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

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 1997

                                       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 2,530,957 shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of August 13, 1997.



<PAGE>   2
                              LEGACY SOFTWARE, INC.

                                      INDEX

                                                                        Page No.

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited):

           Balance Sheets at June 30, 1997 and
           December 31, 1996

           Statements of Operations for the three months ended
           June 30, 1997 and 1996 and six months ended June 30,
           1997 and 1996

           Statements of Cash Flow for the six
           months ended June 30, 1997 and 1996

           Notes to Condensed Financial Statements

Item 2.  Management's Discussion and Analysis of
           Financial Condition and Results of
           Operations for the three and six
           months ended June 30, 1997

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Item 2.  Changes in Securities

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


                                       2
<PAGE>   3
                         PART 1 - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

                              LEGACY SOFTWARE, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          JUNE 30,      DECEMBER 31,
                                                                            1997           1996
                                                                         -----------    ------------
                               ASSETS                                    (Unaudited)
<S>                                                                      <C>             <C>       
CURRENT ASSETS:
       Cash and cash equivalents                                         $   34,461      $1,804,779
       Restricted cash                                                            -          55,240
       Accounts receivable, net of allowances for doubtful accounts
         of $0 and $0                                                        10,318           2,767
       Note Receivable                                                       50,000
       Inventory                                                             80,120
       Other receivables                                                     31,137         125,888
       Other current assets                                                  66,395
                                                                         ----------      ----------

       Total current assets                                                 272,431       1,988,674
                                                                         ----------      ----------

Product development costs, net                                            1,464,850       1,260,478
Property and equipment, net                                                 355,619         407,632
Other Assets                                                                 18,994          23,723

                                                                         ----------      ----------
Total assets                                                             $2,111,894      $3,680,507
                                                                         ==========      ==========
</TABLE>

See accompanying notes to condensed financial statements.



                                       3
<PAGE>   4

                              LEGACY SOFTWARE, INC.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                 JUNE 30,         DECEMBER 31,
                                                                                   1997              1996
                                                                                -----------       -----------
                                                                                (Unaudited)
<S>                                                                             <C>               <C>        
                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
       Line of credit                                                           $      0.00       $    35,250
       Accounts payable                                                             123,832           167,097
       Accrued expenses                                                             103,884            70,489
       Payable to former co-development partner                                     400,000           400,000
       Deferred Revenues                                                             11,325            40,388
       Notes payable and current portion of long-term debt                          110,000           120,433
                                                                                -----------       -----------

       Total current liabilities                                                    749,041           833,657
                                                                                -----------       -----------

LONG TERM DEBT PRIMARILY FROM RELATED PARTIES, net of current portion               339,836           341,369

COMMITMENTS                                                                               -

SHAREHOLDERS' 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: 2,530,957 and 2,523,115 shares issued and outstanding            2,530             2,522

       Additional paid in capital                                                 6,882,432         6,858,914
       Accumulated deficit                                                       (5,861,945)       (4,355,955)
                                                                                -----------       -----------

         Total shareholders' equity                                               1,023,017         2,505,481
                                                                                -----------       -----------

                                                                                $ 2,111,894       $ 3,680,507
                                                                                ===========       ===========
</TABLE>

See accompanying notes to condensed financial statements.



                                       4
<PAGE>   5
                              LEGACY SOFTWARE, INC.

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                    -----------------------------       -----------------------------
                                         1997             1996               1997            1996
<S>                                 <C>               <C>               <C>               <C>        
Revenue
  Royalties                         $    64,155       $     1,210       $   106,932       $     1,210
  Software sales                         13,085             1,351            16,252             5,404
  Consulting                                  -             2,125                 -             2,125
                                    -----------       -----------       -----------       -----------

Total revenue                            77,240             4,686           123,184             8,739
                                    -----------       -----------       -----------       -----------

Costs and expenses
  Cost of royalties                           -            25,500                 -            51,000
  Cost of software sales                  5,568             1,310             8,068             5,160
  Product development                   297,751           240,912           601,269           276,206
  General & administrative              408,713           211,302           772,901           503,407
  Selling                               155,971             4,689           235,145             6,484
                                    -----------       -----------       -----------       -----------

Total costs and expenses                868,003           483,713         1,617,383           842,257
                                    -----------       -----------       -----------       -----------

Loss from operations                   (790,763)         (479,027)       (1,494,199)         (833,518)

Interest expense                         17,149            33,740            31,283           426,204
                                                                                                    0
Interest income                          (5,134)          (28,064)          (19,493)          (28,064)
                                    -----------       -----------       -----------       -----------

Net loss                              ($802,778)        ($484,703)      ($1,505,989)      ($1,231,658)
                                    ===========       ===========       ===========       =========== 

Net loss per common share                ($0.32)           ($0.25)           ($0.60)           ($0.74)

Weighted average common stock
  shares outstanding                  2,525,729         1,908,690         2,524,442         1,653,870
</TABLE>


See accompanying notes to condensed financial statements



                                       5
<PAGE>   6
                              LEGACY SOFTWARE, INC.

