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

                                   FORM 10-QSB

(X)   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998

                                       OR

( )   TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                         Commission file number 0-28330

                              LEGACY SOFTWARE, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                   95-456-1156
(State or other jurisdiction of         (I.R.S. Employer Identification No.)
 information or organization)

         5340 Alla Road
         Los Angeles, California                              90066
         (Address of principal executive offices)             (Zip Code)

                                 (310) 823-2423
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                        Yes   X          No    
                            -----           -----

There were 2,932,254 shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of August 12, 1998.

<PAGE>   2

                              LEGACY SOFTWARE, INC.

                                      INDEX

<TABLE>
<CAPTION>
                                                                            Page No.
                                                                            --------
<S>                                                                         <C>

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited):

                Balance Sheets at June 30, 1998 and
                December 31, 1997

                Statements of Operations for the three
                months ended June 30, 1998 and 1997 and
                six months ended June 30, 1998 and 1997.

                Statements of Cash Flows for the six
                months ended June 30, 1998 and 1997

                Notes to Condensed Financial Statements

Item 2.  Management's Discussion and Analysis or Plan of Operations

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Item 2.  Changes in Securities and Use of Proceeds

Item 3.  Defaults Upon Senior Securities

Item 4.  Submission of Matters to a Vote of Security Holders

Item 5.  Other Information

Item 6.  Exhibits and Reports on Form 8-K

Signatures

Exhibits
              Exhibit 11
              Exhibit 27
</TABLE>


                                       2
<PAGE>   3

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              LEGACY SOFTWARE, INC.

                                 BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                      JUNE 30            DECEMBER 31
                                                                        1998                 1997
                                                                     -----------         -----------
                                       ASSETS                        (Unaudited)

<S>                                                                  <C>                 <C>
CURRENT ASSETS
      Cash and cash equivalents                                      $   66,359          $    14,464
      Accounts receivable, net of allowances for doubtful accounts
        of $12,500                                                       64,551              148,606
      Inventory                                                          17,281               22,320
      Other receivables                                                   1,167               21,016
      Other current assets                                                2,000               22,217
                                                                     ----------          -----------

      Total current assets                                              151,359              228,623
                                                                     ----------          -----------

Product development costs, net                                        1,222,964            1,255,570
Property and equipment, net                                              93,072              128,910
Other assets                                                              4,000                1,829
Investments in production joint ventures                                 48,647

                                                                     ----------          -----------
Total assets                                                         $1,520,042          $ 1,614,932
                                                                     ==========          ===========


                                  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable and accrued expenses                          $   75,217          $    74,033
      Product development advances                                       30,000
      Payable to former co-development partner                          500,000              480,000
      Deferred revenues                                                  12,006               43,010
      Notes payable and current portion of long-term debt               303,619              303,619
                                                                     ----------          -----------

      Total current liabilities                                         920,842              900,662
                                                                     ----------          -----------

LONG-TERM DEBT PRIMARILY FROM RELATED PARTIES,
                    net of current portion                              160,661              161,882

COMMITMENTS                                                                                        -

STOCKHOLDERS' EQUITY
      Preferred Stock, par value $.001 per share, 5,000,000
        shares authorized; none issued and outstanding

      Common Stock, par value $.001 per share, 10,000,000 shares
        authorized: 2,655,002 shares issued and outstanding               2,921                2,654

      Additional paid in capital                                      7,240,521            7,060,788
      Accumulated deficit                                            (6,804,904)          (6,511,054)
                                                                     ----------          -----------

        Total stockholders' equity                                      438,539              552,388
                                                                     ----------          -----------

                                                                     $1,520,042          $ 1,614,932
                                                                     ==========          ===========
</TABLE>

           See accompanying notes to condensed financial statements.


                                       3
<PAGE>   4

                              LEGACY SOFTWARE, INC.

                            STATEMENTS OF OPERATIONS

                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED JUNE 30,               SIX MONTHS ENDED JUNE 30,
                                      ---------------------------               -------------------------
                                        1998              1997                     1998            1997
                                      ---------         ---------               ---------     -----------
<S>                                   <C>               <C>                     <C>           <C>      

REVENUE
   Royalties                          $  63,601         $  64,155               $ 192,510     $   106,932
   Software sales                         7,687            13,085                  15,810          16,252
   Corporate services                    19,500                 -                  61,500               -
                                      ---------         ---------               ---------     -----------

Total revenue                            90,788            77,240                 269,820         123,184
                                      ---------         ---------               ---------     -----------

COSTS AND EXPENSES
   Cost of royalties                      9,560                 -                  26,781               -
   Cost of software sales                 3,638             5,568                  14,200           8,068
   Product development                   13,428           297,751                  56,760         601,269
   General & administrative             187,943           408,713                 377,214         772,901
   Selling                               20,017           155,971                  44,574         235,145
                                      ---------         ---------               ---------     -----------

