--------------------------------------------------------------------------------

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

                                   -----------

                                    FORM 10-K

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

                    For the fiscal year ended March 31, 2001

                         Commission File Number 0-21336

                                   -----------

                                 THE 3DO COMPANY

             (Exact name of Registrant as specified in its charter)

          Delaware                                         94-3177293
(State or other jurisdiction of                         (I.R.S. employer
 incorporation or organization)                       identification number)


                100 Cardinal Way, Redwood City, California 94063
              (Address of principal executive offices and zip code)

                                 (650) 385-3000
              (Registrant's telephone number, including area code)

 Securities registered pursuant to 12(b) of the Act:            None
 Securities registered pursuant to Section 12(g)    Common Stock, $.01 Par Value

                                   -----------

         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 |_|

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K.

         As of May 31, 2001, the aggregate market value of the voting stock held
by  non-affiliates  of the Registrant was  $125,953,048  (based upon the closing
sales  price of such stock as  reported  by the Nasdaq  National  Market on such
date). Shares of Common Stock held by each officer,  director,  and holder of 5%
or more of the outstanding  Common Stock on that date have been excluded in that
such persons may be deemed to be  affiliates.  This  determination  of affiliate
status is not necessarily a conclusive determination for other purposes.

         As  of  May  31,  2001,  the  number  of  outstanding   shares  of  the
Registrants' Common Stock was 47,611,442.

--------------------------------------------------------------------------------
<PAGE>

                                 THE 3DO COMPANY

                         2001 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS


                                     PART I
<TABLE>
                                                                                                                Page
                                                                                                                ----
<CAPTION>
<S>     <C>                                                                                                       <C>
   Item 1.          Business                                                                                      3
   Item 2.          Properties                                                                                   17
   Item 3.          Legal Proceedings                                                                            18
   Item 4.          Submission of Matters to a Vote of Security Holders                                          18



                                     PART II


    Item 5.         Market for Registrant's Common Equity and Related Stockholder Matters                        18
    Item 6.         Selected Financial Data                                                                      18
    Item 7.         Management's Discussion and Analysis of Financial Condition and Results of Operations        20
    Item 7A.        Quantitative and Qualitative Disclosures About Market Risk                                   26
    Item 8.         Consolidated Financial Statements and Supplemental Data                                      27
    Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure         28


                                    PART III


   Item 10.         Executive Officers and Directors of the Registrant                                           28
   Item 11.         Executive Compensation                                                                       30
   Item 12.         Security Ownership of Certain Beneficial Owners and Management                               32
   Item 13.         Certain Relationships and Related Transactions                                               33


                                     PART IV


    Item 14.        Exhibits, Financial Statements, Schedules and Reports on Form 8-K                            34
                    Signatures                                                                                   56
</TABLE>
                                      -2-
<PAGE>

                                     PART I


ITEM 1. BUSINESS


OVERVIEW

         We  are a  leading  developer  and  publisher  of  branded  interactive
entertainment software. We were incorporated in California in September 1991 and
commenced  operations  in October  1991.  In April  1993,  we  reorganized  as a
Delaware  holding company and acquired an entity that had developed our hardware
technology.  We acquired Cyclone Studios in November 1995, Archetype Interactive
Corporation in May 1996 and certain assets of New World Computing,  Inc. in June
1996. We currently have an active subsidiary in the United Kingdom,  3DO Europe,
Ltd.

         Our software products operate on several multimedia platforms including
personal  computers,  the PlayStation  game console,  the PlayStation 2 computer
entertainment  system,  the Nintendo 64 game system, the Nintendo Game Boy Color
hand-held game system, and the Internet. We have also developed software for the
Nintendo  Game Boy Advance  hand-held  game system and are  preparing to develop
software for other next generation  video game consoles.  We plan to continue to
extend  our  popular  brands  across  multiple  categories,   or  "genres,"  and
platforms.  These brands include Army Men, Heroes of Might and Magic,  High Heat
Baseball,  World  Destruction  League  and  Might  and  Magic.  We also  plan to
introduce  new brands  across  multiple  platforms  including  Jonny Moseley and
Cubix.  Our  software  products  cover a variety  of genres,  including  action,
strategy, adventure/role playing, sports and family entertainment.