                             STATEMENT OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED JUNE 30
                                                              ----------------------------
                                                                 1997              1996
                                                              ----------        ----------
<S>                                                          <C>               <C>         
Cash flows from operating activities:
   Net loss                                                  ($1,505,989)      ($1,231,658)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
        Amortization of product development costs                      -            51,000
        Amortization of deferred loan fees and original
          issue discount                                               -           355,307
        Depreciation                                              49,970            11,840
        Gain on disposal of property and equipment                  (157)
        Issuance of common stock in exchange for
          services                                                     -            14,400

Increase (decrease) in cash from changes in:
   Accounts receivable, net                                       (7,551)          (51,034)
   Other receivables                                              94,751
   Inventories                                                   (80,120)
   Other assets                                                  (61,665)          (32,221)
   Accounts payable and accrued expenses                          (9,872)          112,824
   Development expense co-funding billings in
        excess of development expense co-funding
        recognized                                                                (294,045)
   Deferred revenues                                             (29,063)          399,752


                                                             -----------       -----------
        Net cash used in operating activities                 (1,549,696)         (663,835)
                                                             -----------       -----------

 Cash flows from investing activities:
   Note receivable                                               (50,000)
   Purchase of property and equipment                             (5,238)         (166,350)
   Proceeds from the disposition of property and
       equipment                                                   7,438
   Additions to product development costs                       (204,372)         (441,454)

                                                             -----------       -----------
        Net cash used in investing activities                   (252,172)         (607,804)
                                                             -----------       -----------

 Net cash provided by (used in) financing activities
   Payments under line of credit                                 (35,250)
   Note payable                                                   50,000             8,184
   Payments on notes payable and long term debt                  (61,966)         (300,000)
   Net proceeds from initial public offering                           -         5,355,589
   Issuance of stock under the Employee
       Stock Purchase Plan                                        23,526
                                                             -----------       -----------
       Net cash provided by financing activities                 (23,690)        5,063,773
                                                             -----------       -----------


 Increase (decrease) in cash and cash equivalents             (1,825,558)        3,792,134
 Cash and cash equivalents, at beginning of period             1,860,019           365,190
                                                             -----------       -----------
 Cash and cash equivalents, at end of period                 $    34,461       $ 4,157,324
                                                             ===========       ===========


Supplemental disclosure of cash flow information
        Cash paid during the period for:
         Interest                                            $    31,283       $    80,238
         Income taxes                                        $         -       $         -
                                                             -----------       -----------

        Non-cash investing and financing activity: 
        A convertible note payable in the amount of 
        $700,000 was converted into 534,351 shares
        of common stock during the Company's six
        months ended June 30, 1996
</TABLE>


 See accompanying notes to condensed financial statements



                                       6
<PAGE>   7
                              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-Q. 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, 1997,
the results of operations for the three months and the six months ended June 30,
1997 and June 30, 1996, and the cash flows for the six months ended June 30,
1997 and June 30, 1996 are included. Operating results for the three and six
month periods ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.

      The information contained in this Form 10-Q should be read in conjunction
with the Company's Annual Report on Form 10-K.

(2)   Financial Condition and Liquidity

     On May 14, 1996 the Company completed an Initial Public Offering and
generated $5,198,000 of net proceeds. The proceeds have been used to pay off
certain existing debt, to develop new software titles and provide working
capital. For the six month period ended June 30, 1997 the Company has expended
$1,549,696 in cash in operating activities and $209,610 for software development
costs and acquisition of property and equipment. For the twelve months ended
December 31, 1996 the Company expended $1,968,740 in cash in operating
activities and $1,641,557 in software development costs and acquisition of
property and equipment.

     At June 30, 1997 the Company had working capital of ($476,610) compared to
working capital of $1,155,017 at December 31, 1996. The Company has incurred net
losses since inception and expects to continue to operate at a loss during 1997.
The Company's prospects must be considered in light of the risks, expenses and
difficulties encountered by companies in the early states 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 a substantial doubt as to the Company's ability to continue as a going
concern. In addition, the Company's ability to continue operations and achieve
positive cash flow in the future depends on the timeliness, successful
distribution and market acceptance of its current and future software titles
(including without limitation its District Attorney, The Best of ER and ER
Intern titles and the Passport2Network internet game service), the cost of
developing, producing, marketing, distributing and supporting of any such
titles, and the Company's ability to obtain or generate the resources to fund
such efforts. Should the Company's future income be less than anticipated, or
should its software title production and introduction be delayed significantly
or fail to generate sufficient revenues, the Company may require additional
capital in the future. Also, should the Company consummate any acquisition or
business combination (including the proposed Canyon acquisition) the Company
will likely require additional capital to effect such transaction and/or any
related integration and/or expansion of its business and operations see
"Proposed Acquisitions". The Company may seek to satisfy any such capital needs
through additional public or private financings or other sources, but there can
be no assurance that any such additional financing would be available on
favorable terms, if at all. If the Company is unable to generate or obtain such
additional capital, it could have a material adverse effect on its business,
financial condition or results of operations.

     In July 1997 the Company failed to make a principle 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 principle and interest
commencing on July 1, 1997.

     In the fourth quarter of 1996 the Company and International Business
Machines Corporation ("IBM") mutually agreed to terminate the District Attorney
Development and Licensing Agreement dated November 16, 1995. As consideration
for the termination the Company has agreed to pay IBM the aggregate sum of
$400,000, the total amount of milestone payments made by IBM to the Company, as
termination cost on or before December 15, 1997. Also in the fourth quarter of
1996, McGraw-Hill Home Interactive ("McGraw-Hill") without cause effectively
terminated a letter of intent entered into with the Company to co-develop the
contemplated Animal



                                       7
<PAGE>   8

Doctor title. A mutual release was signed in February 1997 at which time the
Company received $75,000 in previously unfunded development costs.


