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

                                   FORM 10-QSB

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

                  For the quarterly period ended March 31, 1998

                                       OR

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

                         Commission file number 0-28330

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

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

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

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

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

                                 Yes [X] No [ ]

There were 2,655,002 shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of May 14, 1998.



                                       1
<PAGE>   2
                              LEGACY SOFTWARE, INC.

                                      INDEX


<TABLE>
<CAPTION>
                                                                                 Page No.
                                                                                 --------
<S>                                                                              <C>
                         PART I - FINANCIAL INFORMATION

Item l. Financial Statements (Unaudited):

                      Balance Sheets at March 31, 1998 and
                      December 31, 1997

                      Statements of Operations for the three
                      months ended March 31, 1998 and 1997.

                      Statements of Cash Flows for the three
                      months ended March 31, 1998 and 1997

                      Notes to Condensed Financial Statements

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

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures

Exhibits
             Exhibit 11
             Exhibit 27
</TABLE>


                                       2


<PAGE>   3
                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
                              LEGACY SOFTWARE, INC.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                              MARCH 31             DECEMBER 31
                                                                                1998                   1997
                                                                            -------------         -------------
                                          ASSETS                             (Unaudited)
<S>                                                                         <C>                   <C>          

CURRENT ASSETS
      Cash and cash equivalents                                             $      27,951         $      14,464
      Accounts receivable, net of allowances for doubtful accounts
        of $12,500                                                                111,806               148,606
      Inventory                                                                    10,811                22,320
      Other receivables                                                             5,833                21,016
      Other current assets                                                         10,882                22,217
                                                                            -------------         -------------
      Total current assets                                                        167,283               228,623
                                                                            -------------         -------------

Product development costs, net                                                  1,231,840             1,255,570
Property and equipment, net                                                       112,041               128,910
Other assets                                                                        4,000                 1,829
                                                                            -------------         -------------
Total assets                                                                $   1,515,164         $   1,614,932
                                                                            =============         =============


                    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable                                                      $      67,859         $      55,567
      Accrued expenses                                                             21,926                18,466
      Product development advances                                                 30,000
      Payable to former co-development partner                                    480,000               480,000
      Deferred revenues                                                            16,630                43,010
      Notes payable and current portion of long-term debt                         303,619               303,619
                                                                            -------------         -------------
      Total current liabilities                                                   920,034               900,662
                                                                            -------------         -------------

LONG-TERM DEBT PRIMARILY FROM RELATED PARTIES,
                      net of current portion                                      161,297               161,882

COMMITMENTS                                                                                                  --

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

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

      Additional paid in capital                                                7,060,788             7,060,788
      Accumulated deficit                                                      (6,629,609)           (6,511,054)
                                                                            -------------         -------------

        Total stockholders' equity                                                433,833               552,388
                                                                            -------------         -------------
                                                                            $   1,515,164         $   1,614,932
                                                                            =============         =============
</TABLE>


            See accompanying notes to condensed financial statements.


                                       1


<PAGE>   4
                              LEGACY SOFTWARE, INC.

                            STATEMENTS OF OPERATIONS

                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED MARCH 31,
                                        -----------------------------------
                                            1998                   1997
                                        -------------         -------------
<S>                                     <C>                   <C>          
REVENUE
    Royalties                           $     128,909         $      42,777
    Software sales                              8,122                 3,167
    Corporate services                         42,000                    --
                                        -------------         -------------
Total revenue                                 179,031                45,944
                                        -------------         -------------

COSTS AND EXPENSES
    Cost of royalties                          17,221                    --
    Cost of software sales                     10,562                 2,500
    Product development                        43,332               303,519
    General & administrative                  189,271               364,188
    Selling                                    24,556                79,173
                                        -------------         -------------
Total costs and expenses                      284,942               749,380
                                        -------------         -------------

LOSS FROM OPERATIONS                         (105,910)             (703,436)

INTEREST EXPENSE                               12,645                14,134
                                        -------------         -------------
INTEREST INCOME                                    --               (14,359)
                                        -------------         -------------

NET LOSS                                $    (118,555)        $    (703,211)
                                        =============         =============

NET LOSS PER COMMON SHARE
      BASIC                             $       (0.04)        $       (0.28)
NET LOSS PER COMMON SHARE
      DILUTED                           $       (0.04)        $       (0.28)

WEIGHTED AVERAGE COMMON STOCK
    SHARES OUTSTANDING
       BASIC                                2,655,002             2,523,115
       DILUTED                              2,655,002             2,523,115
</TABLE>


            See accompanying notes to condensed financial statements.