         We distribute our products  through a broad variety of retail  outlets,
including mass  merchants,  warehouse club stores,  computer and software retail
chains and other specialty retailers. We sold our products to over 20,000 retail
outlets  in fiscal  2001.  Our  largest  retail  customers  in fiscal  2001 were
Wal-Mart,  Best Buy, Electronics Boutique,  Babbage's,  Toys "R" Us, Blockbuster
Entertainment, Target, Sears, Jack of All Games and Kmart.

         Our software  publishing  revenues decreased to $82.8 million in fiscal
2001 from $122.2 million in fiscal 2000 and increased from $48 million in fiscal
1999.  Our net loss was $77.0  million in fiscal 2001  compared to net income of
$0.2  million in fiscal  2000 and a net loss of $13.2  million  in fiscal  1999.
Research and  development  costs  increased to $48.9 million in fiscal 2001 from
$34.3 million in fiscal 2000 and from $25.9  million in fiscal 1999.  The change
in net income  during  fiscal 2001  reflects the impact on revenue of a platform
transition  year and an increase in research and  development as we prepared for
the next generation of console  systems.  Our total assets were $66.6 million as
of the end of fiscal 2001  compared with $97.8 million for fiscal 2000 and $40.5
million as the end of fiscal 1999.  In fiscal 2001,  we released 35 new products
compared to 31 new  products in fiscal 2000 and 14 new  products in fiscal 1999.
New products consist of new brands, sequels and line extensions  released on one
or more  platforms.  We are  currently  developing  over 30 new products that we
expect to release in fiscal 2002.


                                      -3-
<PAGE>
INDUSTRY BACKGROUND

         According to the Interactive Digital Software Association,  an industry
trade association,  video games sales have been growing at an annual rate of 15%
a year over the last several years, double the rate of growth of the US economy,
and outperforming the growth of other  entertainment and technology  industries.
The NPD Group,  a leading  provider of  marketing  information,  estimates  that
retail sales of  interactive  entertainment  software and hardware in the United
States were $8.0 billion in calendar year 2000,  rivaling ticket sales of the US
movie industry.

         A  shortage  of  PlayStation  video game  consoles  and  PlayStation  2
computer  entertainment  systems  as well as  declining  price  points for older
systems and their  software  affected the  industry's  overall  dollar growth in
2000.  Introduced in October 2000, Sony's  PlayStation 2 computer  entertainment
system  represents  the  beginning  of a  new  generation  of  console  systems.
Increasing shipments of PlayStation 2 computer entertainment systems,  joined by
the projected U.S.  introductions  of  Microsoft's  X-Box on November 8th, 2001,
Nintendo's  Game Cube on November 5th,  2001, and the hand-held Game Boy Advance
in June  2001 (each is expected to be followed by European  introductions 3 to 6
months later) are expected to accelerate  the video game cycle.  Each new system
boasts its own distinctive gaming and entertainment qualities.

         The NPD Group  estimates that a total of 45.4 million Sony  PlayStation
and Nintendo 64 video game console systems  have  been sold in North  America as
of December  2000,  approximately  five years after their initial  introduction.
Industry  sources  forecast  that  next-generation  consoles  will  have a North
American  installed  base  of 45  million  by the  end of  2003.  Growth  in the
installed  base of personal  computers  is also driving  demand for  interactive
entertainment  software.   International  Data  Corporation  forecasts  that  PC
penetration of U.S. homes will exceed 52% by year-end 2000. Assuming 80% of home
PCs are used at least partly to play games (as  suggested in consumer  surveys),
the  installed  base  of PCs  used  to  play  games  exceeds  that  of  previous
generations of video games at the peak of a cycle.


                                      -4-
<PAGE>

         The  Internet  provides a means by which  consumers  may play games and
obtain  information   regarding  interactive   entertainment   software  titles.
Individuals may play multiplayer server-based games that reside on Web sites and
servers  maintained  by software  companies.  Additionally,  players may compete
against  each  other  over  the  Internet   using   CD-ROM-based   games  having
multi-player  capabilities  that  reside on their own  personal  computers.  The
Internet also allows  consumers to participate in chat rooms to discuss features
and exchange ideas  regarding the games,  download video clips and demos of some
games and purchase games online.