     In conjunction with the termination of the co-development agreements, the
Company accelerated its plans to become a developer/distributor of titles on its
own. To achieve this transition the Company established a sales and marketing
organization in early Spring 1997. The Company modified this distribution
strategy in June 1997 and is proceeding to use a combination of a distributor to
market two titles and to self distribute two other titles in 1997 and 1998.

     If this transition in distribution methods is not successful the Company
could face short term liquidity requirements that could significantly deplete
current cash resources. At June 30, 1997 the Company has implemented programs
designed to improve its liquidity requirements by ceasing all costs associated
with development of new titles, significantly curtailing its Internet gaming
services, significantly reducing marketing and public relations efforts,
reducing the total Company staff to four administrative personnel, implementing
other operating cost reductions and seeking additional funding.

     Additionally, although the Company believes that, together with a
successful effort to obtain additional funding for its near-term cash needs, its
operating plan and efforts to reduce operating expenses, in conjunction with
acquisition of additional funding, will be adequate to meet its fiscal 1997
working capital needs 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.


(3)  Deferred Revenue

      As of December 31, 1996, the Company had recorded $40,388 in deferred
revenues relating to amounts received from IBM for fourth quarter 1996 sales of
the Emergency Room title co-developed with IBM. In conjunction with the revenue
recognition policy established by the Company, this amount was recognized into
royalty revenue during March of 1997. In June, 1997 the Company received $75,480
for first quarter, 1997 sales of the Emergency Room title. In accordance with
the revenue recognition policy established by the Company, $64,155 was recorded
as revenue and $11,325 was recorded as deferred revenues.

(4)  Earnings Per Share

      Earnings per common share for the three month and six month periods ending
June 30, 1997 are computed based upon the weighted average number of common
shares actually outstanding during the periods plus the additional shares that
would be outstanding assuming the 




                                       8
<PAGE>   9

exercise of dilutive common stock options and purchase warrants, which are
considered common stock equivalents. The number of shares that would be issued
from the exercise of such options and warrants would be reduced by the number of
common shares that could have been purchased from the assumed use of proceeds at
the average market price of the Company's common stock during the period
(treasury stock method). For the three and six month periods ending June 30,
1997, all common stock equivalents were excluded from the calculation of
earnings per share as their inclusion would have been anti-dilutive.

      Statements of Financial Standards No. 128, "Earnings Per Share" (SFAS 128)
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Earlier application is not permitted. SFAS
128 requires dual presentation of basic and diluted earnings per share (EPS) on
the face of the income statement. It also requires a reconciliation of the
numerator and denominator of the diluted EPS computation. This statement also
requires restatement of all prior-period EPS data presented. The Company has not
determined the effect on its EPS from the adoption of this statement.

 (5)  Termination and Acquisition of Co-Development Partner's Rights Under 
      Agreements

                On January 3, 1997, the Company and IBM executed a final
termination agreement with respect to the District Attorney Development and
Licensing Agreement dated November 16, 1995. As consideration for the
termination and for the acquisition of IBM's rights under the agreement, the
Company will pay to IBM no later than December 15, 1997 the aggregate sum of
$400,000, representing the total amount of milestone payments made by IBM to the
Company under the DA License agreement.

      In February of 1997, a release and termination agreement was signed with
McGraw-Hill with respect to the letter of intent for the development and
licensing of the contemplated Animal Doctor title. In association with the
release and termination a payment of $75,000 was received from McGraw Hill in
February of 1997, representing previously unfunded development expenses related
to the contemplated Animal Doctor title. Additionally during the three months
ended March 31, 1997, preliminary conceptual development was halted for a
proposed second McGraw Hill title, Junior Astronaut, for which no agreement or
letter of intent was signed.

(6)  Proposed Acquisitions

     In February of 1997 the Company signed a letter of intent to acquire
certain assets and to assume certain liabilities of Educorp 




                                       9
<PAGE>   10

Multimedia, Inc. ("Educorp"), a California based multimedia software publisher,
and its wholly owned subsidiaries Educorp Direct, Inc. and High Text
Interactive. The total consideration of $1,800,000 was to be payable in shares
of the Company's common stock with the number of shares calculated based on the
average closing price of the stock for thirty calendar days following the
closing of the transaction, but in no event less than 425,000 shares. On June
30, 1997 the Company and Educorp mutually agreed to terminate the negotiations.

     On June 27, 1997 the Company signed a non-binding letter of intent to
acquire 100 percent of the outstanding stock of Canyon Interactive, LLC.
("Canyon") a California limited liability company. The total proposed
consideration is $750,000 in cash and $1,000,000 payable in shares of the
Company's common stock. The actual number of shares will be determined based on
the average market price of the Company's common stock from June 27, 1997 to the
consummation of the transaction. Canyon is a full-service digital publisher
specializing in publishing and marketing interactive conference proceedings and
training seminars on CD-ROM. Canyon's product focus is in industries such as
high technology, telecommunications, medicine and health care and general
business. In conjunction with signing of the letter of intent, the Company
advanced $50,000 to Canyon. The advance has been recorded as a Note Receivable.
At the same time, $50,000 was advanced to the Company by an outside party.
The Company has recorded that advance as a Note Payable.

