UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

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

                For the quarterly period ended September 30, 1998

                                       OR

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

                         Commission file number 0-28330

                              LEGACY SOFTWARE, INC.
        (Exact name of small business issuer as specified in its charter)

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

      5757 W. Century Blvd., Suite 700
          Los Angeles, California                             90045
  (Address of principal executive offices)                  (Zip Code)

                                 (310) 348-7266
                (Issuer's telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the past 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 3,334,084 shares  outstanding of the  registrant's  Common Stock, par
value $.001 per share, as of November 10, 1998.


<PAGE>

                              LEGACY SOFTWARE, INC.

                                      INDEX


                                                                        Page No.
                                                                        --------

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited):

                Balance Sheets at September 30, 1998 and
                December 31, 1997                                              3

                Statements of Operations for the three
                months ended September 30, 1998 and 1997 and
                nine months ended September 30, 1998 and 1997.                 4

                Statements of Cash Flows for the nine
                months ended September 30, 1998 and 1997                       5

                Notes to Condensed Financial Statements                        7

Item 2.  Management's Discussion and Analysis or Plan of Operations           10

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                    17

Item 2.  Changes in Securities and Use of Proceeds                            17

Item 3.  Defaults Upon Senior Securities                                      17

Item 4.  Submission of Matters to a Vote of Security Holders                  17

Item 5.  Other Information                                                    17

Item 6.  Exhibits and Reports on Form 8-K                                     17

Signatures                                                                    18

Exhibits
              Exhibit 11                                                      19
              Exhibit 27                                                      20


                                       2
<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              LEGACY SOFTWARE, INC.

                                 BALANCE SHEETS

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

<S>                                                                 <C>                  <C>        
CURRENT ASSETS
      Cash and cash equivalents                                     $ 1,993,506          $    14,464
      Accounts receivable, net of allowances for doubtful accounts
        of $12,500                                                       39,381              148,606
      Inventory                                                          16,597               22,320
      Other receivables                                                                       21,016
      Other current assets                                               20,000               22,217
                                                                     ----------          -----------
      Total current assets                                            2,069,484              228,623
                                                                     ----------          -----------

Product development costs, net                                          618,858            1,255,570
Property and equipment, net                                              67,366              128,910
Other assets                                                              5,400                1,829
Investments in production joint venture                                  23,047
                                                                     ----------          -----------
Total assets                                                        $ 2,784,155          $ 1,614,932
                                                                     ==========          ===========

                                  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable and accrued expenses                         $   160,308          $    74,033
      Advances for products and operations                               44,317                    -
      Payable to former co-development partner                          100,000              480,000
      Deferred revenues                                                   2,726               43,010
      Notes payable and current portion of long-term debt               174,516              303,619
                                                                     ----------          -----------
      Total current liabilities                                         481,867              900,662
                                                                     ----------          -----------

LONG-TERM DEBT PRIMARILY FROM RELATED PARTIES,
                    net of current portion                              120,750              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; 3,334,084 and 2,655,002 shares issued and
        outstanding                                                       3,334                2,654

      Additional paid in capital                                      9,440,108            7,060,788
      Accumulated deficit                                            (7,261,904)          (6,511,054)
                                                                     ----------          -----------
        Total stockholders' equity                                    2,181,538              552,388
                                                                     ----------          -----------

                                                                    $ 2,784,155          $ 1,614,932
                                                                     ==========          ===========
</TABLE>

            See accompanying notes to condensed financial statements.

                                       3
<PAGE>

                              LEGACY SOFTWARE, INC.