         The interactive  entertainment software market can generally be divided
into several game categories or genres.  According to the IDSA, the most popular
genres include action,  puzzle/board/card,  sports, and adventure/role  playing.
The hit-driven nature of the market has often led to higher  production  budgets
for titles as well are more complex  development  and  production  processes and
longer  development  cycles.  Publishers  with a history of producing hit titles
have  generally  enjoyed a  significant  marketing  advantage  because  of their
heightened  brand  recognition  and  customer  loyalty.  To  capitalize  on this
heightened  brand  recognition  and  customer  loyalty,   some  publishers  have
introduced sequels or line extensions of their hit titles. Sequels are typically
new releases of games based upon the original game concept that also include new
characters,  settings,  and game-play attributes.  Line extensions are typically
new  releases of games based upon the same  successful  brands and  offering the
brand in a different genre and/or on additional platforms.

         We believe that the importance of the timely release of hit titles,  as
well as the increased scope,  complexity and expense of the product  development
and  production  process,  have  increased  the  need  for  disciplined  product
development   processes  that  limit  cost  and  schedule  overruns  and  reduce
development  time.  We believe that this need has  increased  the  importance of
leveraging the technologies,  characters and story lines of past or existing hit
titles into additional  interactive  entertainment software products in order to
spread development costs among multiple products.

         The industry  experienced a very difficult  transition year caused by a
lack of  PlayStation  video game  consoles for nearly six months and a perceived
shortage of PlayStation 2 computer entertainment systems through Christmas 2000.
This  created  significant  competition  for shelf space at mass  merchants  and
software  electronic stores due in large part to a glut of excessive software in
light of  limited  quantities  of  hardware.  As a  result,  these  high  volume
retailers  began to stock a more limited number of titles expected to sell large
quantities of units. We believe retailers consider the historical performance of
games and may be more willing to stock  sequels to  successful  brands and "hot"
genres (e.g., extreme sports and high profile license properties). Retailers are
also seeking to distribute their  advertising  budget across a smaller number of
titles.  We believe that these trends have  increased the importance of building
upon  well-known  brands  in  addition  to  identifying  and  pursuing  licensed
properties.

         We have produced  games for the  PlayStation  2 computer  entertainment
system  and  hand-held  GameBoy  Advance  platforms  and plan to make  games for
Nintendo's GameCube.  Software for new platforms requires different standards of
design and technology to fully exploit their  capabilities.  The introduction of
new platforms also requires that game developers devote  substantial  additional
resources to product design and development.



COMPETITION

         The   interactive   entertainment   software   industry  is   intensely
competitive and is  characterized  by the frequent  introduction of new hardware
systems and software products. Our competitors vary in size from small companies
to very large corporations with significantly  greater financial,  marketing and
product development  resources than us. Due to these greater resources,  some of
our competitors are better able to undertake more extensive marketing campaigns,
adopt more  aggressive  pricing  policies,  and pay higher fees to  licensors of
desirable properties and to third party software developers. We believe that the
principal competitive factors in the interactive entertainment software industry
include brand name recognition,  entertainment value of specific titles, product
features, quality, ease of use, price and product support.

         We compete primarily with other publishers of interactive entertainment
software for personal computers and video game consoles. Significant competitors
include Acclaim Entertainment,  Activision,  Eidos, Electronic Arts, Infogrames,
Interplay,  Lucas Arts,  Midway,  Take-Two  Interactive  and THQ.  In  addition,
integrated  video  game  console  hardware/software  companies  such as Sony and
Nintendo  compete  directly by  developing  their own software  titles for their
respective  platforms.  Large diversified  entertainment or software  companies,
such as The Walt  Disney  Company or

                                      -5-
<PAGE>

Microsoft, many of which own substantial libraries of available content and have
substantially  greater  financial  resources  than us,  may  decide  to  compete
directly with us or to enter into exclusive relationships with our competitors.