<PAGE>   5
                              LEGACY SOFTWARE, INC.

                             STATEMENT OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED MARCH 31,
                                                           ---------------------------------
                                                               1998                  1997
                                                           -----------           -----------
<S>                                                        <C>                   <C>         
Cash flows from operating activities:
   Net loss                                                $  (118,555)          $  (703,211)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
        Amortization of product development costs               23,730
        Depreciation                                            20,447                25,166
        (Gain) loss on disposal of property and
           equipment                                                --                  (157)

Increase (decrease) in cash from changes in:
   Accounts receivable, net                                     36,800                  (453)
   Other receivables                                            15,183                94,107
   Inventories                                                  11,509
   Other assets                                                  9,164                  (433)
   Accounts payable                                             12,292               (40,185)
   Accrued expenses                                              3,460
   Deferred revenues                                           (26,380)              (40,388)

                                                           -----------           -----------
        Net cash used in operating activities                  (12,350)             (665,554)
                                                           -----------           -----------

 Cash flows from investing activities:
   Note receivable                                                  --
   Purchase of property and equipment                           (3,578)               (5,238)
   Proceeds from the disposition of property and                    --
       equipment                                                    --                 4,362
   Additions to product development costs                           --              (201,044)

                                                           -----------           -----------
        Net cash used in investing activities                   (3,578)             (201,920)
                                                           -----------           -----------

 Cash flows from financing activities
   Payments under line of credit                                    --               (35,250)
   Product development advances                                 30,000
   Payments on notes payable and long term debt                   (585)              (41,009)
                                                           -----------           -----------
       Net cash provided by financing activities                29,415               (76,259)
                                                           -----------           -----------


 Increase (decrease) in cash and cash equivalents               13,487              (943,733)
 Cash and cash equivalents, at beginning of period              14,464             1,860,019
                                                           -----------           -----------
 Cash and cash equivalents, at end of period               $    27,951           $   916,286
                                                           ===========           ===========


Supplemental disclosure of cash flow information

       Cash paid during the period for:
         Interest                                          $    12,645           $    18,349
                                                           -----------           -----------
         Income taxes                                      $        --           $        --
                                                           -----------           -----------
</TABLE>


                 See accompanying notes to financial statements


<PAGE>   6
                              LEGACY SOFTWARE, INC.

                          NOTES TO FINANCIAL STATEMENTS

(1)     Basis of presentation

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

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

(2)     Financial Condition and Liquidity

        As of March 31, 1998, the Company had (i) never achieved operating
profits, (ii) had negative working capital of $752,751 and cash on hand of
$27,951, (iii) total short term indebtedness of $783,619, and long term
indebtedness of $161,297, (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 further funding of 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 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 


                                       7


<PAGE>   7
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 D.A. Pursuit of
Justice, the Best of Emergency Room and Emergency Room Intern titles and the
Passport2Network internet game service), the cost of developing, producing and
supporting 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
required, or 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 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 and results of operations.

        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 initiated by NASDAQ
at that date, will result in the Company's stock being delisted from the NASDAQ
SmallCap Market. Based on instructions provided by NASDAQ the Company has
initiated the following steps to comply with the NASDAQ requirements:

        1.      The Company has rescheduled its Annual Meeting of Stockholders
                from May 28, 1998 to June 18, 1998. At that time stockholders
                will be asked to approve a one for three (1:3) reverse split of
                the Legacy Common Stock.