                            STATEMENTS OF OPERATIONS

                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED SEPTEMBER 30,         NINE MONTHS ENDED SEPTEMBER 30,
                                      ---------------------------               -------------------------
                                        1998              1997                     1998            1997
                                      ---------         ---------               ---------     -----------
<S>                                   <C>               <C>                     <C>           <C>        
REVENUE
   Royalties                          $  11,216         $  82,096               $ 203,726     $   189,029
   Software sales                        22,830            33,718                  38,587          49,969
   Corporate services                    18,500                 -                  80,000               -
                                      ---------         ---------               ---------     -----------

Total revenue                            52,546           115,814                 322,313         238,998
                                      ---------         ---------               ---------     -----------

COSTS AND EXPENSES
   Cost of royalties                    604,253            35,148                 631,034          35,148
   Cost of software sales                14,598            23,311                  28,798          31,379
   Product development                   30,684            10,640                  87,444         611,910
   General & administrative             277,164           174,159                 654,378         947,060
   Selling                               31,278            16,553                  75,852         251,697
                                      ---------         ---------               ---------     -----------

Total costs and expenses                957,977           259,811               1,477,506       1,877,194
                                      ---------         ---------               ---------     -----------

LOSS FROM OPERATIONS                   (905,431)         (143,997)             (1,155,193)     (1,638,196)

INTEREST EXPENSE                           (495)          (12,147)                (43,591)        (43,340)
                                              -                                        -
INTEREST INCOME                               -                54                      -           19,457

OTHER INCOME                            147,935                 -                 147,935               -
                                       ---------         ---------               ---------     -----------
LOSS BEFORE EXTRAORDINARY ITEM         (757,001)         (156,090)             (1,050,849)     (1,662,079)

EXTRAORDINARY ITEM                      300,000                 -                 300,000               -
                                       ---------         ---------               ---------     -----------

NET LOSS                              ($457,001)        ($156,090)              ($750,849)    ($1,662,079)
                                       =========         =========               =========     ===========

NET LOSS PER COMMON SHARE
    BASIC AND DILUTED
      BEFORE EXTRAORDINARY ITEM          ($0.63)           ($0.18)                 ($1.06)         ($1.96)
      EXTRAORDINARY ITEM                   0.25                 -                    0.30               -
      AFTER EXTRAORDINARY ITEM           ($0.38)           ($0.18)                 ($0.76)         ($1.96)

WEIGHTED AVERAGE COMMON STOCK
   SHARES OUTSTANDING
      BASIC AND DILUTED               1,206,403           864,326                 993,310         849,173
</TABLE>

            See accompanying notes to condensed financial statements

                                       4
<PAGE>
                              LEGACY SOFTWARE, INC.

                             STATEMENT OF CASH FLOWS

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                          --------------------------------
                                                             1998                  1997
                                                          ----------           -----------
<S>                                                        <C>                 <C>         
Cash flows from operating activities:
   Net loss                                                ($750,849)          ($1,662,079)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
        Amortization of product development costs            636,712                     -
        Depreciation                                          60,596                74,776
        Due former co-development partner                   (300,000)                    -
        (Gain) loss on disposal of property and
           equipment                                               -                  (157)
        (Gain) on sale of assets and assumption of
           debt by third party                              (147,935)                    -

Increase (decrease) in cash from changes in:
   Accounts receivable, net                                  109,225              (103,708)
   Other receivables                                          21,016               102,700
   Inventories                                                 5,723               (70,600)
   Other assets                                               (1,354)              (32,258)
   Accounts payable and accrued expenses                      86,276               (74,351)
   Deferred revenues                                         (40,284)              (21,628)
                                                          ----------           -----------
        Net cash used in operating activities               (320,874)           (1,787,305)
                                                          ----------           -----------
 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                                               1,364                 7,438
   Additions to product development costs                          -              (171,253)
   Investment in production joint ventures                   (78,647)                    -
                                                          ----------           -----------
        Net cash used in investing activities                (81,900)             (219,053)
                                                          ----------           -----------
 Cash flows from financing activities
   Payments under line of credit                                   -               (35,250)
   Note payable                                                                     75,000
   Advances for product development and operations            44,317                     -
   Payments on notes payable and long term debt              (42,501)              (62,780)
   Proceeds from private placements for Common
        Stock                                              2,305,000                     -
   Exercise of Common Stock Warrants                          75,000               162,500
   Issuance of stock under Employee
         Stock Purchase Plan                                       -                23,526
                                                          ----------           -----------
       Net cash provided by financing activities           2,381,816               162,996
                                                          ----------           -----------