         Retailers  of our  products  typically  have a limited  amount of shelf
space and promotional resources, and there is intense competition among consumer
software  publishers,  and  in  particular  interactive  entertainment  software
publishers,  for high quality  retail shelf space and  promotional  support from
retailers.  To the extent  that the number of  consumer  software  products  and
computer platforms increases,  competition for shelf space may intensify and may
require us to increase our marketing expenditures.  Due to increased competition
for limited  shelf space,  retailers  and  distributors  are in an  increasingly
better position to negotiate favorable terms of sale, including price discounts,
price  protection,  marketing and display fees and product return privileges and
other  concessions.  Retailers  and  distributors  also  consider,  as important
competitive  factors,   marketing  support,  quality  of  customer  service  and
historical performance. Our products constitute a relatively small percentage of
any retailer's sales volume.


INTERACTIVE ENTERTAINMENT SOFTWARE DEVELOPMENT

         With 426 studio employees as of March 31, 2001, we believe that we have
one of the largest internal development groups in the interactive  entertainment
software  industry.  Our  internal  development  studios  are 3DO  Redwood  City
(Redwood City,  California),  3DO Austin (Austin, Texas) and New World Computing
(Agoura Hills, California).

         We have produced  games for the  PlayStation  2 computer  entertainment
system  and  hand-held  GameBoy  Advance  platforms  and plan to make  games for
Nintendo's GameCube.  Software for new platforms requires different standards of
design and technology to fully exploit their  capabilities.  The introduction of
new platforms also requires that game developers devote  substantial  additional
resources to product design and development.

         We believe our internal  studios  allow us to maintain  better  control
over product quality,  development costs and development schedules in comparison
to companies that outsource product development to external development studios.
By developing  our  interactive  entertainment  software  internally,  we retain
ownership of the technology we develop and spread our investment in research and
development across brands, platforms and genres.

         Our internal studios consist of several development teams, all of which
report to our  Executive  Vice  President of Product  Development.  Each team is
dedicated  to the  development  of a  particular  product for the  duration of a
specific project. A team generally consists of producers,  engineers, designers,
programmers  and  artists.  We allocate  personnel  to brands and  platforms  to
maintain  brand  continuity  and  creativity  in  development  while  seeking to
maximize productivity from experts in the technology for each hardware platform.

         Interactive  entertainment  software  game  concepts  are  generated by
employees from our internal  studios,  as well as from our sales,  marketing and
executive  teams.  Concept or theme  proposals  are reviewed and approved by our
executive  team. We also conduct product and marketing focus groups to determine
the  potential  market for a new product or brand.  Once a game is approved,  we
assign an  executive  producer  and a product  marketing  manager to oversee its
development  and marketing.  This team develops a design document and script for
the game, as well as a timeline. During development,  our executives review each
product's  development  progress against  predetermined  milestones,  as well as
market conditions and the title's  potential  financial  performance.  If market
conditions or development  milestones indicate that the product will not achieve
the approved  strategic or financial plan, we either take corrective  actions or
terminate  the product  and  reallocate  current  resources  to other  projects.
Products we complete are tested by our executive  team and our internal  testing
group prior to release for shipment to the retail channel.

         We  complement  our  internal   development  with  external  resources.
External development firms are used to develop games:


o        on platforms  that are not  supported by internal  capabilities  (e.g.,
         Game Boy Color and Game Boy Advance),

o        that utilize  unique  technologies  developed and owned by the external
         developer,

                                      -6-
<PAGE>
o        when the  nature  or timing of the  desired  development  could be more
         efficiently performed externally,

o        in order to provide unique capabilities (e.g., localization).

SALES, MARKETING AND DISTRIBUTION

         We target the retail channel and consumers  through a variety of sales,
advertising and marketing  campaigns including  television,  print media, public
relations  and  Internet  marketing.   The  selling  and  marketing   strategies
associated  with a  particular  product  may vary  depending  upon  the  product
platform.  Advertising  and marketing  campaigns for  interactive  entertainment
software for the personal  computer usually require  expenditures in print media
such as  trade  magazines,  newspapers  and  consumer  magazines.  Historically,
products  for  the  video  game  console  platform  generally  required  a  more
significant investment in the production of a television campaign. Consumers for
the next generation video game console appear to be best reached by expenditures
in print media, including online marketing.

         In addition to our 51-person internal sales and marketing organization,
which focuses on sales to major North American and United Kingdom  retailers and
distributors,  we also utilize eight independent sales representative firms that
specialize  in the sales and  marketing  of  products  for  video  game  console
platforms.  We also have  several  licensees  that sell our  products in various
territories   including  Europe,  Latin  America,   Asia,  and  Australia.   Our
distributors  purchase fully packaged  products from us for resale to retailers,
while licensees receive master copies of software code and packaging, which they
can  manufacture,  market and sell to  distributors or retailers in exchange for
royalty payments.