(7)   Marketing and Distribution Agreement

      On July 31, 1997 the Company and Alpha Soft Corporation ("Alpha") entered
into a Distribution Agreement for the District Attorney cases 1 through 3 and
ER Intern titles. Under the terms of the Agreement Alpha will produce, market
and distribute the titles and the Company will receive a royalty on each sale.

(8)   Reclassifications

      Certain 1996 amounts were reclassified to conform with the 1997
presentation.



                                       10
<PAGE>   11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF 
        OPERATION.

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 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
timing of new product introductions; retail sell-through of the Company's
products; the continued emergence of the Internet resulting in new competition
and changing consumer demands; the Company's ability to adapt and expand its
product offerings in light of changes to and developments in personal computer
platforms and the Internet environment; 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; 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); the consummation of
possible acquisitions or combinations; and the Company's ability to integrate
acquired or combined operations with its existing business and otherwise manage
growth and the Company's ability to generate or obtain additional capital
resources to fund its operations and growth. Additional information on these and
other risk factors are included under the headings "Risk Factors" and elsewhere
in this Form 10-Q.

Risk Factors

         Need for Additional Capital; Uncertainty as a Going Concern. At June
30, 1997 the Company had working capital of ($476,610) compared to working
capital of $1,155,017 at December 31, 1996. The Company has incurred net losses
since inception and expects to continue to operate at a loss during 1997. 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. In addition, the Company's ability to continue operations and achieve
positive cash flow in the future depends on the timeliness, successful
distribution and market acceptance of its current and future software titles
(including without limitation its District Attorney, The Best of ER and ER
Intern titles and the Passport2Network internet game service), the cost of
developing, producing, marketing, distributing and supporting of any such
titles, and the Company's ability to obtain or generate the resources to fund
such efforts. Should the Company's future income be less than anticipated, its
software title production and introduction be delayed significantly or fail to
generate sufficient revenues, the Company may require additional capital in the
future. Also, should the Company consummate any acquisition or business
combination (including the proposed Canyon acquisition), the Company will likely
require additional capital to effect such transaction and/or any related
integration and/or expansion of its business and operations. The Company may
seek to satisfy any such capital needs through additional public or private
financings or other sources, but there can be no assurance that any such
additional financing would be available on favorable terms, if at all. If the
Company is unable to generate or obtain such additional capital, it could have a
material adverse effect on its business, financial condition or results of
operations.

         Management of Growth; Uncertainties Relating to Acquisitions, Business
Combinations and New Businesses. The Company has pursued, is currently pursuing
and, in the future may pursue, new technologies and businesses internally and
through acquisitions and combinations which involve significant risks. Any such
acquisition or combination (including the proposed Canyon acquisition) may
involve, among other things,




                                       11
<PAGE>   12

the issuance of equity securities, the payment of cash, the incurrence of
contingent liabilities and the amortization of expenses related to goodwill and
other intangible assets, and transaction costs, which have adversely affected,
or may adversely affect, the Company's business, results of operations and
financial condition. The Company's ability to integrate and organize any new
businesses and/or products, whether internally developed or obtained by
acquisition or combination, (including the Passport2 Internet game and
information service, and the proposed acquisition of Canyon) will likely require
significant expansion of the Company's operations. There is no assurance that
the Company will have or be able to obtain the necessary resources to
satisfactorily affect any such expansion, and the failure to do so could have a
material adverse effect on the Company's results of operations, financial
condition and business. In addition, the proposed acquisition and future
acquisitions and/or combinations by the Company involve risks of, among other
things, entering markets or segments in which the Company has no or limited
prior experience, the potential loss of key employees of the acquired company
and/or of Legacy, difficulty, delay or failure in the integration of the
operations, management, personnel and business of any such new business with the
Company's business and any operating and financial difficulties of any new or
newly combined operations, any of which could have a materially adverse effect
on the Company's business, financial condition or results of operations. Given
the above risks, among others, there can be no assurance that the anticipated
benefits of any specific acquisition, or any internally developed new business
segment or business combination will be realized.

         Pending Negotiations Between the Company and IBM regarding Emergency
Room Derivative Products. IBM notified the Company in May, 1997 that it disputed
the Company's right to distribute and/or sell derivatives of the Emergency Room
title under the terms of the Multimedia Rights License Agreement between the
Company and IBM, as amended by Amendment No.1, Amendment No.2 and the Amendment
and Termination Agreement pursuant to which the Development and Licensing
Agreement with respect to the District Attorney title was terminated. The
Company disagrees with IBM's position, and currently is in negotiations with IBM
to resolve the dispute. There can be no assurance, however, that such
disagreement will be resolved in favor of the Company, or at all, and a failure
to do so would have a material adverse effect on the Company's business,
financial condition, and results of operations.


         Dependence on IBM for Substantially All the Company's Revenues. For the
first six months of 1997, approximately 88% of the Company's total revenue was
derived from royalty payments made by IBM to the Company on sales of the
Emergency Room title pursuant to the Company's co-development agreement with
IBM. The Company expects royalty revenue from the Emergency Room title, a
DOS-based product, to diminish 


                                       12
<PAGE>   13

significantly over the course of 1997, as it will face increased competition
from Windows-based products. Although IBM is currently distributing and
marketing the Emergency Room title on behalf of the Company, the Company and IBM
have terminated their co-development relationship with respect to future
RealPlay(TM) titles, including, but not limited to, the District Attorney title.
In light of the Company's dependence on IBM for the distribution and marketing
of its Emergency Room title, if sales of the Emergency Room title by IBM were to
materially decrease, if IBM were to terminate its development and marketing
relationship with the Company with respect to the Emergency Room title, if the
Company is unable to develop other CD-ROM titles or other services, if the
Company can not 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 results of operations, financial condition and business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - "General", 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 IBM 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, the
timing of product introductions and the recognition of royalty revenue received
from its co-development partner. In response to competitive pressures, the
Company may take certain pricing or marketing actions that could materially
adversely affect the Company's results of operations, business and financial
condition 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 




                                       13
<PAGE>   14

adversely affected by a decrease in quarterly sales, the failure to meet the
Company's sales expectations for any quarter or higher customer support costs
and product returns associated with sales of defective products.