 Increase (decrease) in cash and cash equivalents          1,979,042            (1,843,362)
 Cash and cash equivalents, at beginning of year              14,464             1,860,019
                                                          ----------           -----------
 Cash and cash equivalents, at end of period              $1,993,506           $    16,657
                                                          ==========           ===========
Supplemental  disclosure of cash flow information
   a. Cash paid during the period
      for:
         Interest                                         $   43,591           $    43,340
                                                          ----------           -----------
         Income taxes                                     $        -           $         -
                                                          ----------           -----------

                                       5
<PAGE>

b.    Non-cash transactions
      Sale of assets of $59,800 and issue of a
      note for $108,099 less assumption of $315,834 of
      debt by a third party                               $  147,935           $         -
                                                          ----------           ------------
             Reduction of debt by former co-development
                partner                                   $  300,000           $         -
                                                          ----------           ------------
</TABLE>
            See accompanying notes to condensed financial statements

                                        6
<PAGE>
                              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 September 30, 1998,  the results of operations  for the three and nine months
ended September 30, 1998 and September 30, 1997, and the cash flows for the nine
months ended  September 30, 1998 and September 30, 1997 are included.  Operating
results for the three and nine month  periods  ended  September 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)   Proposed Acquisition of Videocall International Corporation

      On September 8, 1998 the Company and Videocall  International  Corporation
      ("Videocall")  announced  that the two companies had entered into a Letter
      of Intent  for  Legacy to  purchase  the  common  shares of  Videocall  in
      exchange for Legacy common and preferred  stock. On September 14, 1998 the
      two  companies  signed an  Agreement  and Plan of Merger  ("Merger  Plan")
      detailing the terms of the transaction.  Videocall is a worldwide provider
      of  videocalling  services to business and consumers.  Videocall is in the
      process  of   developing   international   locations   through   strategic
      partnerships  and,  through a relationship  with  PictureTel  Corporation,
      using  PictureTel's  Swiftsites  for the  videocalling  site  hardware and
      software. The Board of Directors of the Company and the Board of Directors
      of Videocall  have  approved the  acquisition.  The parties are  currently
      preparing a definitive Proxy Statement and Registration  Statement on Form
      S-4 to be submitted for stockholder  approval of the Merger Plan. Upon the
      approval  by  stockholders  it is the  intent of Legacy to exit the CD-ROM
      software development  activities,  to determine the economic value of sale
      or retention of existing  products and going forward to focus  entirely on
      Videocall operations.

      Prior to  stockholder  approval of the  acquisition  of  Videocall  by the
      Company  Videocall has entered in Letters of Intent to purchase all of the
      assets of two companies as explained below.

      On September 28, 1998 Videocall  signed a Letter of Intent to purchase all
      the assets and assume all of the  liabilities of Town and Country  Village
      West  from  Sacramento  Results,  Inc.  of Mesa  Arizona.  The  commercial
      property  comprises 130,000 square feet, with 114,000 net leasable feet on
      6.36  acres of land with an  appraised  property  value of $ 9.9  million.
      Videocall will use a portion of the available  office space to establish a
      Western US operations center. It is intended that this transaction will be
      consummated  with  stock  of  the  Company  and  cash  subsequent  to  the
      stockholder approval of the Merger Plan.

      On October 19, 1998 Videocall signed a Letter of Intent to acquire all the
      assets and assume all the  liabilities of Phobos Phone Bureaus  Limited of
      London,  England  (`Phobos").  Phobos  is  a  provider  of  a  proprietary
      telecommunications  calling system to UK based telephone-calling  centers.
      Phobos  currently  has 70  installations  in  operation  in the UK.  It is
      intended  that this  transaction  will be  consummated  with  stock of the
      Company subsequent to the stockholder approval of the Merger Plan.