North America. We distribute and sell our interactive  entertainment software in
North America through direct relationships with major retail customers,  as well
as through third party  distributors.  Our distributors  primarily sell products
for the personal computer platform. Our largest retailers in fiscal 2001 were:

           Wal-Mart                                    Kmart
           Toys "R" Us                                 Babbage's
           Best Buy                                    KayBee Toys
           Target                                      Jack of all Games
           Blockbuster Entertainment                   Hollywood Video
           Electronics Boutique

         In fiscal 2001,  sales to Wal-Mart and Kmart each represented more than
10% of our total software publishing revenues. In fiscal 2000, sales to Wal-Mart
represented more than 10% of our total software  publishing  revenues.  Sales to
our five  largest  customers  accounted  for  approximately  49% of our software
publishing  revenues in fiscal 2001 and 40% of our software  publishing revenues
in fiscal 2000.

International.  3DO  Europe Ltd.  utilizes  direct  distribution of its products
into the United  Kingdom  utilizing its own sales and marketing  staff.  We also
have  numerous  distribution  agreements  throughout  Europe,  New  Zealand  and
Australia. Our distributors purchased fully packaged products from us for resale
to  retailers  and 3DO works  closely with them to generate  targeted  marketing
programs for each territory. We also have licensing agreements in Asia and Latin
America  in which  licensees receive  master  copies  of the  software  code and
packaging,  which  they can  manufacture,  market  and sell to  distributors  or
retailers in exchange for royalty  payments.  Sales from our European entity for
the year ended  March 31, 2001 and 2000 were $14.0  million  and $12.3  million,
respectively.  Operating  expenses were $7.0 million and $4.2 million for fiscal
2001 and fiscal 2000, respectively. Assets for this entity were $8.9 million and
$15.3 million at March 31, 2001 and 2000, respectively.


Internet.  We  currently  maintain  an  extensive  Web site which  contains  the
following major sections:

o        Products.  For  each  of our  brands,  the  site  contains  a  detailed
         description of each product and its gameplay.  In some instances  users
         can also download to their  computers a demo containing a few levels of
         each game, a video clip showing actual gameplay,  or actual screenshots
         from each game.  Users have the ability to download  artwork  including
         box art, character renderings,  and wallpaper for display on a computer
         desktop. Our Web site also provides support for each product,  allowing
         users

                                      -7-
<PAGE>
         to download updates and  modifications to our software,  view responses
         to  frequently  asked  questions,  and  communicate  with our  customer
         service department.

o        The 3DO  Community.  This  section  of the  site  allows  customers  to
         register  individually  with their own  profiles and screen  names,  to
         converse  on-line  with  each  other  about our  products,  and to post
         messages and receive mail  regarding  our products.  A free,  Web-based
         e-mail  capability is also offered,  allowing users to send and receive
         mail from a 3DO-branded domain address such as "armymen.com."

o        The 3DO Store. This section of the site offers consumers the ability to
         purchase  packaged  versions of our products online,  directly from us,
         for conventional  delivery to their homes.  The "3DO Pipeline"  section
         allows  consumers to purchase  downloadable  versions of some games for
         electronic delivery to their computers over the Internet.


MANUFACTURING

         We believe that our principal  strengths  are designing and  developing
strong,  high quality  interactive  entertainment  software brands.  In order to
concentrate  our  efforts on brand and title  development,  we have  established
relationships  with  JVC,  Sony and  Nintendo  to  outsource  manufacturing  and
physical  distribution of our titles.  We also outsource these functions to take
advantage of the  manufacturing  economies of scale which these major  companies
can offer and to avoid the capital  investment  and overhead  costs  inherent in
establishing and maintaining internal manufacturing operations.

