                            1997             1998             1997              1998
                                                         ---------         ---------        ---------         ---------

<S>                                                      <C>               <C>              <C>               <C>      
Net revenues                                             $ 213,569         $ 246,776        $ 437,296         $ 479,318
Cost of goods sold                                         131,321           119,926          257,251           231,781
Selling and distribution expenses                           35,232            50,238           82,151           105,806
General and administrative expenses                         16,849            15,206           36,938            39,070
Research and development                                     4,616            20,729           11,427            53,291
Royalty advance write-off                                   73,821                --           73,821                --
Purchased research and development                          11,008             5,000           11,008             5,000
SingleTrac retention bonus                                   2,400             1,680            2,400             1,680
Merger costs                                                 1,050                --            1,050                --
Amortization of goodwill                                       382               828              948             2,375
                                                         ---------         ---------        ---------         ---------
     Operating income (loss)                               (63,110)           33,169          (39,698)           40,315
Interest and other expenses, net                             1,084             1,968            2,322             3,933
                                                         ---------         ---------        ---------         ---------
     Income (loss) before provision for (benefit           (64,194)           31,201          (42,020)           36,382
    from) income taxes                                                                                                    
Provision for (benefit from) income taxes                  (21,722)           14,429          (12,543)           16,438
                                                         ---------         ---------        ---------         ---------
     Net income (loss)                                   $ (42,472)        $  16,772        $ (29,477)        $  19,944
                                                         =========         =========        =========         =========

Basic net income (loss)  per share                       $   (0.63)        $    0.24        $   (0.44)        $    0.29

    Weighted average number of shares outstanding           67,717            69,742           67,174            68,632

Diluted net income (loss) per share                      $   (0.63)        $    0.24        $   (0.43)        $    0.29

    Weighted average number of shares outstanding           67,717            70,097           67,944            69,292
</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
                            (UNAUDITED, IN THOUSANDS)


<TABLE>
<CAPTION>
                                                        Three Months Ended                  Nine Months Ended 
                                                           December 31,                         December 31,
                                                    ------------------------------- -------------------------------
                                                         1997            1998            1997           1998
                                                    --------------- --------------- -------------------------------

<S>                                                 <C>             <C>             <C>                 <C>     
Net income (loss)                                      $(42,472)        $ 16,772         $(29,477)        $ 19,944

Other comprehensive income (loss):
   Foreign currency translation adjustments              (1,707)            (408)          (1,696)             344
   Unrealized holding gain (loss) on securities             (11)              --             (129)              --

                                                       --------         --------         --------         --------
Comprehensive income (loss)                            $(44,190)        $ 16,364         $(31,302)        $ 20,288
                                                       ========         ========         ========         ========
</TABLE>



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



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



<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                         December 31,
                                                                ---------------------------
                                                                  1997              1998
                                                                ---------         ---------

<S>                                                             <C>               <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                             $ (29,477)        $  19,944
  Adjustments to reconcile net income (loss) to net cash
     used in operating activities:
     Depreciation and amortization                                  3,689            10,123
     Purchased research and development                            11,008             5,000
     Royalty advance write-off                                     73,821                --
       Deferred income taxes                                        4,386            (1,527)
       Deferred income                                             (7,723)               28
       Changes in operating assets and liabilities:
          Receivables, net                                        (98,245)         (144,691)
          Inventories, net                                        (24,870)          (61,754)
          Income taxes receivable                                 (15,171)            8,895
          Other current assets                                    (14,061)           (4,443)
          Accounts payable                                         59,082            83,272
          Accrued liabilities                                      13,766            28,546
          Royalties payable                                        17,498            (4,403)
          Income taxes payable                                     (7,698)           14,276
          Long-term liabilities                                       404               194
          Other                                                     1,082            (1,366)
                                                                ---------         ---------
             Net cash used in operating activities                (12,509)          (47,906)
                                                                ---------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of investments                                           (320)               --
  Purchases of property and equipment                             (13,616)          (15,910)
  Acquisitions, net                                                (5,833)           (2,465)
                                                                ---------         ---------
             Net cash used in investing activities                (19,769)          (18,375)
                                                                ---------         ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings, net                                                  54,600            67,000
  Proceeds from exercise of warrants                                2,102                --
  Proceeds from exercise of stock options                             785               360
                                                                ---------         ---------
             Net cash provided by financing activities             57,487            67,360
                                                                ---------         ---------