Total costs and expenses                234,586           868,003                 519,529       1,617,383
                                      ---------         ---------               ---------     -----------

LOSS FROM OPERATIONS                   (143,798)         (790,763)               (249,709)     (1,494,199)

INTEREST EXPENSE                         31,495            17,149                  44,140          31,283
                                              -                                        -
INTEREST INCOME                               -             5,134                       -          19,493
                                      ---------         ---------               ---------     -----------

NET LOSS                              ($175,293)        ($802,778)              ($293,849)    ($1,505,989)
                                      =========         =========               =========     ===========

NET LOSS PER COMMON SHARE
      BASIC                              ($0.07)           ($0.32)                 ($0.11)         ($0.60)
NET LOSS PER COMMON SHARE
      DILUTED                            ($0.07)           ($0.32)                 ($0.11)         ($0.60)

WEIGHTED AVERAGE COMMON STOCK
   SHARES OUTSTANDING
      BASIC                           2,655,002         2,525,729               2,655,002       2,524,442
      DILUTED                         2,655,002         2,525,729               2,655,002       2,524,442
</TABLE>

            See accompanying notes to condensed financial statements


                                       4
<PAGE>   5

                              LEGACY SOFTWARE, INC.

                             STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED JUNE 30,
                                                          --------------------------------
                                                             1998                  1997
                                                          ----------           -----------
<S>                                                       <C>                  <C>
Cash flows from operating activities:
   Net loss                                                ($293,849)          ($1,505,989)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
        Amortization of product development costs             32,606
        Depreciation                                          40,454                49,970
        (Gain) loss on disposal of property and
           equipment                                               -                  (157)

Increase (decrease) in cash from changes in:
   Accounts receivable, net                                   84,055                (7,551)
   Other receivables                                          19,849                94,751
   Inventories                                                 5,039               (80,120)
   Other assets                                               18,046               (61,665)
   Accounts payable and accrued expenses                       1,184                (9,872)
   Deferred revenues                                         (31,004)              (29,063)

                                                          ----------           -----------
        Net cash used in operating activities               (123,620)           (1,549,696)
                                                          ----------           -----------

 Cash flows from investing activities:
   Note receivable                                                                 (50,000)
   Purchase of property and equipment                         (4,617)               (5,238)
   Proceeds from the disposition of property and                   -
       equipment                                                   -                 7,438
   Additions to product development costs                          -              (204,372)
   Investment in production joint ventures                   (48,647)

                                                          ----------           -----------
        Net cash used in investing activities                (53,264)             (252,172)
                                                          ----------           -----------

 Cash flows from financing activities
   Payments under line of credit                                   -               (35,250)
   Due to former co-development partner                       20,000
   Note payable                                                                     50,000
   Product development advances                               30,000
   Payments on notes payable and long term debt               (1,221)              (61,966)
   Proceeds from private placement for Common
        Stock                                                105,000
   Exercise of Common Stock Warrants                          75,000
   Issuance of stock under Employee
         Stock Purchase Plan                                       -                23,526
                                                          ----------           -----------
       Net cash provided by financing activities             228,779               (23,690)
                                                          ----------           -----------


 Increase (decrease) in cash and cash equivalents             51,895            (1,825,558)
 Cash and cash equivalents, at beginning of year              14,464             1,860,019
                                                          ----------           -----------
 Cash and cash equivalents, at end of period              $   66,359           $    34,461
                                                          ==========           ===========


Supplemental disclosure of cash flow information

       Cash paid during the period for:
         Interest                                         $   44,140           $    31,283
                                                          ----------           -----------
         Income taxes                                     $                    $         -
                                                          ----------           -----------
</TABLE>


            See accompanying notes to condensed financial statements


                                       5
<PAGE>   6

                              LEGACY SOFTWARE, INC.

                          NOTES TO FINANCIAL STATEMENTS

(1)     Basis of presentation

     The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation of the Company's financial position
at June 30, 1998, the results of operations for the three and six months ended
June 30, 1998 and June 30, 1997, and the cash flows for the six months ended
June 30, 1998 and June 30, 1997 are included. Operating results for the three
and six month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.

         The information contained in this Form 10-QSB should be read in
conjunction with audited financial statements as of December 31, 1997 filed as
part of the Company's Annual Report on Form 10-K.