         Sony  Computer   Entertainment   America  ("SCEA")  has  granted  us  a
non-exclusive license to develop and distribute  entertainment software products
for the PlayStation video game console and PlayStation 2 computer  entertainment
system in the United States,  Canada and Europe.  We pay Sony a per unit royalty
for each unit  manufactured.  Sony is the  exclusive  manufacturer  of  products
licensed  under  these  agreements.  The  agreements  grant us  licenses  to use
proprietary Sony software and hardware to develop titles for the PlayStation and
PlayStation 2 and to use Sony  trademarks to market,  distribute and sell titles
for these platforms. Development of new games under this agreement is subject to
approval  by Sony and  testing and  approval  of the  completed  game by Sony is
required prior to market introduction.

         Nintendo has granted us a non-exclusive  license to utilize proprietary
programming   specifications,   development   tools,   trademarks,   and   other
intellectual  property  rights solely in order to develop and  distribute  video
game  software  for  play on the  Nintendo  64  system  throughout  the  Western
Hemisphere and Western Europe,  Australia, New Zealand, South Africa and certain
countries  of  Eastern  Europe.  Development  of new games  for use  under  this
agreement  is subject to approval by  Nintendo  and testing and  approval of the
completed   game  by  Nintendo  is  required   prior  to  market   introduction.
Additionally,  Nintendo has  exclusive  responsibilities  for  establishing  and
fulfilling all aspects of the manufacturing  process.  We have also entered into
similar  licenses for the Game Boy Color in the U.S. and Europe and for Game Boy
Advanced in the Western  Hemisphere.  Under these agreements,  after licensing a
product,  we buy  discrete  quantities  of  licensed  game  software  units from
Nintendo  for  sale.   We  pay  Nintendo  a  per  unit  royalty  for  each  unit
manufactured.

         JVC manufactures our personal computer  CD-ROMs.  We have granted JVC a
non-exclusive license to replicate compact discs of our executable game software
code and assemble and package materials to create a finished product. Prices for
replication  are pursuant to prices  submitted by written  quotation or contract
and are subject to change annually by JVC based on changes in material and labor
costs and market conditions.  Additionally JVC provides warehousing services and
takes  orders from us for finished  products and packages and prepares  them for
shipping. At no time does JVC acquire any ownership rights to items we supply to
it. The contract may be  terminated  by either party with 60 days' prior written
notice.

         Before we start shipping a product, we provide our manufacturers with a
title's  software  code  and  related  artwork,   user  instructions,   warranty
information, brochures and packaging designs. JVC, Nintendo and Sony manufacture
based on purchase orders we submit in the ordinary  course of business.  JVC and
Sony  generally  ship our titles  within two weeks  after  receiving  our order.
Nintendo  generally  ships titles  within four to six weeks after  receiving our
order  primarily  due  to the  additional  time  required  to  manufacture  game
cartridges overseas. Although we depend on

                                      -8-
<PAGE>
a  limited  number  of  manufacturers,  we have  not  experienced  any  material
difficulties or delays in the manufacture of our titles, nor have we experienced
any  material  delays  due to  title  defects  or due to the  unavailability  of
components  or raw  materials.  Our  software  titles  carry  a  90-day  limited
warranty.


INTELLECTUAL PROPERTY

         We hold copyrights on our products, product literature, advertising and
marketing  materials,  and other  published  materials.  We also hold  trademark
rights in our  corporate  name and logo,  as well as in certain  of our  product
names and publishing  labels. We have licensed certain products to third parties
for manufacture and distribution in particular  geographic markets,  principally
outside of North America and Europe, and we receive royalties in connection with
such  licenses.  We  currently  outsource  some of our  product  development  to
third-party developers, and have a policy of endeavoring to contractually retain
all intellectual property rights relating to such externally developed projects.

         We  regard  our  software  as  proprietary  and  rely  primarily  on  a
combination  of  copyright,  trademark  and  trade  secret  laws,  employee  and
third-party  nondisclosure  agreements,  and other such  methods to protect  our
proprietary  rights. We own or license various copyrights and trademarks.  While
we provide  end-user license  agreements or other  limitations on the use of our
software,  the  enforceability  of such  agreements or limitations is uncertain.
While we  copy-protect  our  products,  we are aware that  unauthorized  copying
occurs within the computer  software  industry,  and if a significantly  greater
amount of  unauthorized  copying of our  software  products  were to occur,  our
operating results could be materially adversely affected.