      In accordance with the terms of the September 8, 1998 Letter of Intent and
      as provided in the Merger Plan Michael J. Zwebner was elected  Chairman of
      the Board of  Directors  of the  Company  and  Ariella  J.  Lehrer,  Ph.D.
      resigned as  Chairwoman of the Board.  Dr. Lehrer  resigned to form Legacy
      Interactive,  Inc.  ("Interactive")  and as a condition of the transaction
      the  Company   entered  into  an  agreement  to  sell  certain  assets  to
      Interactive  and  Interactive  assumed  certain debt from the Company.  In
      addition to Mr.  Zwebner the Company  elected  Alexander H.  Walker,  Jr.,
      Michael  Cuzner-Charles  and Eugene A. Rosov to fill existing vacancies on
      the board.
                                       7
<PAGE>



      In order to insure a smooth  transition of management and direction of the
      merged companies C. Robert Kline, Jr., Ph.D., Ivan M. Rosenberg, Ph.D. and
      William E. Sliney resigned as members of the Board of Directors  effective
      October 9, 1998. In addition on the same date Dr. Kline  resigned as Chief
      Executive  Officer and Mr.  Sliney  resigned as Vice  President  and Chief
      Financial Officer.

      On November 6, 1998 the Company  elected  David B. Hurwitz to the Board of
      Directors  filling a  vacancy.  The  Company  also gave  Eugene A.  Rosov,
      President the additional  title of Chief  Executive  Officer and C. Harold
      Snyder was named the Chief Financial Officer.

(3)   Notification by NASDAQ of Failure to Maintain Minimum Listing Requirements

     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 SmallCap
Market.  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.  The  Company  appeared  before a
hearing  committee on September 18, 1998 and outlined the steps it has taken and
will subsequently take 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")  exercised 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 DK Trust at $0.50 per share generating $105,000
        for the Company.

     4. On September 4, 1998 a private  placement of $200,000 for 400,000 shares
        of  Legacy  Common  Stock was made in  accordance  with the terms of the
        Legacy/Videocall Letter of Intent signed on that date.

     5. On September  14, 1998 the Company and IBM signed an  agreement  whereby
        the  $500,000  balance owed IBM was reduced to $200,000 and a payment of
        $25,000 was made on that date.  Subsequent  payments of $25,000  will be
        made in each calendar quarter until the debt of $175,000 is paid off. In
        the event of a default  in payment by the  Company,  not cured  within a
        thirty day period, an amount of $400,000, less any payments already made
        under the agreement  shall be  immediately  due and payable to IBM, with
        interest accruing at the rate of ten percent per annum.

     6. In addition on September 14, 1998 the Company  entered into an Agreement
        of Sale between the Company and Legacy Interactive Inc. ("Interactive"),
        a company currently owned by the former  Chairperson of Legacy,  whereby
        certain assets of the Company totaling $216,260 were sold to Interactive
        and Interactive  assumed $324,359 in debt from the Company. On September
        14,  1998 the  Company  made a payment of $36,033  to  Interactive  as a
        portion of the  difference  between the assets sold and debt  assumed by
        Interactive.  The parties are currently in  negotiations  to determine a
        plan of payment for the balance due of $72,066.

     7. On September 22, 1998 a private  placement of  $2,000,000  for 1,960,000
        shares of Legacy Common Stock was made by third party investors into the
        Company to provide  additional  capital  to the  Company  for use in the
        merged Legacy/Videocall operations.

                                       8

<PAGE>

(4)   Financial Condition and Liquidity

   
     Prior to the $2,200,000  private  placements  made in conjunction  with the
proposed merger with Videocall and the reduction of indebtedness  resulting from
the settlement  with IBM and the sale of certain assets plus  assumption of debt
by Interactive the Company (i) had never achieved  operating  profits,  (ii) had
negative working capital and limited cash on hand,  (iii) had significant  short
and long term  indebtedness,  (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 four.  Revenues  from  the  Company's  Emergency  Room  title  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.  Without  the  infusion of
funds in  conjunction  with the  Videocall  transaction  and 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.
    

(5)   Termination of Distribution Agreement

     On July 31, 1997 the Company  entered into a  Distribution  Agreement  with
Alpha  Software  Corporation  ("Alpha  Soft") to distribute  the Emergency  Room
Intern and the three case pack of the DA  Pursuit of Justice  titles.  By mutual
agreement  the Company and Alpha Soft signed a Settlement  Agreement and General
Release which will terminate the Distribution Agreement on December 31, 1998.

(6)   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.