  Effect of exchange rates on cash and cash equivalents            (2,241)              763
                                                                ---------         ---------
  Net increase in cash and cash equivalents                        22,968             1,842
  Cash and cash equivalents - beginning of period                  16,640            17,224
                                                                ---------         ---------
  Cash and cash equivalents - end of period                     $  39,608         $  19,066
                                                                =========         =========
</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 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
Transition Report on Form 10-K for the transition period from January 1, 1998 to
March 31, 1998.

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 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 approximately $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 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,
approximately $11 million of acquisition cost was expensed in the quarter ended
December 31, 1997.



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

         In November 1998, the Company acquired One Zero Media, Inc. ("OZM"), an
Internet entertainment content company, in exchange for approximately 2.4
million newly issued shares of the Company's common stock. Total consideration,
including acquisition costs, was approximately $15.8 million, which was
allocated to net assets acquired and goodwill. The acquisition was accounted for
as a purchase, because it is the Company's present intention to sell an
ownership interest in OZM.

         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 was approximately $12.3 million. The
acquisition was accounted for as a purchase. The purchase price was allocated to
purchased in-process R&D and goodwill. Accordingly, $5.0 million of acquisition
cost was expensed in the quarter ended December 31, 1998.

         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 $1.2 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.

NOTE 3 - INVENTORIES, NET

         Inventories consist of the following:


<TABLE>
<CAPTION>
                                               March 31,      December 31,
                                                1998             1998
                                             ------------     -----------
                                                    (in thousands)
                                           
<S>                                          <C>              <C>        
Finished goods                               $     94,220     $   150,367
Raw materials                                       4,249           9,759
                                             ------------     -----------
                                             $     98,469     $   160,126
                                             ============     ===========
</TABLE>


NOTE 4 - COMMITMENTS AND CONTINGENCIES

         On January 21, 1997, the Company entered, with certain banks, into a
revolving Credit Agreement (as amended, the "Old Credit Agreement") 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") which 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. The
borrowings under the New Credit Agreement bear interest at either the banks'
reference rate (which is generally equivalent to



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

the published prime rate) or the LIBOR rate, plus a spread that is based on
certain ratios, which is currently 1.25%. The Company pays, on the unused
portion of the Line, a commitment fee that is based on certain ratios, which is
currently 0.275%. The New Credit Agreement requires maintenance of certain
financial ratios and net income levels.

         At December 31, 1998, the Company had outstanding debt of approximately
$95.0 million, representing borrowings under the New Credit Agreement, and
letters of credit amounting to approximately $10.0 million.


NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                    Nine Months Ended
                                                                                       December 31,
                                                                                  ----------------------
                                                                                   1997            1998
                                                                                  -------        -------
                                                                                      (in thousands)

<S>                                                                               <C>            <C>    
Issuance of common stock in connection with the acquisition of  SingleTrac        $ 7,169        $    --
Issuance of common stock in connection with the acquisition of OZM                     --         15,473
Issuance of common stock in connection with the acquisition of Reflections             --         12,279
Cash paid for income taxes                                                          6,051          5,000
Cash paid for interest                                                              1,766          4,083
</TABLE>



NOTE 6 - SUBSEQUENT EVENT

         On February 8, 1999, certain partnerships affiliated with General
Atlantic Partners agreed to purchase from the Company 0.6 million shares of the
Company's Series A Convertible Preferred Stock ("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 per share. The transaction is expected to close in
February, 1999.




                                     Page 9
<PAGE>   10
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 SEC filings including, but not limited to, the
factors described on pages 11 through 17 of the Company's Transition Report on
Form 10-K for the transition period from January 1, 1998 to March 31, 1998.

OVERVIEW

         The Company creates, publishes, merchandises and distributes
interactive entertainment, edutainment and value-priced consumer software for a
variety of platforms on a worldwide basis. Since it commenced operations in
February 1993, the Company has experienced rapid growth and its product and
customer mix has changed substantially.