         We  rely  on  existing  copyright  laws  to  prevent  the  unauthorized
reproduction and distribution of our software.  However, existing copyright laws
afford only limited  protection.  Policing  unauthorized  use of our products is
difficult,  and  software  piracy can be  expected to be a  persistent  problem,
especially  in  certain  international  markets.  Further,  the laws of  certain
countries in which our products are or may be distributed  either do not protect
our products and intellectual  property rights to the same extent as the laws of
the U.S. or are weakly enforced, and consequently legal protection of our rights
may be ineffective in such countries.  Additionally,  if we seek to leverage our
software products using emerging technologies,  such as the Internet and on-line
services,  it may become more  difficult  to protect our  intellectual  property
rights  and to avoid  infringing  the  intellectual  property  rights of others.
Furthermore,  the intellectual property laws are less clear with respect to such
emerging technologies.  We cannot be certain that existing intellectual property
laws  will  provide  adequate  protection  for  our  products  and  services  in
connection with such emerging technologies.

         As the number of  interactive  entertainment  software  products in the
industry  increases  and the  features  and  content of these  products  further
overlap,  software  developers may  increasingly  become subject to infringement
claims.  Although we believe that we make reasonable  efforts to ensure that our
products do not violate the intellectual property rights of others, we cannot be
certain that claims of infringement  will not be made. Any such claims,  with or
without merit, can be time consuming and expensive to defend. From time to time,
we have received  communications  from third parties  asserting that features or
content of certain of our products may infringe upon the  intellectual  property
rights  of  such  parties.   We  cannot  be  certain  that  existing  or  future
infringement  claims against us will not result in costly  litigation or require
us to seek to license the intellectual  property rights of third parties,  which
licenses may not be available on acceptable terms, if at all.

         We license  certain  copyrights and trademarks for use in our High Heat
Baseball brand and pay applicable royalties to Major League Baseball Properties,
Inc. and the Major League Baseball Players  Association.  If we should be unable
to maintain or renew those licenses for use in High Heat  Baseball,  we would be
unable to release  additional sequels and line extensions for that brand and our
operating results could be materially adversely affected.


GOVERNMENT REGULATION

         The  home  video  game  industry  requires  interactive   entertainment
software publishers to provide consumers with information about graphic violence
and sexually  explicit  material  contained in their  interactive  entertainment
software  products.  This system  requires  publishers  to  identify  particular
products within defined rating categories

                                       -9-
<PAGE>

and communicate such ratings to consumers through  appropriate  package labeling
and  through  advertising  and  marketing  presentations  consistent  with  each
product's rating.

         Mandatory   government-imposed   interactive   entertainment   software
products rating systems  eventually may be adopted in many countries,  including
the United States.  Due to the uncertainties  inherent in the  implementation of
rating systems,  confusion in the  marketplace may occur,  and publishers may be
required to modify or remove products from the market. However, we are unable to
predict what effect, if any, such rating systems would have on our business.

         Many foreign countries have laws which permit governmental  entities to
censor  the  content  of  certain  works,  including  interactive  entertainment
software.  As a result, we may be required to modify our products to comply with
these  requirements,  or withdraw  them from the market  which  could  result in
additional expense and loss of revenues.

         Certain  retailers  have in the past  declined  to stock some  software
products because they believed that the content of the packaging  artwork or the
products would be offensive to their  customer base.  Although such actions have
not yet  affected us, we cannot be certain  that our  distributors  or retailers
will not take such actions in the future.

EMPLOYEES

         As of March 31,  2001,  we  employed  526  full-time  employees  and 28
independent  contractors to supplement  our permanent work force.  These persons
provided  services in the following  areas:  426 in product  development,  51 in
sales and marketing, and 77 in finance,  administration,  distribution and legal
services.  We believe that our relations  with  employees are good.  None of our
employees are subject to collective bargaining agreements.

RISK FACTORS

Our quarterly  operating results  frequently vary  significantly due to factors,
many of which are outside our control.