     The Company  believes  that,  together  with a successful  effort to obtain
additional  funding for its near-term  cash needs,  its proposed  acquisition of
Videocall,  its exit from the CD-ROM software  development  activities and focus
entirely  on  Videocall  operations,  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.

(7)   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.  For The three
and nine months ended  September 30, 1998 and 1997 all  outstanding  options and
warrants  were not  included  in  diluted  earnings  per share  since  they were
antidilutive.

                                       9
<PAGE>

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.   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.  Prior to
the $2,200,000  private  placements made in conjunction with the proposed merger
with Videocall and the reduction of  indebtedness  resulting from the settlement
with IBM and the sale of certain  assets plus  assumption of debt by Interactive
the Company (i) had never achieved operating profits,  (ii) had negative working
capital  and limited  cash on hand,  (iii) had  significant  short and long term
indebtedness,  (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 four.  Revenues  from the  Company's  Emergency  Room  title 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.  Without  the  infusion of
funds in  conjunction  with the  Videocall  transaction  and 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.

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

                                       10

<PAGE>

date, will result in the Company's stock being delisted from the NASDAQ SmallCap
Market.  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.  The  Company  appeared  before a
hearing  committee on September 18, 1998 and outlined the steps it has taken and
will subsequently take 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")  exercised 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 DK Trust at $0.50 per share  generating  $105,000  for
        the Company.

     4. On September 4, 1998 a private  placement of $200,000 for 400,000 shares
        of  Legacy  Common  Stock was made in  accordance  with the terms of the
        Legacy/Videocall Letter of Intent signed on that date.

     5. On September  14, 1998 the Company and IBM signed an  agreement  whereby
        the  $500,000  balance owed IBM was reduced to $200,000 and a payment of
        $25,000 was made on that date.  Subsequent  payments of $25,000  will be
        made in each calendar quarter until the debt of $175,000 is paid off. In
        the event of a default  in payment by the  Company,  not cured  within a
        thirty day period, an amount of $400,000, less any payments already made
        under the agreement  shall be  immediately  due and payable to IBM, with
        interest accruing at the rate of ten percent per annum.

     6. In addition on September 14, 1998 the Company  entered into an Agreement
        of Sale between the Company and Legacy Interactive Inc. ("Interactive"),
        a company currently owned by the former  Chairperson of Legacy,  whereby
        certain assets of the Company totaling $216,260 were sold to Interactive
        and Interactive  assumed $324,359 in debt from the Company. On September
        14,  1998 the  Company  made a payment of $36,033  to  Interactive  as a
        portion of the  difference  between the assets sold and debt  assumed by
        Interactive.  The parties are currently in  negotiations  to determine a
        plan of payment for the balance due of $72,066.

     7. On September 22, 1998 a private  placement of  $2,000,000  for 1,960,000
        shares of Legacy Common Stock was made by third party investors into the
        Company to provide  additional  capital  to the  Company  for use in the
        merged Legacy/Videocall operations.

     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.

      Dependence  on  Alpha  Software  Corporation  for  Substantially  All  the
Company's Revenues. For the nine months ended September 30, 1998,  approximately
63% of the  Company's  total  revenue  was  derived  from  Alpha Soft 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  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. 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 Soft  terminates  on December 31, 1998.  The  Company's  revenues  will be

                                       11
<PAGE>

significantly  reduced if the Company is unable to enter into an agreement  with
other  distributors  due to its dependence on Alpha Soft. The termination of the
distribution agreement with Alpha Soft 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 Soft 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.

     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. Upon the approval by stockholders
of the Merger Plan it is the intent of the  Company to exit the CD-ROM  software
development  activities  and focus  entirely on the  Videocall  teleconferencing
industry.

     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  September 30, 1998 compared to the three months
ended September 30, 1997.

     For the three months ended  September  30, 1998,  revenues  decreased  from
$115,814 for the three months ended  September 30, 1997 to $52,546 for the three
months ended  September 30, 1998.  This $63,268  decrease was due primarily to a
$70,880  decrease  in  royalty  revenue  due to lower  sales of ER Intern and DA
Pursuit of Justice by Alpha Soft,  and a decrease  of $10,888 in software  sales
offset by an  increase  of $18,500 in  corporate  services  revenue,  a division
formed in January 1998.