         Publishing, together with merchandising and distribution, are the two
major activities of the Company. Publishing is divided into front-line and
value-priced products. 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 the platforms on which 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: personal computers ("PCs") and
dedicated game consoles such as the 32-bit Sony PlayStation ("PSX") and 64-bit
Nintendo 64 ("N64"). 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.

         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 storylines of such hit titles into additional interactive
entertainment software products in order to spread development costs among
multiple products. In this environment, the Company has determined to increase
its focus on building internal development, alliances and acquisitions, and to
reduce its relative dependence on third-party developers.

In the quarter ended December 31, 1997, the Company expensed royalty advances of
$73.8 million on products that were in development or on sale. Accordingly, the
Company changed its accounting, beginning on January 1, 1998, for future royalty
advances, treating such costs as research and development expenses, 


                                    Page 10
<PAGE>   11
which are expensed as incurred. Multi-year output advances continue to be
capitalized as royalty advances and expensed over the development periods, in
accordance with generally accepted accounting principles.

         Since royalty advances are fixed costs, their impact is more
significant during softer revenue quarters. Consequently, the Company expects
higher research and development costs as a percentage of net revenues, relative
to the prior year, due to the expensing of royalty advances as a result of the
change in accounting.

         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 Sam's Club, Price-Costco and Best Buy. During the second half of 1997,
Wal-Mart began purchasing software directly from a number of publishers whose
software was previously sold to Wal-Mart through the Company. The Internet and
on-line networks also present a new channel through which publishers and
distributors can distribute their products to end-users.

         In October 1997, the Company acquired SingleTrac, a leading developer
of front-line software. In November 1998, the Company acquired OZM, an Internet
entertainment company, and in December 1998, the Company acquired Reflections
and Legend, developers of entertainment software, and Homesoft, a distributor of
entertainment software. The financial results of SingleTrac, OZM, Reflections,
Homesoft and Legend have been included in the Company's Consolidated Financial
Statements on a purchase basis for the period since acquisition.

         Sales are recorded net of expected future returns. Historically, the
Company has experienced returns at approximately 30% of gross sales.

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

         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 11
<PAGE>   12
RESULTS OF OPERATIONS

         The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for the periods indicated:


<TABLE>
<CAPTION>
                                                          Three Months                Nine Months
                                                       Ended December 31,          Ended December 31,
                                                       -------------------       ---------------------
                                                         1997        1998         1997           1998
                                                       -------      ------       ------        -------

<S>                                                    <C>          <C>          <C>           <C>   
Net revenues                                             100.0%      100.0 %      100.0 %        100.0%
Cost of goods sold                                        61.5        48.6         58.8           48.4
Selling and distribution expenses                         16.5        20.4         18.8           22.1
General and administrative expenses                        7.9         6.2          8.4            8.2
Research and development                                   2.2         8.4          2.6           11.1
Royalty advance write-off                                 34.6          --         16.9             --
Purchased research and development                         5.2         2.0          2.5            1.0
SingleTrac retention bonus                                 1.1         0.7          0.5            0.4
Merger costs                                               0.5          --          0.2             --
Amortization of goodwill                                   0.2         0.3          0.2            0.5
                                                       -------      ------       ------        -------
     Operating income (loss)                             (29.6)       13.4         (9.1)           8.4
                                                                                  
Interest  and other expenses, net                          0.5         0.8          0.5            0.8
                                                       -------      ------       ------        -------
 Income (loss) before provision for (benefit             (30.1)       12.6         (9.6)           7.6
from) income taxes
Provision for (benefit from) income taxes                (10.2)        5.8         (2.9)           3.4
                                                       -------      ------       ------        -------
     Net income (loss)                                   (19.9)%       6.8 %       (6.7) %         4.2 %
                                                       =======      ======        =====         ======
</TABLE>



Net revenues for the three and nine months ended December 31, 1998 increased
approximately $33.2 million, or 15.5%, to $246.8 million from $213.6 million,
and $42.0 million, or 9.6%, to $479.3 million from $437.3 million, respectively,
as compared to the comparable periods of the prior year. The increase in net
revenues for the three months ended December 31, 1998 was attributable to a
15.4% increase in publishing revenues, which includes both front-line publishing
and value-priced publishing ("Published Product"), to $152.5 million from $132.1
million for the comparable period of the prior year, and a 15.8% increase in
products distributed for third parties, to $94.3 million from $81.5 million for
the comparable period of the prior year. Value-priced publishing includes titles
published by the Company and products obtained from third parties. The increase
in net revenues for the nine months ended December 31, 1998 was attributable to
an 8.8% increase in Published Product revenues, to $303.4 million from $278.8
million for the comparable period of the prior year, and an 11.0% increase in
products distributed for third parties, to $175.9 million from $158.5 million
for the comparable period of the prior year.