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

                a. the reduction of a $480,000 obligation to International
                Business Machines Corporation ("IBM") into a series of royalty
                payments from certain Legacy products formerly co-developed with
                IBM as well as products marketed by Legacy in 1998. The parties


                                       8


<PAGE>   8
                have agreed in principal to the following: (i) the payment of
                $25,000 by Legacy at the signing of a definitive agreement and;
                (ii) the payment to IBM of royalties totaling $175,000 plus
                interest at 10 percent;

                b. the conversion of 75,954 of Warrants to purchase Legacy
                Common Stock held by EBC Trust Company ("EBC") at a conversion
                rate of $1.31 thereby generating $99,500 for the Company;

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

                d. an investment by EBC of up to $250,000 in the Company or
                participation of up to $250,000 in a project joint venture with
                the Company; and

                e. the conversion of substantially all of the outstanding debt
                of Legacy to certain principals of the Company into Legacy
                Preferred Stock

(3)     Private Placement and Termination of Proposed Acquisition

        In January, 1998, the Company signed a non-binding Letter of Intent with
Black Tusk Medical, Inc. , a Nevada corporation ("BTI") to joint venture the
development and publishing of high production value educational software. BTI as
a part of a $3.5 million financing program was to make an equity investment in
the Company. The Letter of Intent was superseded by a revised Letter of Intent
dated March 25, 1998. Pursuant to the revised Letter of Intent BTI and Legacy
were to pursue joint venture programs for the development and distribution of up
to four product-oriented joint ventures, including new titles in the Company's
RealPlay(TM) series--Emergency Room and D.A. Pursuit of Justice. To date BTI has
advanced the Company $30,000 toward two of the proposed joint ventures.
Utilizing the joint venture vehicle the Company and BTI intended to obtain
funding from third parties to produce, market and distribute the Company's
titles in the retail, OEM, educational and professional markets worldwide. The
Company and BTI were to share in any revenue received from each joint venture
after the initial funding to the third party investors has been repaid. On April
29, 1998 the January and March Letters of Intent were terminated by mutual
agreement of the Company and BTI.


                                       9


<PAGE>   9
        The Company and C. Robert Kline, Jr., Ph.D., a former principal of BTI,
entered into negotiations to execute a Subscription Agreement whereby Dr. Kline
will purchase 210,000 shares of the Company Common Stock for $105,000. To date
Dr. Kline has advanced $33,000 of this amount toward the development of the two
proposed joint ventures begun when BTI and the Company were in negotiations for
the merger of BTI into the Company. Upon completion of the Subscription
Agreement Dr. Kline will be nominated for a position on the Legacy Board of
Directors and will assume the position of Acting Chief Executive Officer. Under
Dr. Kline the Company plans to initiate programs to maximize the revenue
potential of existing Legacy products for the balance of fiscal 1998. In
addition, it is the intent of the Company to continue to pursue funding for
joint ventures in the same manner as was contemplated when BTI was to be merged
into the Company.

(4)     Marketing and Distribution Agreement

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

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


(5)     Earnings Per Share

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


                                       10


<PAGE>   10
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 positioning of the
Company's products in the Company's market segments; the Company's ability to
generate or obtain additional capital resources to fund its operations and
growth; the ability of the Company to comply with NASDAQ regulations; 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; 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. Additional information on these and other risk factors are included
under the headings "Risk Factors" and elsewhere in this Form 10-QSB


                                       11


<PAGE>   11
Risk Factors

        Need for Additional Capital; Uncertainty as a Going Concern. As of March
31, 1998, the Company had (i) never achieved operating profits, (ii) had
negative working capital of $752,751 and cash on hand of $27,951, (iii) total
short term indebtedness of $783,619, and long term indebtedness of $161,297,
(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 further funding of 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 and derivatives
thereof are continuing to decrease, and revenues from the D.A. Pursuit of
Justice title have been lower than expected. The Company has incurred net losses
since inception and expects to continue to operate at a loss during 1998. The
Company's prospects must be considered in light of the risks, expenses and
difficulties encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets. The Company's
ability to maintain operations in the near term and to achieve positive cash
flow in the future depends on a variety of factors. Given the Company's current
working capital deficiency and lack of cash resources, should the Company be
unable to obtain additional funding to supply its near-term cash requirements,
there is substantial doubt as to the Company's ability to continue as a going
concern. 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 D.A. Pursuit of Justice, the Best of Emergency
Room and Emergency Room Intern titles and the Passport2Network internet game
service), the cost of developing, producing and supporting 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 required, or 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 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 and results of
operations.