         Development of New Titles. The Company currently has several titles in
the conceptual, pre-production and production phases of development. The Company
does not currently plan to begin full scale development of additional titles
until such time as the proposed distribution channels for existing titles are in
place and are operational. There can be no assurance, however, that the Company
will be able to successfully distribute any existing or future titles through
its own efforts or the efforts of distributors, which will impair the Company's
ability to fund the development of future titles, and, as a result, have a
material adverse effect on the Company's ability to generate future operating
cash flow.


         Rapidly Changing Technologies and Markets. The markets in which the
Company competes are characterized by ongoing technological developments,
frequent new product announcements and introductions, evolving industry
standards, changing customer requirements and new competitors. The introduction
of products and services embodying new technologies and the emergence of new
industry standards and practices, including new platforms, CD-ROMs and the
Internet, can render existing products obsolete and unmarketable. The Company's
future success depends upon its ability to enhance its existing products and
services, develop new products and services that address the changing
requirements of its customers, develop additional products and services for new
or other platforms and environments, such as Windows 95 and the Internet, and
anticipate or respond to technological advances, emerging industry standards and
practices and changes in CD-ROMs, the Internet and other technologies, in a
timely, cost-effective manner. There can be no assurance that any of such
initiatives can be successfully implemented or that they will result in
increased revenue or profits for the Company. Conversely, there can be no
assurance that consumers' use of the Internet, particularly for entertainment
and edutainment, will continue to increase as rapidly as it has during the past
few years nor can there be any assurance that customers will be willing to pay
for such service in the foreseeable future.




                                       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.

         Increased competition in the software development market, resulting
from, among other things, the timing of competitive product releases and the
similarity of such products to those of the Company, may result in significant
price competition, reduced profit margins, loss of shelf space or a reduction in
sell-through of the Company's products at retail stores, any of which could have
a material adverse effect on the Company's results of operations, business or
financial condition. In addition, the Company believes that large software
companies, media companies and film studios are increasing their focus on the
interactive entertainment and edutainment sectors of the software market and, as
a result of their greater resources, name recognition, customer base and
licensed rights, are significant competitors in the software industry. Current
and future competitors with greater resources than the Company may be able to,
among other things, carry larger inventories, undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make higher offers or
guarantees to software developers and co-development partners than the Company.
New hardware formats and electronic delivery systems may be introduced into the
software market and potential new competitors may enter the software development
and distribution market, resulting in greater competition for the Company. There
can be no assurance that the Company will have the resources required to respond
effectively, or at all, to market or technological changes, or to compete
successfully with current or future competitors, or that competitive pressures
faced by the Company will not materially and adversely affect the Company's
business, operating results or financial condition.




                                       15

<PAGE>   16

         Consolidation among software companies significantly increased in l996
and has shown signs of continuing. For example, CUC, Inc. has purchased Davidson
Software, Sierra and Knowledge Adventure; Softkey, Inc. has purchased The
Learning Company and MECC; IBM has purchased Edmark, and GT Interactive, Inc.
has purchased Humungous Entertainment, Inc. This consolidation process makes it
more difficult for small publishers, such as the Company, to obtain broad retail
distribution without "affiliating" with larger distributors in certain channels.

         In the past, the Company focused primarily on the edutainment product
category. Through the acquisition of On The Toes Of Giants in 1996, the Company
has moved into the area of Internet edutainment products and games. The Internet
category is dominated by a number of very large competitors and is subject to
rapid change in consumer preference. Should the Company increase its presence in
the Internet industry segment, it will experience these additional risks and
competitive pressures.

         Products in the market compete primarily on the basis of subjective
factors, such as entertainment value, and objective factors, such as price,
graphics and sound quality. Large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft Corporation, are increasing their focus on the interactive
entertainment and education software market, which will result in even greater
competition for the Company. Many of these companies have substantially greater
financial, marketing and technical resources than the Company. As competition
increases, significant price competition and reduced profit margins may result.
In response to increased competition for shelf space, the Company may need to
increase marketing expenditures. In addition, competition from new technologies
(such as new hardware platforms and the Internet) may reduce demand in markets.
Consummation of the proposed acquisition of Canyon would place the Company in
the competitive market of interactive conference proceedings and training
seminars. The Company may have to commit capital, marketing expenditures and
management talent to establish a presence in this new market or in other new
markets entered by way of acquisition of, combination with or internal
development of new businesses. There can be no assurance that the Company will
have sufficient resources to make such commitments, or that the Company will be
able to compete successfully in any new market even if such resources are
available.

         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.



                                       16

<PAGE>   17
General.