The increase in Published Product revenues for the three months ended December
31, 1998 is primarily due to a 27.3% increase in front-line Published Product
revenues, fueled by strong sales of the release, internationally and
domestically, of Oddworld: Abe's Exoddus for PSX and Duke Nukem: Time to Kill
for PSX and the continued strong sales of Unreal for PC and the Blues Clues PC
titles, published by Humongous Entertainment, Inc., a subsidiary of the Company
("Humongous"), based on Nickelodeon's top-rated pre-school TV show.
Additionally, revenues of value-priced publishing titles published by the
Company, such as Deer Hunter II for PC, increased, but such increases were more
than offset by declines in revenues of value-priced products obtained from third
parties, which decreased during the three months ended December, 31, 1998. These
titles, in addition to Oddworld: Abe's Oddysee for PSX, Rogue Trip for PSX, Mike
Piazza's Strike Zone for N64, Deer Hunter for PC, the hunting and fishing genre
products such as Rocky Mountain Trophy Hunter for PC and various catalog titles,
contributed to the increase in Published Product revenues for the nine months
ended December 31, 1998, compared to the comparable period of the prior year.

         The increase in revenues of products distributed for third parties for
the three and nine months ended December 31, 1998 is primarily due to an
increase in the number of mass merchant stores supplied and serviced by the
Company and the strong sales of Windows '98 Upgrade and Quicken '99 for PC, the
newly released Turbo Tax software and Flight Simulator for PC, and the growth of
the Company's 


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<PAGE>   13
affiliated label program, partially offset by the decline in Wal-Mart revenues,
compared to the comparable period of the prior year.

         Cost of goods sold primarily includes costs of purchased products.
These expenses for the three and nine months ended December 31, 1998 decreased
approximately $11.4 million, or 8.7%, to $119.9 million from $131.3 million, and
$25.5 million, or 9.9%, to $231.8 million from $257.3 million, respectively, as
compared to the comparable periods of the prior year. Cost of goods sold as a
percentage of net revenues for the three and nine months ended December 31, 1998
decreased to 48.6% and 48.4% from 61.5% and 58.8%, respectively, as compared to
the comparable periods of the prior year. The decrease, as a percentage of net
revenues, was primarily due to the change in product mix within Published
Product and products distributed for third parties, and the Company's change in
accounting with respect to royalty advances, resulting in the expensing of such
advances to research and development as incurred, rather than recouping such
advances based on sales.

         Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. These expenses for the three and nine months
ended December 31, 1998 increased approximately $15.0 million, or 42.6%, to
$50.2 million from $35.2 million, and $23.7 million, or 28.8%, to $105.8 million
from $82.2 million, respectively, as compared to the comparable periods of the
prior year. Selling and distribution expenses as a percentage of net revenues
for the three and nine months ended December 31, 1998 increased to 20.4% and
22.1% from 16.5% and 18.8%, respectively, as compared to the comparable periods
of the prior year. The increase, as a percentage of net revenues, was primarily
attributable to increased premium freight costs due to higher than anticipated
sales volume, advertising worldwide to support existing and upcoming releases of
the Company's Published Product, and the expense of consolidating inventory of
the Company's Value Price Division from Plymouth, Minnesota into the Company's
Edison, NJ distribution center.

         General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses for the three months ended December 31, 1998 decreased
approximately $1.6 million, or 9.8%, to $15.2 million from $16.8 million, and
increased for the nine months ended December 31, 1998 approximately $2.1
million, or 5.8%, to $39.1 million from $36.9 million, respectively, as compared
to the comparable periods of the prior year. General and administrative expenses
as a percentage of net revenues for the three and nine months ended December 31,
1998 decreased to 6.2% and 8.2% from 7.9% and 8.4%, respectively, as compared to
the comparable periods of the prior year. The decrease, as a percentage of net
revenues, was due primarily to a favorable bad debt impact compared to the prior
year, the reduction of headcount from consolidating the Company's Value Price
Division, partially offset by the additional depreciation associated with the
expansion of the Company's worldwide facilities and the implementation of
enterprise software to enhance the Company's management information systems
worldwide.