                                       12

<PAGE>   12
        Possible Delisting by NASDAQ. 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 initiated by NASD at that date, will result in the Company's
stock being delisted from the NASDAQ SmallCap Market. Based on instructions
provided by NASDAQ the Company has initiated steps to comply with the NASDAQ
requirements. There can be no assurance that the Company will be successful in
complying with the new NASDAQ requirements and if it does come into compliance
that, in its current financial condition, it will be able to maintain
compliance. In the event the Company is delisted due to its inability to comply
with or maintain compliance with the NASDAQ requirements, the Company may be
unable to raise additional capital when needed, and the Company's business,
results of operations and financial condition may be materially adversely
affected.

        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 may involve, among other things, 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, 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 effect such expansion, and the failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, 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 difficulty, delay
or failure in the integration of the operations, management, personnel and
business of any such new 


                                       13


<PAGE>   13
business with the Company's business and 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 and results of
operations. Moreover, there can be no assurance that the anticipated benefits of
any specific acquisition or of any internally developed new business segment or
business combination will be realized.

        Dependence on Alpha Software Corporation ("Alpha Soft") for
Substantially All the Company's Revenues. For the three months ended March 31,
1998, approximately 72% 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. In
light of the Company's dependence on Alpha Soft for the distribution and
marketing of the D.A. Pursuit of Justice and Emergency Room Intern titles, if
Alpha Soft were to terminate its distribution and marketing relationships with
the Company, 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.

        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 


                                       14


<PAGE>   14
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.

        Development of New Titles. The Company currently has several titles in
the conceptual and pre-production phases of development. The Company does not
currently plan to begin full-scale development of additional titles until such
time as funding for existing titles is in place. 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
would 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 98 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.


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<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 and distribution efforts, 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, financial condition and
results of operations.

        Products in the market compete primarily on the basis of subjective
factors, such as entertainment value, and objective factors, 


                                       16


<PAGE>   16
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 and/or implement reduced pricing policies. In
addition, competition from new technologies (such as new hardware platforms and
the Internet) may reduce demand in current markets. The Company may have to
commit capital, marketing expenditures and management talent to establish itself
in 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.

Results of Operations

        For the three months ended March 31, 1998 compared to the three months
ended March 31, 1997.

        For the three months ended March 31, 1998, revenues increased from
$45,944 for the three months ended March 31, 1997 to $179,031 for the three
months ended March 31, 1998. This $133,087 increase was due primarily to an
increase in royalty revenue, less an estimate for returns, related to sales of
the D.A. Pursuit of Justice and ER Intern titles by Alpha Software Corporation
compared to revenue recognized in 1997 from other Company titles. Software sales
increased from $3,167 in 1997 to $8,122 in 1998 resulting primarily from sales
by the Company of the Best of Emergency Room title and individual cases of the
D.A. Pursuit of Justice title through distributors. Corporate services revenue
was $42,000 in the three months ended March 31, 1998 resulting from the
Company's launching of a new corporate service operation in January 1998.

        Total cost of revenue for the three months ended March 31, 1998
increased by $25,283 compared to the three months ended March 31, 1997. 


                                       17


<PAGE>   17
This increase is primarily a result of an increase of $17,221 in cost of
royalties associated with sales of the D.A. Pursuit of Justice and ER Intern
titles and an increase of $8,062 as a result of the increase in software sales
by the Company through distributors during the three month period ended March
31, 1998.

        Product development expenses, which are net of co-funded development
expenses, decreased from $303,519 for the three months ended March 31, 1997 to
$43,332, a decrease of 86%, for the three months ended March 31, 1998. The
decrease in development expense is the result of the completion of the D.A.
Pursuit of Justice, ER Intern and the Best of Emergency Room titles in July,
1997 and the Company cessation of future product development at that time.