(2)   Financial Condition and Liquidity

     As of June 30, 1998, the Company had (i) never achieved operating profits,
(ii) had negative working capital of $769,483 and cash on hand of $66,359, (iii)
total short term indebtedness of $803,619, and long term indebtedness of
$160,661, (iv) ceased development of new titles pending the generation of
additional working capital or the implementation of subcontractor relationships
on terms that permit payments to be made by the Company when it has cash
available to make such payments, (v) curtailed its internet gaming services,
(vi) closed one of its business offices, (vii) significantly reduced marketing
and public relations efforts, and (viii) reduced its total number of employees
to five. Revenues from the Company's Emergency Room and derivatives thereof are
continuing to decrease, and revenues from the D.A. Pursuit of Justice title have
been lower than expected. The Company has incurred net losses since inception
and expects to continue to operate at a loss during 1998. The Company's
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets. The Company's ability to maintain
operations in the near term and to achieve positive cash flow in the future
depends on a variety of factors. Given the Company's current


                                       6

<PAGE>   7

working capital deficiency and lack of cash resources, should the Company be
unable to obtain additional funding to supply its near-term cash requirements,
there is substantial doubt as to the Company's ability to continue as a going
concern. The Company is exploring several options including the issuing of 
additional equity securities, combining its operations with another entity and
selling a significant portion of its assets.

     On February 26, 1998. the Company was notified by The Nasdaq Stock Market,
Inc. ("NASDAQ") that the Company is not in compliance with the net tangible
assets/market capitalization/net income requirement(s), pursuant to NASD
Marketplace Rule(s) 4310(c )(02) and the minimum bid price requirement, pursuant
to NASD Marketplace Rule 4310(c )(04) both of which became effective on February
23, 1998. Non-compliance with these and other rules adopted by NASDAQ at that
date, will result in the Company's stock being delisted from the NASDAQ Small
Cap Exchange. On July 20, 1998 NASDAQ notified the Company continuing failure to
comply with the rules would result in delisting of the Company's stock on July
28, 1998. The Company filed an appeal for an oral hearing on a date to be
determined by NASDAQ to stay the delisting. To date the Company has not received
notice of such a hearing. Based on instructions originally provided by NASDAQ
the Company has initiated the following steps to maintain compliance:

     1. At the Annual Meeting of Stockholders on June 18, 1998 the stockholders
        approved a one for three (1:3) reverse split of the Legacy Common Stock.

     2. On June 23, 1998 EBC Trust Company ("EBC") converted 57,252 Warrants to
        purchase Legacy Common Stock at $1.31 per share thereby generating
        $75,000 for the Company.


                                       7
<PAGE>   8

     3. On June 30, 1998 a private placement for 210,000 shares of Legacy Common
        Stock was made by BK Trust at $0.50 per share generating $105,000 for
        the Company.

     4. In addition the Company is in the process of negotiating the following:

         a. the reduction of a $500,000 obligation to International Business
            Machines Corporation ("IBM") into a series of royalty payments from
            certain Legacy products formerly co-developed with IBM as well as
            products marketed by Legacy. The parties have agreed in principal to
            the following: (i) the payment of $25,000 by Legacy at the signing
            of a definitive agreement and; (ii) the payment to IBM of royalties
            totaling $175,000;

         b. the elimination of a $75,000 advance made by EBC in July, 1997 to
            the Company for a proposed acquisition which was terminated in
            September, 1997;

         c. an investment by a private investment group  of up to $250,000 in
            the Company; and

         d. actively seeking a merger partner with sufficient resources to bring
            the Company into compliance with the NASDAQ requirements.


                                       8
<PAGE>   9

(3)  Termination of Distribution Agreement


     On July 31, 1997 the Company entered into a Distribution Agreement with
Alpha Software Corporation ("Alpha Software") to distribute the Emergency Room
Intern and the three case pack of the DA Pursuit of Justice titles. In
accordance with the terms of the Agreement the Company will terminate this
Agreement on the effective termination date of March 31, 1999.



(4)  Marketing Services Agreement

     On May 12, 1998 the Company entered into a Marketing Services Agreement
with ROI, Inc. ("ROI") whereby ROI will function as a sales representative for
distribution of CD-ROM and DVD versions of the Company's individual cases of the
DA Pursuit of Justice title and the Best of Emergency Room title as well as
other titles which may be included during the term of the agreement. The
agreement is for eight months and may be extended for additional twelve month
periods. In addition, the Company is currently in negotiations with two
additional distributors to obtain distribution agreements for products that are
scheduled for release in 1999.

(5) Election of Chief Executive Officer and Director

     On June 30, 1998 the Board of Directors of the Company elected C. Robert
Kline, Jr., Ph.D. Chief Executive Officer and a Director of the Company. Dr.
Kline, with a distinguished career in business and education, brings to the
Company an executive experienced in large and small high tech companies. Under
Dr. Kline the Company plans to initiate programs to maximize the revenue
potential of existing Legacy products for the balance of fiscal 1998 and to
continue to pursue funding for joint ventures in future periods and potential
combination candidates.