         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 for the three and nine months ended December
31, 1998 increased approximately $16.1 million, or 349.1%, to $20.7 million from
$4.6 million, and $41.9 million, or 366.4%, to $53.3 million from $11.4 million,
respectively, as compared to the comparable periods of the prior year. Research
and development, as a percentage of net revenues for the three and nine months
ended December 31, 1998 increased to 8.4% and 11.1% from 2.2% and 2.6%,
respectively, as compared to the comparable periods of the prior year. The
increase is primarily due to the change in accounting effective January 1, 1998,
whereby royalty advances on products that are currently in development are
expensed as incurred, and the additional headcount attributable to increased in
house development capacity. Research and development expenses of the Company's
internal development studios, which, during the relevant periods, primarily
included SingleTrac, Cavedog Entertainment and Humongous, increased to $9.2 and
$23.6 million for the three and nine months ended December 31, 1998 from $4.6
and $11.4 million in the comparable periods of the prior year.


                                    Page 13
<PAGE>   14
         The charge for royalty advance write-off of $73.8 million during 1997
represents a change in estimate and accounting whereby royalty advances on
products that were currently in development or on sale were expensed. In
connection with this change, the Company prospectively expensed royalty advances
in a manner comparable with internal software development costs, which are
expensed to research and development as incurred.

         In connection with the acquisitions of SingleTrac in October 1997 and
Reflections in December 1998, the Company incurred charges of $11.0 million and
$5.0 million, respectively, for purchased research and development. In addition,
the Company incurred a charge of $2.4 million and $1.7 million for the three
months ended December 31, 1997 and 1998, respectively, for a retention bonus for
the SingleTrac employees, which was based on the achievement of certain
performance goals.

         Merger costs consist of legal, accounting and other professional fees
incurred by the Company for the canceled acquisition of MicroProse, Inc., during
1997.

         Interest and other expenses, net, increased approximately $0.9 million
and $1.6 million for the three and nine months ended December 31, 1998,
respectively, as compared to the comparable periods of the prior year. The
increase was primarily attributable to the increase in interest costs associated
with increased borrowings under the Old Credit Agreement and New Credit
Agreement.

         The Company's effective tax rate, before the write-off of purchased
research and development, for the three and nine months ended December 31, 1998
and 1997 was, in each period, approximately 40%.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1998, the Company's working capital was $177.6
million compared to $70.0 million at March 31, 1998. Cash and cash equivalents
were $19.1 million at December 31, 1998 compared to $17.2 million at March 31,
1998.

         The primary source of cash and liquidity during the nine months ended
December 31, 1998 was the increase in accounts payable of $83.3 million, cash
provided by financing activities of $67.4 million and net income of $19.9
million. These externally and internally generated funds and the existing cash
balance at March 31, 1998 of $17.2 million were primarily used to fund
receivables of $144.7 million, inventory of $61.8 million and the purchase of
property and equipment of $15.9 million. The increase in the receivable balance
at December 31, 1998 reflects the seasonally greater sales in the fourth
calendar quarter and a larger proportion of sales, including Oddworld: Abe's
Exoddus, the Turbo Tax software, Duke Nukem: Time to Kill and Unreal, occurring
late in the quarter as compared to the three months ended March 31, 1998. The
increase in the inventory balances as of December 31, 1998, as compared to March
31, 1998, was primarily attributable to the seasonality of software sales and to
the mix of higher cost products within the inventory including Windows '98
Upgrade, Quicken '99, TurboTax and Flight Simulator and a greater proportion of
PSX product, which also carries a higher cost. The increase in accounts payable
was primarily attributable to the increase of inventory. The increase in
property and equipment is primarily due to additional investments in computer
hardware and software and leasehold improvements to support the Company's
growth.