     Total  cost of  revenue  for the three  months  ended  September  30,  1998
increased by $560,392  compared to the three months  ended  September  30, 1997.
This  increase  is  primarily  a result  of the  Company  recording  a charge of
$600,000  to the product  development  costs  associated  with the DA Pursuit of
Justice title based on lower forecasted sales of the title in CD-ROM form by the
Company and the  termination  of the  Distribution  Agreement with Alpha Soft on
December  31,  1998.  The  Company has been  developing  a DVD version of the DA
Pursuit of Justice title and is currently in negotiations  with third parties to
sell the title or to enter into a licensing distribution agreement to market the
DVD version  through a third party.  This was offset by a decrease of in cost of
royalties  associated  with sales of the DA  Pursuit  of  Justice  and ER Intern
titles of $30,895 from the three months  ended  September  30, 1997 due to lower
sales of the titles.  Cost of software sales  decreased by $8,713 as a result of
the decrease in software sales by the Company  through  distributors  during the
three month period ended September 30, 1998.

     Product  development  expenses,  which  are  net of  co-funded  development
expenses,  increased from $10,640 for the three months ended  September 30, 1997
to $30,684 for the three  months  ended  September  30,  1998.  The  increase in

                                       12

<PAGE>

development  expense is the result of costs associated with the development of a
DA - DVD version of current DA Pursuit of Justice  title costs  associated  with
the Corporate Services contracts.

     General and  administrative  expenses for the three months ended  September
30, 1998  increased by $103,005 to $277,164  from  $174,159 for the three months
ended  September  30, 1997.  This  increase is  primarily  due to an increase in
professional  fees,  the costs  related to public  companies  and funds spent on
potential acquisitions.

     Selling  expenses of $31,278 for the three months ended  September 30, 1998
increased $14,725 from the $16,553 in the three month period ended September 30,
1997.  This  increase is  primarily  related to customer  service and  technical
support expenses associated with ER Intern and other Company supported products.

     Interest  expense  decreased  from $ 12,147 to $(495) for the three  months
ended  September 30, 1998 compared to the three months ended  September 30, 1997
due to the  assumption of debt by  Interactive in the month of September and the
settlement  agreement with IBM. The Company had no interest income for the three
months  ended  September  30, 1998  compared to $ 54 for the three  months ended
September  30, 1997  primarily as a result of a decrease in funds  available for
investment since the Company's initial public offering in May 1996.

      Other income of $147,935 for the three months ended  September 30, 1998 is
due to the net  amount  of the sale of  certain  assets to  Interactive  and the
assumption of certain debt by Interactive on September 14, 1998.

      Extraordinary  income for the three months ended September 30, 1998 is due
to the  cancellation  of debt of $ 300,000  as a result of the  Company  and IBM
signing  a  Payment  Agreement   relating  to  the  licensing  and  distribution
agreements  between  the two  companies  for the  Emergency  Room  and  District
Attorney  titles  formerly  co-developed  with IBM. In the event of a default in
payment  by the  Company,  not cured  within a thirty day  period,  an amount of
$400,000,   less  any  payments  already  made  under  the  agreement  shall  be
immediately  due and payable to IBM, with  interest  accruing at the rate of ten
percent per annum.

For the nine months ended  September  30, 1998 compared to the nine months ended
September 30, 1997.

     For the nine months ended  September  30,  1998,  revenues  increased  from
$238,998 for the nine months ended  September 30, 1997 to $322,313,  an increase
of 35% for the nine months ended September 30, 1998.  This $83,315  increase was
due primarily to a $80,000 increase in corporate  services  revenue,  a division
formed in January 1998.  Royalty  revenue  increased  from $189,029 for the nine
months ended  September 30, 1997 to $203,726 for the nine months ended September
30,  1998 due to sales of the  Emergency  Room  Intern and DA Pursuit of Justice
titles by Alpha Soft in the first nine months of 1998.  Software sales decreased
by $11,382 in the nine months ended  September  30, 1998 to $38,587 from $49,969
for the nine months ended September 30, 1997 due to decreasing sales of products
sold by the Company through distributors.