     The Company believes that, together with a successful effort to obtain
additional funding for its near-term cash needs, its ongoing negotiations to
seek funding for joint ventures, its operating plan and efforts to reduce
operating expenses, in conjunction with acquisition


                                       9
<PAGE>   10

of such additional funding, it will be adequate to meet its fiscal 1998 working
capital needs, however, there can be no assurance that the Company will be able
to obtain such funding, or that it will not experience liquidity problems caused
by adverse market conditions and other unfavorable events. In addition, there
can be no assurance that the Company will be successful in maintaining
compliance with the new NASDAQ requirements and if it does maintain compliance
that, in its current financial condition, it can continue to be in compliance.




(6)  Earnings Per Share

     The Company adopted SFAS No. 128, "Earnings Per Share", during 1997. SFAS
No. 128 requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common stock. All prior
period weighted average and per share information has been restated in
accordance with SFAS No. 128.



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

Cautionary Note Regarding Forward-Looking Statements

     Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that the Company
"expects," "estimates," anticipates," or "believes" and all other statements
concerning future financial results, product offerings, proposed acquisitions or
combinations or other events that have not yet occurred) are forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Forward-looking statements involve known and unknown factors, risks and
uncertainties which may cause the Company's actual results in future periods to
differ materially from forecasted results.


                                       10
<PAGE>   11
Those factors, risks and uncertainties include, but are not limited to the
Company's ability to generate or obtain additional capital resources to fund its
operations and growth; the consummation of possible acquisitions or
combinations; the positioning of the Company's products in the Company's market
segments; the Company's ability to effectively manage its various businesses in
a rapidly changing environment; the continued emergence of the internet
resulting in new competition and changing consumer demands; growth rates of the
Company's market segments; variations in the cost of, and demand for, customer
service and technical support; price pressures and competitive environment in
the consumer software and edutainment industry; the possibility of programming
errors or other "bugs' in the Company's software games and Internet technology;
the Company's ability to establish itself successfully as a software developer,
publisher and distributor; the emergence of competition from new and existing
software and gaming internet companies; and the timing and consumer acceptance
of new product releases and services (including current users' willingness to
upgrade from older versions of the Company's products). Additional information
on these and other risk factors are included under the headings "Risk Factors"
and elsewhere in this Form 10-QSB



Risk Factors

     Need for Additional Capital; Uncertainty as a Going Concern. As of June 30,
1998, the Company had (i) never achieved operating profits, (ii) had negative
working capital of $769,483 and cash on hand of $66,359 (iii) total short term
indebtedness of $803,619, and long term indebtedness of $160,661, (iv) ceased
development of new titles pending the generation of additional working capital
or the implementation of subcontractor relationships on terms that permit
payments to be made by the Company when it has cash available to make such
payments, (v) curtailed its Internet gaming services, (vi) closed one of its
business offices, (vii) significantly reduced marketing and public relations
efforts, and (viii) reduced its total number of employees to five. Revenues from
the Company's Emergency Room and derivatives thereof are continuing to decrease,
and revenues from the D.A. Pursuit of Justice title have been lower than
expected. The Company has incurred net losses since inception and expects to
continue to operate at a loss


                                       11
<PAGE>   12
during 1998. The Company's prospects must be considered in light of the risks,
expenses and difficulties encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets. The
Company's ability to maintain operations in the near term and to achieve
positive cash flow in the future depends on a variety of factors. Given the
Company's current working capital deficiency and lack of cash resources, should
the Company be unable to obtain additional funding to supply its near-term cash
requirements, there is substantial doubt as to the Company's ability to continue
as a going concern. The Company is exploring several options including the
issuing of additional equity securities, combining its operations with another
entity and selling a significant portion of its assets.

     On February 26, 1998. the Company was notified by The Nasdaq Stock Market,
Inc. ("NASDAQ") that the Company is not in compliance with the net tangible
assets/market capitalization/net income requirement(s), pursuant to NASD
Marketplace Rule(s) 4310(c )(02) and the minimum bid price requirement, pursuant
to NASD Marketplace Rule 4310(c )(04) both of which became effective on February
23, 1998. Non-compliance with these and other rules adopted by NASDAQ at that
date, will result in the Company's stock being delisted from the NASDAQ Small
Cap Exchange. On July 20, 1998 NASDAQ notified the Company continuing failure to
comply with the rules would result in delisting of the Company's stock on July
28, 1998. The Company filed an appeal for an oral hearing on a date to be
determined by NASDAQ to stay the delisting. To date the Company has not received
notice of such a hearing. Based on instructions provided by NASDAQ the Company
has initiated steps to maintain compliance. There can be no assurance that the
Company will be successful in maintaining compliance with the new NASDAQ
requirements and if it does maintain compliance that, in its current financial
condition, it can continue to be in compliance.