         The Company completed an initial public offering of 1,150,000 shares of
its common stock, par value $.001 per share (the "Common Stock"), on May 17,
1996. The Company was incorporated in California in 1989 and reincorporated in
Delaware in March, 1996. The Company develops edutainment CD-ROM computer
software. An edutainment product combines entertainment and education content
for home and educational use, in which learning is an integral part of playing a
game. The Company is also in the final testing stages of its Internet gaming
technology, the Passport2 Network, with several interactive games currently
operational. The Company began generating revenue from the Passport2 Network
during the second quarter of 1997. Additionally, with the proposed acquisition
of Canyon, the Company plans to enter the publishing and marketing of
interactive conference proceedings and training seminars on CD-ROM.

         International Business Machines Corporation ("IBM") is currently
marketing the Emergency Room title, the Company's first RealPlay(TM) (formerly
Career Sim(TM)) series title, which the Company co-developed with IBM. Due to
the Company's inability to reasonably estimate returns on the Emergency Room
title, the Company did not recognize royalty revenue on the accrual basis of
accounting until the fourth quarter of 1996 when the amount of returns could be
reasonably estimated in accordance with Statement of Financial Accounting
Standards No. 48 ("SFAS 48"). Royalty revenue recognized from the Emergency Room
title during the three months ended March 3l, 1997 and the three months ended
June 30, 1997 relates to IBM's sales from the fourth quarter of 1996 and the
first quarter of 1997 respectively. The Company expects sales of the original
DOS based version of Emergency Room distributed and marketed by IBM to diminish
over the next twelve months.

         As of June 30, 1997 the Company completed the first three cases of the
District Attorney title, The Best of ER, consisting of the best 50 cases from
Emergency Room and ER Intern comprising 50 new cases under a Windows enhanced
version of Emergency Room.

         On July 31, 1997 the Company and Alpha Soft Corporation ("Alpha")
entered into a Distribution Agreement for the District Attorney cases 1 through
3 and ER Intern titles. Under the terms of the Agreement Alpha will produce,
market and distribute the titles and the Company will receive a royalty on each
sale. 

         In addition to the Alpha Agreement, the Company began manufacturing,
marketing and distributing through a sales representative organization the Best
of ER in June 1997. IBM notified the Company in May, 1997 that it disputed the
Company's right to distribute and/or sell derivatives of the Emergency Room
title under the terms of the Multimedia Rights License Agreement between the 




                                       17
<PAGE>   18

Company and IBM, as amended by Amendment No.1, Amendment No.2 and the Amendment
and Termination Agreement pursuant to which the Development and Licensing
Agreement with respect to the District Attorney title was terminated. The
Company disagrees with IBM's position, and currently is in negotiations with IBM
to resolve the dispute. There can be no assurance, however, that such
disagreement will be resolved in favor of the Company, or at all, and a failure
to do so would have a material adverse effect on the Company's business,
financial condition, and results of operations.


         On June 27, 1997 the Company signed a non-binding letter of intent to
acquire 100 percent of the outstanding stock of Canyon Interactive, LLC.
("Canyon"). The proposed total consideration is $750,000 in cash and $1,000,000
payable in shares of the Company's common stock. The actual number of shares
will be determined based on the average market price of the Company's common
stock from June 27, 1997 to the consummation of the transaction. Canyon is a
full-service digital publisher specializing in publishing and marketing
interactive conference proceedings and training seminars on CD-ROM. Canyon's
product focus is in leading industries such as high technology,
telecommunications, medicine and health care and general business. Due to the
Company's lack of experience in this market and its limited resources, there can
be no assurance, should the acquisition be consummated, that the Company will be
able to assimilate, operate and develop the Canyon business successfully, and
the Company's failure to do so could have a materially adverse effect on the
Company's ability to fund the development of future titles and ability to
generate future operating cash flows.





                                       18
<PAGE>   19
Results of Operations

         For the three months ended June 30, 1997 compared to the three months
ended June 30, 1996.

         For the three months ended June 30, 1997, revenues increased from
$4,686 for the three months ended June 30, 1996 to $77,240. This $72,554
increase was due primarily to an increase in royalty revenue related to the
Emergency Room title which represented all the royalty revenue in 1997 compared
to revenue recognized in 1996 from other Company titles. The royalty revenue
recognized in the three months ended June 30, 1997 represents revenue of IBM
sales for the first three months of 1997, less an estimate for returns. Software
sales increased from $1,351 in 1996 to $13,085 in 1997 resulting primarily from
the introduction of The Best of ER title.

         Total cost of revenue for the three months ended June 30, 1997
decreased by $21,242 or 79% as compared to the same period in 1996. This
decrease is primarily the result of a decrease in cost of royalties from $25,500
to $0. The decrease is the result of amortization of the remaining capitalized
product development costs of the Emergency Room title in 1996. The capitalized
product development costs associated with the District Attorney and ER Intern
titles have not yet been amortized since the products are not currently expected
to be released until the third quarter of 1997.

         Product development expenses, which are net of co-funded development
expenses increased from $240,912 for the three months ended June 30, 1996 to
$297,751, for the three months ended June 30, 1997, an increase of $56,839
primarily due to the Company not receiving any milestone payments from
co-development projects in the second quarter of 1997 versus the second quarter
of 1996 and as such did not reduce the product development expenses.

         General and administrative expenses for the three months ended June 30,
1997 increased by $197,411 or 93% to $408,713, from $211,302 for the three
months ended June 30, 1996. This increase is primarily due to the increase in
the number of employees and the relocation of the Company's headquarters,
including an increase in rent expense. Additionally, the increase is related to
personnel and organizational and systems changes and increases in professional
fees that are directly associated with being a publicly traded company.