         On January 21, 1997, the Company entered, with certain banks, into a
revolving Credit Agreement (as amended, the "Old Credit Agreement") 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") which 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 



                                    Page 14
<PAGE>   15
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. The borrowings under the New Credit Agreement
bear interest at either the banks' reference rate (which is generally equivalent
to the published prime rate) or the LIBOR rate, plus a spread that is based on
certain ratios, which is currently 1.25%. The Company pays, on the unused
portion of the Line, a commitment fee that is based on certain ratios, which is
currently 0.275%. The New Credit Agreement requires maintenance of certain
financial ratios and net income levels.

         On February 8, 1999, certain partnerships affiliated with General
Atlantic Partners agreed to purchase from the Company 0.6 million shares of the
Company's Series A Convertible Preferred Stock ("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 per share. The transaction is expected to close in
February, 1999.

         At December 31, 1998, the Company had outstanding debt of approximately
$95.0 million, representing borrowings under the New Credit Agreement, and
letters of credit amounting to approximately $10.0 million.

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

         The Company believes that existing cash and cash equivalents, together
with cash expected to be generated from operations, the New Credit Agreement and
the issuance of the Preferred Stock will be sufficient to fund the Company's
anticipated operations for the next twelve months.

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 21st century dates from 20th
century dates. 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 a comprehensive review of its critical
information systems and is in the process of creating a plan for reviewing its
products for Year 2000 compliance. A plan has been developed to remedy any
deficiencies in the Company's critical information systems. The Company expects
to resolve 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 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 



       
                                     Page 15
<PAGE>   16
systems and vendor and other third parties by March 31, 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 200 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 $0.4 million for the cost of upgrading,
replacing, testing and implementing its Year 2000 compliance, and has currently
spent approximately $0.33 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 16
<PAGE>   17
PART II.  OTHER  INFORMATION

Item 1.  Litigation

         With respect to the action brought against the Company by Scavenger,
Inc., previously described in the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, at a December 10, 1998 compliance
conference, the New York Supreme Court reissued a discovery order, whereby
discovery must be completed by July 30, 1999. Another compliance conference has
been scheduled for May 12, 1999.

         With respect to the class action securities litigation, previously
described in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, plaintiffs served their consolidated amended complaint in
early January 1999. By order dated January 23, 1999, plaintiffs were granted
leave to file a second consolidated and amended complaint, which adds claims
under Section 10(b) of the Securities Exchange Act and Rule 10b-5 against the
Company's independent auditor, Arthur Andersen, LLP. Defendants have not yet
responded to the second consolidated and amended complaint.

Item 2.    Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

         On November 5, 1998, the Company acquired all of the outstanding
capital stock of One Zero Media, Inc. ("OZM"). In connection therewith, the
Company issued an aggregate of approximately 2.4 million shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"), to the
stockholders of OZM. The securities issued in this transaction were not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to the exemption provided under Section 4(2) thereof for transactions
not involving a public offering.

         On December 23, 1998, the Company acquired Reflections Interactive
Limited ("Reflections"). In connection therewith, the Company issued an
aggregate of approximately 2.3 million shares of Common Stock to Martin Lee
Edmondson. The securities issued in this transaction were not registered under
the Securities Act, pursuant to the exemption provided under Regulation S
thereof for transactions not involving a public offering. On December 23, 1998,
the Company filed a registration statement on Form S-3 pursuant to Rule 415
under the Securities Act to register approximately 1.2 million of the shares
granted to Mr. Edmondson for resale. The registration statement was subsequently
declared effective on January 15, 1999.

Item 5.  Other.

         On February 8, 1999, the Board of Directors of the Company appointed
Mr. Thomas Heymann as the Chief Executive Officer and Chairman of the Board of
Directors of the Company.


                                    Page 17
<PAGE>   18
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 herein 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 herein 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

                  During the quarter ended December 31, 1998, no Current Reports
on Form 8-K were filed.



                                    Page 18
<PAGE>   19
                                   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/    DAVID CHEMEROW
                                         -----------------------------------
                                         David Chemerow
                                         President and Chief Operating Officer
                                         Date:  February 16, 1999


                                     By: /s/    ANDREW GREGOR  
                                         -----------------------------------
                                         Andrew Gregor
                                         Chief Financial Officer and Senior
                                         Vice President, Finance and 
                                         Administration
                                         Date:  February 16, 1999



                                    Page 19