                                       12
<PAGE>   13

      Ability to Timely Consummate a Combination.  The Company's ability to
continue as a going concern may de dependent on its ability to consummate a
combination. However, the Company's ability to consummate a combination may be
impaired by the rules that require stockholder approval for certain
combinations. Obtaining stockholder approval is a time-consuming process that
includes sending out notification to brokers, preparing a disclosure document
and sending out the disclosure document to stockholders to review and vote
upon. The Company may not have the financial resources to survive this process.
Failure to consummate a combination may have a material adverse effect on the
Company's business, financial condition and results of operations.

      Dependence on Alpha Software Corporation for Substantially All the
Company's Revenues. For the six months ended June 30, 1998, approximately 71% of
the Company's total revenue was derived from Alpha Software on royalty revenue
generated by the D.A. Pursuit of Justice and Emergency Room Intern titles. The
royalty revenue from the Emergency Room title, a DOS-based product, diminished
significantly over the course of 1997, as it faced increased competition from
Windows-based


                                       13
<PAGE>   14
products, and the royalty revenue from the D.A. Pursuit of Justice and Emergency
Room Intern titles increased as these products entered the market in larger
numbers. The Company and IBM have terminated their co-development relationship
with respect to future RealPlay(TM) titles, including, but not limited to, the
D.A. Pursuit of Justice title and the Company will terminate its Agreement with
Alpha Software on March 31, 1999. If the Company is unable to develop other
CD-ROM titles or other services, if the Company cannot find alternative
distribution arrangements for its present or future titles, or if the Company's
other products and services, if any, do not receive market acceptance, there
will be a material adverse effect on the Company's business, financial condition
and results of operations. The agreement with Alpha Software terminates on March
31, 1999. The Company's revenues will be significantly reduced if the Company is
unable to enter into an agreement with other distributors due to its dependence
on Alpha Software. The termination of the distribution agreement with Alpha
Software may have a material adverse effect on the Company's business, financial
condition and results of operations.

     Significant Quarterly Fluctuations in Revenue and Operating Results and
Related Factors. The Company's quarterly operating results have fluctuated
significantly in the past, and are likely to fluctuate significantly in the
future based on a number of factors. Such factors include, but are not limited
to, the size and rate of growth of the consumer edutainment and gaming software
market, uncertainties relating to acquisitions and business combinations, market
acceptance of the Company's products and those of its competitors, competition
for shelf space and promotional support, development and promotional expenses
relating to the introduction of new products or enhancements of existing
products, projected and actual changes in computer formats and platforms and the
internet, the timing and success of product introductions, product returns,
changes in pricing policies by the Company and its competitors, the accuracy of
retailers' forecasts of consumer demand, the timing of orders from major
customers, order cancellations, delays in shipment, delays in royalty revenue
received from Alpha Software or other distributors, the effect of personal
computer sales, risks from limited protection of proprietary rights and
significant price reductions in personal computer software, and consignment
shipments of the Company's products. The Company expects to experience
significant fluctuations in its quarterly operating results as a result of
changes in the mix of products with varying profit margins sold by the Company
from quarter to quarter and the timing of product introductions. In response to
competitive pressures, the Company may take certain pricing or marketing actions
that could materially adversely affect the Company's business, financial
condition and results of operations in any quarter. The Company's expense levels
are based, in part, on its expectations regarding future sales. As a result,
operating results would be disproportionately adversely affected by a decrease
in quarterly sales, the failure to meet the Company's sales expectations for any
quarter or costs associated with sales of defective products, higher customer
support costs and product returns.


                                       14
<PAGE>   15

     Competition. Each of the computer software development, internet technology
and software retail distribution industries is intensely competitive. The
Company's competitors in each industry range from small companies with limited
resources to large, more established companies which have significantly greater
assets and greater financial, technical and personnel resources than those of
the Company. The Company expects competition to continue and increase in each of
these market segments. The Company in its current financial condition cannot
successfully compete in its market industries.


                                       15
<PAGE>   16

     Seasonality. Typically, revenues are highest during the fourth fiscal
quarter, decline in the first fiscal quarter and are lowest in the second and
third fiscal quarters. This seasonal pattern is due primarily to the increased
demand for the Company's products during the calendar year-end holiday selling
season. There can be no assurance that the Company will achieve profitability
and, even if achieved, that such profitability will be consistent on a quarterly
or annual basis.

Results of Operations

     For the three months ended June 30, 1998 compared to the three months ended
June 30, 1997.

     For the three months ended June 30, 1998, revenues increased from $77,240
for the three months ended June 30, 1997 to $90,788 for the three months ended
June 30, 1998. This $13,548 increase was due primarily to a $19,500 increase in
corporate services revenue, a division formed in January 1998, offset by
decreases in royalty revenue of $554 and decreases in software sales of $5,398.