        General and administrative expenses for the three months ended March 31,
1998 decreased by $174,917 or 48% to $189,271, from $364,188 for the three
months ended March 31, 1997. This decrease is primarily due to the Company
ceasing all costs associated with development of new titles; significantly
curtailing further funding of 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.

        Selling expenses of $24,556 for the three months ended March 31, 1998
decreased $54,617 or 69% from the $79,173 in the three month period ended March
31, 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.

        Interest expense decreased from $14,134 to $12,645 for the three months
ended March 31, 1998 compared to the three months ended March 31, 1997 primarily
due to the decrease in notes payable at March 31, 1998. The Company had no
interest income for the three months ended March 31, 1998 compared to $14,359
for the three months ended March 31, 1997 primarily as a result of a decrease in
funds available for investment since the Company's initial public offering in
May 1996.


Liquidity and Capital Resources

        The Company had $12,350 in cash outflows from operating activities for
the three months ended March 31, 1998 compared to cash outflows of $665,554 for
the three months ended March 31, 1997. The decrease in net outflows of $653,204
between 1998 and 1997 operating cash flow primarily resulted from the following:
a decrease in the net loss from operations after adjustments for non-cash items
of $603,510; a decrease in the change of deferred revenue of 14,008; a decrease
in 


                                       18


<PAGE>   18
the change in accounts receivable of $41,671; an increase in inventory of
$11,509; an increase in the change of accounts payable and accrued expenses of
$55,937 and an increase in other assets of $9,597. This decrease is primarily
due to the Company ceasing all costs associated with development of new titles;
significantly curtailing further funding of 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 first three months ended March 31, 1998
consisted of purchases of computer equipment totaling $3,578 compared to $5,238
used for computer equipment, $201,044 in additions to product development costs
offset by $4,362 in disposition of property and equipment for the three months
ended March 31, 1997

        The Company has cash inflows of $29,415 from financing activities for
the first three months of 1998 compared to outflows of $76,259 for the first
three months of 1997. Financing activities for the three months ended March 31,
1998 included an advance of $30,000 for use in project joint ventures offset by
payments of $585 of notes payable. This compares to payments under the Company's
line of credit of $35,250 and payments of notes payable of $41,009 for the three
months ended March 31, 1997.

        As of March 31, 1998, the Company had (i) never achieved operating
profits, (ii) had negative working capital of $752,751 and cash on hand of
$27,951, (iii) total short term indebtedness of $783,619, and long term
indebtedness of $161,297, (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 further funding of 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 and derivatives thereof are continuing to decrease, and revenues from the
D.A. Pursuit of Justice title have been lower than expected. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The Company has incurred net losses since inception and expects to
continue to operate at a loss during 1998. The Company's prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets. The Company's ability to maintain operations in the
near term and to achieve positive cash flow in the future depends on a variety
of factors. Given the Company's current working capital deficiency and lack of
cash resources, should the Company be unable to obtain additional funding to
supply its near-term cash requirements, there is 


                                       19


<PAGE>   19
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 D.A. Pursuit of Justice, the Best of Emergency Room and Emergency
Room Intern titles and the Passport2Network internet game service), the cost of
developing, producing and supporting 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 required, or 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 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 and results of
operations.

        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 initiated by NASD
at that date, will result in the Company's stock being delisted from the NASDAQ
SmallCap Market. Based on instructions provided by NASDAQ the Company has
initiated the following steps to comply with the NASDAQ regulations:

        1.      The Company will hold its Annual Meeting of Stockholders no
                later than June 18, 1998. At that time stockholders will be
                asked to approve a one for two (1:3) reverse split of the Legacy
                Common Stock.