     Total  cost of  revenue  for the  nine  months  ended  September  30,  1998
increased by $593,305 compared to the nine months ended September 30, 1997. This
increase is primarily a result of the Company  recording a charge of $600,000 to
the product  development  costs  associated with the DA Pursuit of Justice title
based on lower  forecasted  sales of the title in CD-ROM form by the Company and
the  termination of the  Distribution  Agreement with Alpha Soft on December 31,
1998. The Company has been developing a DVD version of the DA Pursuit of Justice
title and is currently in  negotiations  with third parties to sell the title or
to enter into a  licensing  distribution  agreement  to market  the DVD  version
through  a third  party..  This was  offset by a  decrease  of $4,114 in cost of
royalties  associated  with sales of the D.A.  Pursuit of Justice  and ER Intern
titles and a decrease of $2,581 in the cost of Company distributed products.

     Product  development  expenses,  which  are  net of  co-funded  development
expenses,  decreased from $611,910 for the nine months ended  September 30, 1997
to $87,444, a decrease of 86%, for the nine months ended September 30, 1998. The
decrease in  development  expense is the result of the completion of the Best of
Emergency  Room  titles  in July,  1997 and the  Company's  cessation  of future
product development at that time.

     General and administrative expenses for the nine months ended September 30,
1998  decreased by $292,682 or 31% to $654,378 from $947,060 for the nine months
ended  September 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 four  administrative  personnel and  implementing  other operating cost
reductions.

                                       13
<PAGE>

     Selling  expenses of $75,852 for the nine months ended  September  30, 1998
decreased  $175,845  or 70% from the  $251,697  in the nine month  period  ended
September 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  $43,340 to $43,591  for the nine months
ended  September 30, 1998 compared to the nine months ended  September 30, 1997.
The Company had no interest  income for the nine months ended September 30, 1998
compared to $19,457 for the nine months ended  September 30, 1997 primarily as a
result of a decrease  in funds  available  for  investment  since the  Company's
initial public offering in May 1996.

      Other income of $147,935 for the nine months ended  September  30, 1998 is
due to the net  amount  of the sale of  certain  assets to  Interactive  and the
assumption of certain debt by Interactive on September 14, 1998.

 Extraordinary income for the nine months ended September 30, 1998 is due to the
cancellation  of debt of $ 300,000 as a result of the  Company and IBM signing a
Payment Agreement relating to the licensing and distribution  agreements between
the two companies for the Emergency Room and District  Attorney  titles formerly
co-developed with IBM. In the event of a default in payment by the Company,  not
cured  within a thirty day  period,  an amount of  $400,000,  less any  payments
already made under the agreement  shall be  immediately  due and payable to IBM,
with interest accruing at the rate of ten percent per annum.

Liquidity and Capital Resources

     The Company had $320,874 in cash outflows from operating activities for the
nine months ended September 30, 1998 compared to cash outflows of $1,787,305 for
the nine months ended  September 30, 1997.  The decrease in net  operating  cash
outflows  of  $1,466,431  between  1998 and  1997  primarily  resulted  from the
following:  a decrease in the net loss from  operations  after  adjustments  for
non-cash items of $1,233,919;  an decrease in the change of deferred  revenue of
$40,284;  an decrease in the change in accounts receivable and other receivables
of $130,241;  an decrease in inventory of $5,723; an increase in other assets of
$1,354 and a increase in the change of accounts  payable and accrued expenses of
$86,275.  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  four
administrative personnel and implementing other operating cost reductions.

     Investing  activities in the nine months ended September 30, 1998 consisted
of  purchases  of computer  equipment  totaling  $4,617,  disposals  of computer
equipment of $1,364 and an investment in a production  joint ventures of 78,647.
In the nine months ended  September  30, 1997  additions to product  development
costs  of  $171,253,  purchase  of  computer  equipment  of  $5,238  and a  note
receivable  of $50,000  were offset by $7,438 in  disposition  of  property  and
equipment.