     Total cost of revenue for the three months ended June 30, 1998 increased by
$7,630 compared to the three months ended June 30, 1997. This increase is
primarily a result of an increase of $9,560 in cost of royalties associated with
sales of the D.A. Pursuit of Justice and ER Intern titles. Cost of software
sales decreased by $1,930 as a result of the decrease in software sales by the
Company through distributors during the three month period ended June 30, 1998.

     Product development expenses, which are net of co-funded development
expenses, decreased from $297,751 for the three months ended June 30, 1997 to
$13,428, a decrease of 95%, for the three months ended June 30, 1998. The
decrease in development expense is the result of the completion of the D.A.
Pursuit of Justice, ER Intern and the Best of Emergency Room titles in July,
1997 and the Company cessation of future product development at that time.

     General and administrative expenses for the three months ended June 30,
1998 decreased by $220,770 or 54% to $187,943, from $408,713 for the three
months ended June 30, 1997. This decrease is primarily due to the Company
ceasing all costs associated with development of new titles; significantly
curtailing its internet gaming services; closing one business office;
significantly reducing marketing and public relations efforts; reducing the
total Company staff to five administrative personnel and implementing other
operating cost reductions.



                                       16
<PAGE>   17

     Selling expenses of $20,017 for the three months ended June 30, 1998
decreased $135,954 or 87% from the $155,971 in the three month period ended June
30, 1997. This decrease is primarily related to decreases in salaries and
promotional expenses related to the introduction of the D.A. Pursuit of Justice,
the Best of Emergency Room and ER Intern titles and the Passport2Network all
introduced in 1997.

     Interest expense increased from $17,149 to $31,495 for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997 due to an
accrual of $20,000 in interest expense pending completion of a definitive
agreement of the obligation to IBM. The Company had no interest income for the
three months ended June 30, 1998 compared to $5,134 for the three months ended
June 30, 1997 primarily as a result of a decrease in funds available for
investment since the Company's initial public offering in May 1996.

For the six months ended June 30, 1998 compared to the six months ended June 30,
1997.

     For the six months ended June 30, 1998, revenues increased from $123,184
for the six months ended June 30, 1997 to $269,820 for the six months ended June
30, 1998. This $146,636 increase was due primarily to a $61,500 increase in
corporate services revenue, a division formed in January 1998. Royalty revenue
increased from $106,932 for the six months ended June 30, 1997 to $192,510 for
the six months ended June 30, 1998 due to sales of the Emergency Room Intern and
DA Pursuit of Justice titles by Alpha Software in the first three months of
1998.

     Total cost of revenue for the six months ended June 30, 1998 increased by
$32, 913 compared to the six months ended June 30, 1997. This increase is
primarily a result of an increase of $27,781 in cost of royalties associated
with sales of the D.A. Pursuit of Justice and ER Intern titles.

     Product development expenses, which are net of co-funded development
expenses, decreased from $601,269 for the six months ended June 30, 1997 to
$56,760, a decrease of 91%, for the six months ended June 30, 1998. The decrease
in development expense is the result of the completion of the D.A. Pursuit of
Justice, ER Intern and the Best of Emergency Room titles in July, 1997 and the
Company cessation of future product development at that time.

     General and administrative expenses for the six months ended June 30, 1998
decreased by $395,687 or 51% to $377,214, from $772,901 for the six months ended
June 30, 1997. This decrease is primarily due to the Company ceasing all costs
associated with development of new titles; significantly curtailing its internet
gaming services; closing one business office; significantly reducing marketing
and public relations efforts; reducing the total Company staff to five


                                       17
<PAGE>   18

administrative personnel and implementing other operating cost reductions.

     Selling expenses of $44,574 for the six months ended June 30, 1998
decreased $190,571 or 81% from the $235,145 in the six month period ended June
30, 1997. This decrease is primarily related to decreases in salaries and
promotional expenses related to the introduction of the D.A. Pursuit of Justice,
the Best of Emergency Room and ER Intern titles and the Passport2Network all
introduced in 1997.

     Interest expense increased from $31,283 to $44,140 for the six months ended
June 30, 1998 compared to the six months ended June 30, 1997 due to an accrual
of $20,000 in interest expense pending completion of a definitive agreement of
the obligation to IBM offset by decreases in notes payable. The Company had no
interest income for the six months ended June 30, 1998 compared to $19,493 for
the six months ended June 30, 1997 primarily as a result of a decrease in funds
available for investment since the Company's initial public offering in May
1996.