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

                a. the reduction of a $480,000 obligation to International
                Business Machines Corporation ("IBM") into a series of royalty
                payments from certain Legacy products formerly co-developed with
                IBM as well as products marketed by Legacy in 1998. The parties
                have agreed in principal to the following: (i) the payment of
                $25,000 by Legacy at the signing of a definitive agreement and;


                                       20


<PAGE>   20
                (ii) the payment to IBM of royalties totaling $175,000 plus
                interest at 10 percent;

                b. the conversion of 75,954 of Warrants to purchase Legacy
                Common Stock held by EBC Trust Company ("EBC") at a conversion
                rate is $1.31 thereby generating $99,500 for the Company;

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

                d. an investment by EBC of up to $250,000 in the Company or
                participation of up to $250,000 in a project joint venture with
                the Company; and

                e. the conversion of substantially all of the outstanding debt
                of Legacy to certain principals of the Company into Legacy
                Preferred Stock

        In January, 1998, the Company signed a non-binding Letter of Intent with
Black Tusk Medical, Inc., a Nevada corporation ("BTI") to joint venture the
development and publishing of high production value educational software. BTI as
a part of a $3.5 million financing program will make an equity investment in the
Company. The Letter of Intent was superseded by a revised Letter of Intent dated
March 25, 1998. Pursuant to the revised Letter of Intent BTI and Legacy were to
pursue joint venture programs for the development and distribution of up to four
product-oriented joint ventures, including new titles in the Company's
RealPlay(TM) series - Emergency Room and D.A. Pursuit of Justice. To date BTI
has advanced the Company $30,000 toward two of the proposed joint ventures.
Utilizing the joint venture vehicle the Company and BTI intended to obtain
funding from third parties to produce, market and distribute the Company's
titles in the retail, OEM, educational and professional markets worldwide. The
Company and BTI were to share in any revenue received from each joint venture
after the initial funding to the third party investors has been repaid.
On April 29, 1998 the January and March Letters of Intent were
terminated by mutual agreement of the Company and BTI.

        The Company and C. Robert Kline, Jr., Ph.D., a former principal of BTI,
have entered into negotiations to execute a Subscription Agreement whereby Dr.
Kline will purchase 210,000 shares of the Company Common Stock for $105,000. To
date Dr. Kline has advanced $33,000 of this 


                                       21


<PAGE>   21
amount toward the development of the two proposed joint ventures begun when BTI
and the Company were in negotiations for the merger of BTI into the Company.
Upon completion of the Subscription Agreement Dr. Kline will be nominated for a
position on the Legacy Board of Directors and will assume the position of Acting
Chief Executive Officer. Under Dr. Kline, the Company will initiate programs to
maximize the revenue potential of existing Legacy products for the balance of
fiscal 1998. In addition, it is the intent of the Company to continue to pursue
funding for joint ventures in the same manner as was contemplated when BTI was
to be merged into the Company.

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

        Since July, 1997 the Company has failed to make a principal payment on
an unsecured note payable in the amount of approximately $260,000 to a related
party. The monthly payment, in the amount of $10,000, was due in accordance with
the terms of the original note dated February 1, 1991 as amended which
provides for monthly payments of principal and interest commencing on July 1,
1997. In March, 1998 the Company failed to make principal payments aggregating
$5,435 to two other related parties. Interest on all the debt has been paid to
date.

        The Company's ability to achieve positive cash flow over the next twelve
months depends on a variety of factors including the ability to obtain
additional financing, the timeliness, successful distribution of, and market
acceptance of its current and future software titles, most importantly the D.A.
Pursuit of Justice, the Best of Emergency Room, and ER Intern titles, the costs
of developing, producing and marketing such titles, and various other factors,
some of which may be beyond the Company's control.


                                       22


<PAGE>   22
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

        Since July, 1997 the Company has failed to make a principal payment on
an unsecured note payable in the amount of approximately $260,000 to a related
party. The monthly payment, in the amount of $10,000, was due in accordance with
the terms of the original note dated February 1, 1991 as amended which provides
for monthly payments of principal and interest commencing on July 1, 1997.
Interest on the note has been paid to date.

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

        Not Applicable.

ITEM 5. OTHER INFORMATION.

        Not Applicable.


                                       23


<PAGE>   23
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>   24
                                   SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date:  May 14, 1998   LEGACY SOFTWARE, INC.


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



                                       25