     The Company has cash inflows of $2,381,616  from  financing  activities for
the nine months ended September 30, 1998 compared to inflows of $162,996 for the
nine months ended September 30, 1997.  Financing  activities for the nine months
ended  September 30, 1998 included  advances of $44,317 for use in project joint
ventures  and  operations,   three  private  placements  for  Common  Stock  for
$2,305,000,  the  exercise of Warrants  for Common  Stock for $75,000  offset by
payments on notes  payable of  $42,501.  This  compares  to  payments  under the
Company's  line of credit of $35,250 and  payments  of notes  payable of $62,780
offset by a $75,000 note payable,  exercise of common stock warrants of $162,500
and $23,526 of Common Stock purchases under the Employee Stock Purchase Plan for
the nine months ended September 30, 1997.

Prior to the $2,200,000 private placements made in conjunction with the proposed
merger with  Videocall  and the  reduction of  indebtedness  resulting  from the
settlement  with IBM and the sale of certain  assets plus  assumption of debt by
Interactive  the  Company (i) had never  achieved  operating  profits,  (ii) had
negative working capital and limited cash on hand,  (iii) had significant  short
and long term  indebtedness,  (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 four.  Revenues  from  the  Company's  Emergency  Room  title  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.  Without  the  infusion of
funds in  conjunction  with the  Videocall  transaction  and given the Company's

                                       14

<PAGE>

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.

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 SmallCap
Market.  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.  The  Company  appeared  before a
hearing  committee on September 18, 1998 and outlined the steps it has taken and
will subsequently take 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")  exercised 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 DK Trust at $0.50 per share  generating  $105,000  for
        the Company.

     4. On September 4, 1998 a private  placement of $200,000 for 400,000 shares
        of  Legacy  Common  Stock was made in  accordance  with the terms of the
        Legacy/Videocall Letter of Intent signed on that date.

     5. On September  14, 1998 the Company and IBM signed an  agreement  whereby
        the  $500,000  balance owed IBM was reduced to $200,000 and a payment of
        $25,000 was made on that date.  Subsequent  payments of $25,000  will be
        made in each calendar quarter until the debt of $175,000 is paid off. In
        the event of a default  in payment by the  Company,  not cured  within a
        thirty day period, an amount of $400,000, less any payments already made
        under the agreement  shall be  immediately  due and payable to IBM, with
        interest accruing at the rate of ten percent per annum.

     6.In addition on September  14, 1998 the Company  entered into an Agreement
        of Sale between the Company and Legacy Interactive Inc. ("Interactive"),
        a company currently owned by the former  Chairperson of Legacy,  whereby
        certain assets of the Company totaling $216,260 were sold to Interactive
        and Interactive  assumed $324,359 in debt from the Company. On September
        14,  1998 the  Company  made a payment of $36,033  to  Interactive  as a
        portion of the  difference  between the assets sold and debt  assumed by
        Interactive.  The parties are currently in  negotiations  to determine a
        plan of payment for the balance due of $72,066.

     7. On September 22, 1998 a private  placement of  $2,000,000  for 1,960,000
        shares of Legacy Common Stock was made by third party investors into the
        Company to provide  additional  capital  to the  Company  for use in the
        merged Legacy/Videocall operations.

     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.

     The Company  believes  that,  together  with a successful  effort to obtain
additional  funding for its near-term  cash needs,  its proposed  acquisition of
Videocall,  its exit from the CD-ROM software  development  activities and focus
entirely  on  Videocall  operations,  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


                                       15
<PAGE>

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.

                                       16

<PAGE>

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     On August 18, 1997,  the U.S.  Securities and Exchange  Commission  ("SEC")
issued a subpoena  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.

            Not Applicable

ITEM 5.  OTHER INFORMATION.

         Not Applicable.

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

         (a)  The following exhibits are included herewith:

              Exhibit 11 -  Computation of Weighted Average  Common Stock Share
                            Outstanding

              Exhibit 27 -   Financial Data Schedule

         (b) The Company filed a Form 8-K on September 14, 1998 under Item 5.

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<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date:  November ____, 1998 LEGACY SOFTWARE, INC.


                                    /s/ C. Harold Snyder
                                    --------------------
                                    C. Harold Snyder
                                    Chief Financial Officer
                                    (Duly Authorized Officer and Principal
                                    Financial and Accounting Officer)


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