Liquidity and Capital Resources

     The Company had $123,620 in cash outflows from operating activities for the
six months ended June 30, 1998 compared to cash outflows of $1,549,696 for the
six months ended June 30, 1997. The decrease in net outflows of $1,426,076
between 1998 and 1997 operating cash flow primarily resulted from the following:
a decrease in the net loss from operations after adjustments for non-cash items
of $1,235,387; an increase in the change of deferred revenue of $1,941; an
increase in the change in accounts receivable of $16,704; an increase in
inventory of $85,159; a decrease in the change of accounts payable and accrued
expenses of $11,056 and an increase in other assets of $79,711. This decrease is
primarily due to the Company ceasing all costs associated with development of
new titles; significantly curtailing its internet gaming services; closing one
business office; significantly reducing marketing and public relations efforts;
reducing the total Company staff to five administrative personnel and
implementing other operating cost reductions.

     Investing activities in the six months ended June 30, 1998 consisted of
purchases of computer equipment totaling $4,617 compared to $5,238 for computer
equipment in the six months ended June 30, 1997. Additions to product
development costs of $204,372 were offset by $7,438 in disposition of property
and equipment for the six months ended June 30, 1997

     The Company has cash inflows of $228,779 from financing activities for the
six months ended June 30, 1998 compared to outflows


                                       18
<PAGE>   19

of $23,690 for the six months ended June 30, 1997. Financing activities for the
six months ended June 30, 1998 included an advance of $30,000 for use in project
joint ventures, a private placement for Common Stock for $105,000, the exercise
of Warrants for Common Stock for $75,000 and an increase of $20,000 in the
accrual for the amount due a former co-development partner pending settlement of
the obligation offset by payments of $1,221 of notes payable. This compares to
payments under the Company's line of credit of $35,250 and payments of notes
payable of $61,966 offset by a $50,000 note payable and $23,526 of Common Stock
purchases under the Employee Stock Purchase Plan for the six months ended June
30, 1997.

     As of June 30, 1998, the Company had (i) never achieved operating profits,
(ii) had negative working capital of $769,483 and cash on hand of $66,359, (iii)
total short term indebtedness of $803,619, and long term indebtedness of
$160,661, (iv) ceased development of new titles pending the generation of
additional working capital or the implementation of subcontractor relationships
on terms that permit payments to be made by the Company when it has cash
available to make such payments, (v) curtailed its internet gaming services,
(vi) closed one of its business offices, (vii) significantly reduced marketing
and public relations efforts, and (viii) reduced its total number of employees
to five. Revenues from the Company's Emergency Room and derivatives thereof are
continuing to decrease, and revenues from the D.A. Pursuit of Justice title have
been lower than expected. The Company has incurred net losses since inception
and expects to continue to operate at a loss during 1998. The Company's
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets. The Company's ability to maintain
operations in the near term and to achieve positive cash flow in the future
depends on a variety of factors. Given the Company's current working capital
deficiency and lack of cash resources, should the Company be unable to obtain
additional funding to supply its near-term cash requirements, there is
substantial doubt as to the Company's ability to continue as a going concern.
The Company is exploring several options including the issuing of additional
equity securities, combining its operations with another entity and selling a
significant portion of its assets.



                                       19
<PAGE>   20

     On February 26, 1998. the Company was notified by The Nasdaq Stock Market,
Inc. ("NASDAQ") that the Company is not in compliance with the net tangible
assets/market capitalization/net income requirement(s), pursuant to NASD
Marketplace Rule(s) 4310(c )(02) and the minimum bid price requirement, pursuant
to NASD Marketplace Rule 4310(c )(04) both of which became effective on February
23, 1998. On July 20, 1998 NASDAQ notified the Company continuing failure to
comply with the rules would result in delisting of the Company's stock on July
28, 1998. The Company filed an appeal for an oral hearing on a date to be
determined by NASDAQ to stay the delisting. To date the Company has not
received notice of such a hearing. Non-compliance with these and other rules
adopted by NASDAQ at that date, will result in the Company's stock being
delisted from the NASDAQ Small Cap Exchange. Based on instructions provided by
NASDAQ the Company has initiated the following steps to maintain compliance:

     1. At the Annual Meeting of Stockholders on June 18,1998 the stockholders
        approved a one for three (1:3) reverse split of the Legacy Common Stock.

     2. On June 23, 1998 EBC Trust Company ("EBC") converted 57,252 Warrants to
        purchase Legacy Common Stock at $1.31 per share thereby generating
        $75,000 for the Company.

     3. On June 30, 1998 a private placement for 210,000 shares of Legacy Common
        Stock was made by BK Trust at $0.50 per share generating $105,000 for
        the Company.

     4. In addition the Company is in the process of negotiating the following:

         a. the reduction of a $500,000 obligation to International Business
            Machines Corporation ("IBM") into a series of royalty payments from
            certain Legacy products formerly co-developed with IBM as well as
            products marketed by Legacy in 1998. The parties have agreed in
            principal to the following: (i) the payment of $25,000 by Legacy at
            the signing of a definitive agreement and; (II) the payment to IBM
            of royalties totaling $175,000.

         b. the elimination of a $50,000 advance made by EBC in July, 1997 to
            the Company for a proposed acquisition which was terminated


                                       20
<PAGE>   21

            in September, 1997;

         c. an investment by a private investment group of up to $250,000 in the
            Company; and

         d. actively seeking a merger partner with sufficient resources to bring
            the Company into compliance with the NASDAQ requirements.