         Selling expenses of $155,971 for the three months ended June 30, 1997
increased $151,282 over the $4,689 in the three months period ended June 30,
1996. This increase is primarily related to general product and Company public
relations efforts, promotional 




                                       19
<PAGE>   20

expenses related to the introduction of the District Attorney, The Best of
Emergency Room and ER Intern titles.

         Interest expense decreased from $33,740 to $17,149 for the three months
ended June 30, 1997 compared to the three months ended June 30, 1996 primarily
due to the decrease in notes payable and the line of credit at June 30, 1997.
The Company had interest income of $5,134 for the three months ended June 30,
1997 compared to $28,064 for the three months ended June 30, 1996 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, 1997 compared to the six months ended
June 30, 1996.

         For the six months ended June 30, 1997 revenue increased by $114,445
from $8,739 for the six months ended June 30, 1996 to $123,184 for the six
months ended June 30, 1997. This increase was primarily due to an increase in
royalty revenue related to sales of the Emergency Room title. During the six
month period ended June 30, 1996, the Company was unable to recognize royalty
revenue because the Company was unable to estimate returns in accordance with
SFAS 48. However, as disclosed in the annual report the Company was able to
reasonably estimate the returns and recognize royalty revenue during the fourth
quarter of 1996. The portion of the royalty revenue recognized in the fourth
quarter of 1996, which was attributable to sales during the six month period
ended June 30, 1996, was $361,262. Software sales increased from $5,404 for the
six months ended June 30, 1996 to $16,252 for the six months ended June 30, 1997
primarily from sales of The Best of ER title which began shipping in June, 1997.

         For the six month period ended June 30, 1997 cost of royalties was $0
compared to $51,000 for the six months ended June 30, 1996. The decrease is the
result of amortization of the remaining capitalized product development costs of
the Emergency Room title in 1996. The cost of software sales increased from
$5,160 in the six month period ended June 30, 1996 to $8,068 in the six month
period ended June 30, 1997 as a result of sales of The Best of ER title in the
three months ended June 30, 1997 compared to sales of older Company software
products in 1996 as The Best of ER was not available in 1996.

         Product development expenses for the six months ended June 30, 1997
increased by $325,063 to $601,269 compared to $276,206 for the six months ended
June 30, 1996 primarily due to the Company not receiving any milestone payments
from co-development projects in the six months ended June 30, 1997 therefore not
reducing product development expenses.

         General and administrative expense increased from $503,407 for the six
months ended June 30, 1996 to $772,901 for the six months ended 



                                       20
<PAGE>   21

June 30, 1997. The increase is due to the relocation of the Company's
headquarters, including an increase in rent expense, an increase in the number
of projects under development in the six month period ended June 30, 1997, an
increase in the number of employees and overhead structure and increases in
professional fees that are directly associated with being a publicly traded
company compared to the six month period ended June 30, 1996.

         Selling expenses for the six months ended June 30, 1997 increased by
$228,661 to $235,145 from $6,484 for the six months ended June 30, 1996. The
increase is primarily related to the increased company public relations efforts
and promotional expenses related to the Passport2 Network and promotion of The
Best of ER, District Attorney and ER Intern titles.

         Interest expense decreased from $426,204 for the six months ended June
30, 1996 to $31,283 for the six months ended June 30, 1997 resulting primarily
from that certain convertible note in the original principal amount of
$1,000,000 payable to EBC Trust Corporation that was retired in May of 1996.
Interest income decreased to $19,493 for the six months ended June 30, 1997
compared to $28,064 for the six months ended June 30, 1996 due to use of the
proceeds of the initial public offering in Company operations during 1997.

Liquidity and Capital Resources

         The Company had $1,549,696 in cash outflows from operating activities
for the six months ended June 30, 1997 compared to cash outflows of $663,835 for
the six months ended June 30, 1996. The increase in net outflows of $885,861
between 1997 and 1996 operating cash flow primarily resulted from the following:
an increase in the net loss from operations after adjustments for non-cash items
of $657,065; a decrease in the change of accounts payable and accrued expenses
of $122,696; a decrease in the change of deferred revenue of $428,815, and an
increase in inventory of $80,120. This has been offset by an increase of
$294,045 in the change of development co-funding billings in excess of
development expense co-funding recognized; a decrease in the change of accounts
receivable of $43,483, and a decrease in other receivables of $94,751. The total
net outflows from operating activities are primarily the result of net losses
caused by research and development expenditures associated with the Company's
Passport2 Network, increases in general and administrative expense associated
with the increase in the Company's overhead structure and increased selling
costs related to the Company's marketing and distribution activities.

         Investing activities in the first six months of 1997 consisted of a
note receivable of $50,000, purchases of computer equipment and construction of
leasehold improvements totaling $5,238 and the capitalization of product
development costs related to the District Attorney and The Best of ER titles
totaling $204,372. These outflows 



                                       21
<PAGE>   22

were offset slightly by proceeds from the disposition of property and equipment
in the amount of $7,438. In the first six months of 1996 investing activities
consisted of purchases of computer equipment and construction of leasehold
improvements totaling $166,350 and additional product development costs for the
District Attorney title of $441,454.