     The Company believes that, together with a successful effort to obtain
additional funding for its near-term cash needs, its ongoing negotiations to
seek funding for joint ventures, its operating plan and efforts to reduce
operating expenses, in conjunction with acquisition of such additional funding,
will be adequate to meet its fiscal 1998 working capital needs, however, there
can be no assurance that the Company will be able to obtain such funding, or
that it will not experience liquidity problems caused by adverse market
conditions and other unfavorable events. In addition, there can be no assurance
that the Company will be successful in maintaining compliance with the new
NASDAQ requirements and if it does maintain compliance that, in its current
financial condition, it can continue to be in compliance.

     Since July, 1997 the Company has failed to make a principal payment on an
unsecured note Payable to a related party. The monthly payment, in the amount of
$10,000, was due in accordance with the terms of the original Note dated
February 1, 1991 as amended which provides for monthly payments of principal and
interest commencing on July 1, 1997. In March, 1998 the Company failed to make
principal payments aggregating $5,435 to two other related parties. Interest on
all the debt has been paid to date.





                                       21
<PAGE>   22

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     On August 18, 1997, the U.S. Securities and Exchange Commission ("SEC")
issued a subpoenas deces tecum to the Custodian of Records of the Company and
other parties. The subpoenas were issued in connection with the SEC's formal
investigation entitled In the Matter of Reynolds Kendrick Stratton, Inc., File
No. LA-752 (the "Investigation"). The Investigation appears to center around
activities of JB Oxford Holdings, Inc., a broker-dealer, which is the successor
to Reynolds Kendrick Stratton, Inc., and was the underwriter of the Company's
initial public offering. The SEC has indicated that it expects to take the
testimony of the Company and other parties at some point in the future. The
Company has no reason to conclude that it is a target of the Investigation.

     The Company is not currently involved in any litigation that is expected to
have a material adverse effect on the Company's business or financial position.
There can be no assurance, however, that third parties will not assert
infringement or other claims against the Company in the future which, regardless
of the outcome, could have an adverse impact on the Company as a result of
defense costs, diversion of management resources and other factors.



ITEM 2.  CHANGES IN SECURITIES.

         Not Applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         Not Applicable.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         The Company's annual meeting of stockholders was held on June 18, 1998.
         The directors elected at the meeting were:

<TABLE>
<CAPTION>
                                      For         Against      Withheld
                                      ---         -------      --------
           <S>                        <C>         <C>          <C>
           Ariella J. Lehrer, Ph.D.   2,141,443                  14,645
</TABLE>


                                       22
<PAGE>   23

<TABLE>
<CAPTION>
           <S>                        <C>         <C>          <C>
           William E. Sliney          2,141,788                  14,300
           Ivan M. Rosenberg, Ph.D.   2,142,088                  14,000
           C. Robert Kline, Jr. Ph.D. 2,142,088                  14,000
</TABLE>

           Approval of the Company's Restated Certificate of Incorporation to
           effect a one for three reverse stock split of the Company's issued
           and outstanding Common Stock:

<TABLE>
<CAPTION>
                                      For         Against      Withheld
                                      ---         -------      --------
                                      <S>         <C>          <C>
                                      2,125,588    26,300        4,200
</TABLE>

           Ratification of the selection of BDO Seidman, LLP as the Company's
           independent accountants for the fiscal year ended December 31, 1998:

<TABLE>
<CAPTION>
                                      For         Against      Withheld
                                      ---         -------      --------
                                      <S>         <C>          <C>
                                      2,145,588     4,300        6,200
</TABLE>

           The foregoing matters are described in detail in the Company's proxy
           statement dated April 30, 1998 for the 1998 Annual Meeting of
           Stockholders.

ITEM 5.  OTHER INFORMATION.

         Not Applicable.

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

         (a)  The following exhibits are included herewith:

              Exhibit 11 -   Weighted Average of Common Stock Shares Outstanding

              Exhibit 27 -   Financial Data Schedule

         (b)  The Company filed no reports on Form 8-K during the quarter for
              which this form is filed.



                                       23
<PAGE>   24

                                   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.

Date:  August 14, 1998     LEGACY SOFTWARE, INC.


                                    /s/ WILLIAM E. SLINEY
                                    ----------------------------------
                                    William E. Sliney
                                    Vice President and Chief Financial Officer
                                    (Duly Authorized Officer and Principal
                                    Financial and Accounting Officer)






                                       24