         The Company has cash outflows of $23,690 from financing activities for
the first six months of 1997 compared to inflows of $5,063,773 for the first six
months of 1996. Financing activities for the six months ended June 30, 1997
included payments of notes payable of $61,996 and payments under a line of
credit of $35,250 which was offset by proceeds of a note payable of $50,000. Net
cash of $5,063,773 for the first six months of 1996 consisted of receipt of
$5,355,589 representing net proceeds of the Company's initial public offering
less $300,000 used to retire the note payable to EBC Trust Corporation and an
increase of $8,184 on the Company's line of credit. In July 1997 the Company
failed to make a principle 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 principle and interest commencing on July 1,
1997. 

         The Company's ability to achieve positive cash flow over the next
twelve months depends on a variety of factors including the successful operation
of certain of the assets and liabilities acquired from the proposed acquisition
of the stock of Canyon, the timeliness, successful distribution of and market
acceptance of its current and future software titles, most importantly the
District Attorney, The Best of ER, and ER Intern titles, the costs of
developing, producing and marketing such titles, and should the proposed
acquisition of Canyon be consummated, the successful integration and operation
of its business with the Company's existing business, and various other factors,
some of which may be beyond the Company's control.

         Additionally, in conjunction with the termination of the co-development
agreements, with IBM and McGraw-Hill the Company accelerated its plans to become
a developer/distributor of titles on its own. To achieve this transition the
Company established a sales and marketing organization in early Spring 1997. The
Company modified this distribution strategy in June 1997 and is proceeding to
use a combination of a distributor to market two titles and to self distribute
two other titles in 1997 and 1998.

         If this transition in distribution methods is not successful the
Company could face short term liquidity requirements that could significantly
deplete current cash resources. At June 30, 1997 the Company has implemented
programs designed to improve its liquidity requirements by 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; implementing other operating cost reductions and
seeking additional funding.

         Additionally, although the Company believes that, together with a
successful effort to obtain additional financing to fulfill near-term cash
requirements, its operating plan and efforts to reduce operating expenses, in
conjunction with the acquisition of additional funding, will be adequate to meet
its fiscal 1997 working capital needs there can be no assurance that the Company
will be able to obtain the necessary financing or that it will



                                       22
<PAGE>   23

not experience liquidity problems caused by adverse market conditions and other
unfavorable events.

         Should the Company's future income be less than anticipated or its
software title production and introduction be delayed significantly or not
generate sufficient future revenues, the Company may require additional capital.
In addition, should the Company consummate the Canyon acquisition or any other
acquisition or business combination, it will likely require an expansion of the
Company's current operations requiring additional capital. The Company may seek
to satisfy such capital needs through additional public or private financings or
other sources. However, there can be no assurance that the Company would be able
to obtain such financings on favorable terms, or at all, and the failure to do
so would have a material adverse effect on the Company's business, financial
condition, and results of operations. 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 has incurred net losses since inception and expects to
continue to operate at a loss during 1997. Similarly, the Company's future
capital requirements will be affected by, among other things, the timing and
cost of producing new titles, promotional and advertising expenses required to
launch new titles, future titles, debt service requirements including long term
notes payable and amounts due to a former co-development partner, operating
leases, and investments in technological and production process research.




                                       23
<PAGE>   24
                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         On March 26, 1997 a complaint was filed against the Company in
California Superior Court for the West District of Los Angeles County by The
Brief Exchange Legal Network, Inc. ("Brief Exchange") and Comp-Pro Seminars,
Inc. (together, the "Plaintiffs"). The complaint claims breach by the Company of
an alleged oral contract with Plaintiffs respecting marketing and distribution
of the Company's "District Attorney - Pursuit of Justice" CD-ROM title. The
Plaintiffs jointly allege damages from lost earnings in the amount of
$1,500,000, and Brief Exchange alleges additional damages from harm to its
reputation of $1,000,000. The Company believes the Plaintiff's claims to be
without merit and intends to vigorously defend the suit. There is no assurance,
however, that such claims will not be upheld, which result may have a material
adverse effect on the business and financial condition of the Company.

         Other than described above, the Company is neither currently a party to
nor is any of its property the subject of any legal proceedings which would be
material to the business or financial condition of the Company.



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 May 29, 1997.
         The directors elected at the meeting were:
         
         <TABLE>
         <CAPTION>
                                                For             Against         Withheld
                                                ---             -------         --------
         <S>                                 <C>                <C>              <C>
         Ariella J. Lehrer, Ph.D.            2,041,985             0             447,800
         William E. Sliney                   2,041,985             0             447,800
         Stanley Wojtysiak                   2,041,985             0             447,800
         Curtis A. Hessler                   2,041,985             0             447,800
         Ivan M. Rosenberg, Ph.D.            2,041,985             0             447,800
         Morley A. Winograd                  2,041,985             0             447,800
         </TABLE>

         Other matters voted upon and results of those votes were as follows:

         <TABLE>
         <CAPTION>
                                                For             Against         Withheld
                                                ---             -------         --------
         <S>                                 <C>                <C>              <C>
         Approval of a series of                                                          
         amendments to the Company's
         1995 Stock Option/Stock Issuance
         Plan, including an increase in
         the number of shares of common
         stock of the Company available
         for issuance by an additional
         400,000 shares                       1,279,645          180,340           14,900
         </TABLE>

         The foregoing matters are described in detail in the Company's proxy
         statement dated March 31, 1997 for the 1997 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.



                                       24
<PAGE>   25
                                   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 13, 1997                 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)



                                       25