         We  have   experienced  and  expect  to  continue  to  experience  wide
fluctuations in quarterly  operating results as a result of a number of factors.
We cannot control many of these factors, which include the following:


         o        market acceptance of our titles;


         o        the timing and  number of new video game  consoles  introduced
                  and  shipped to  market,  such as the  PlayStation  2 computer
                  entertainment system;

         o        the timing and number of new title introductions;


         o        the mix of sales of higher  and  lower  margin  products  in a
                  quarter.  We typically  earn a higher gross margin on sales of
                  games for the personal  computer  platform.  Gross  margins on
                  sales of products for game  console  platforms  are  generally
                  lower because of license fees payable to Sony and Nintendo and
                  higher   manufacturing  costs  for  game  cartridges  for  the
                  Nintendo 64 console platform.  Therefore, our gross margins in
                  any  period  can  be  significantly  affected  by  the  mix of
                  products we sell for the personal  computer,  Sony PlayStation
                  and Nintendo 64 platforms;


         o        development   and   promotional   expenses   relating  to  the
                  introduction  of  new  titles,   sequels  or  enhancements  of
                  existing titles;

         o        product returns;

         o        changes in pricing policies by us and our competitors;

         o        the timing of orders from major  customers  and  distributors;
                  and

         o        delays in production and shipment.

         For these reasons, you should not rely on period-to-period  comparisons
of our financial results as indications of

                                      -10-
<PAGE>

future results.  Our future operating  results could fall below the expectations
of securities industry analysts or investors. Any such shortfall could result in
a significant  decline in the market price of our common stock.  Fluctuations in
our operating results will likely increase the volatility of our stock price.

Our revenues could be significantly affected by many uncertain factors.

         There are many business and economic  factors that could  significantly
affect our revenues, which include:

o        If new platform  introductions  are delayed,  we could lose significant
         revenues.  Our  ability  to sell our  products  depends  on the  timely
         introduction of platforms and their  achievement of market  acceptance.
         Delays in the  introduction  or limited  availability  of hardware have
         harmed our operating  results and continued  shortages of hardware pose
         serious uncertainty for our quarterly and fiscal year results;

o        Significant  portions of our historical revenues have been derived from
         a limited  number of brands,  so a decline in a brand's  popularity may
         seriously  harm our revenues.  The Army Men brand  represented  61% and
         Might and Magic  represented  18% of our total revenues in fiscal 2001.
         Because we depend on a limited number of brands for the  development of
         sequels and line extensions,  if one or more of our brands were to lose
         their current  popularity,  our revenues and profits could be seriously
         harmed.  Furthermore,  we  cannot  be  certain  that a  sequel  or line
         extension of a popular brand will be as popular as prior titles in that
         brand;

o        Historically, the anticipation or introduction of next-generation video
         game   platforms  has  resulted  in  decreased   sales  of  interactive
         entertainment  software for existing  platforms.  Sony  introduced  its
         PlayStation  2  computer  entertainment  system in October  2000.  Both
         Microsoft and Nintendo are expected to introduce the new X-Box and Game
         Cube, respectively, in November 2001. Sales of our current products for
         the current  Nintendo and Sony  PlayStation have already been adversely
         affected  and we expect  this trend to  continue  until one or more new
         platforms  achieves a widely installed base of consumers.  Obsolescence
         of software or platforms  could leave us with increased  inventories of
         unsold titles and limited amounts of new titles to sell to consumers.

o        If we do not create  titles for new  hardware  platforms,  our revenues
         will decline.  The  interactive  entertainment  software market and the
         personal  computer  and video game console  industries  in general have
         been affected by rapidly changing  technology,  which leads to software
         and platform obsolescence. Our titles have been developed primarily for
         multimedia  personal  computers and video game  systems,  including the
         Nintendo 64, Game Boy Color,  PlayStation  video game  consoles and the
         PlayStation 2 computer  entertainment system. Our software designed for
         personal  computers  must  maintain  compatibility  with  new  personal
         computers, their operating software and their hardware accessories.  If
         we are unable to successfully adapt our software and develop new titles
         to function on various hardware  platforms and operating  systems,  our
         business could be seriously harmed;

o        If our new product introductions are delayed, we could lose significant
         potential  revenues.  Most of our products have a relatively short life
         cycle  and  sell for a  limited  period  of time  after  their  initial
         release,   usually  less  than  one  year.  We  depend  on  the  timely
         introduction of successful new products,  including  enhancements of or
         sequels to existing  products and  conversions  of previously  released
         products to  additional  platforms,  to replace  declining net revenues
         from older products;

o        Our  arrangements  with  retailers for published  titles  require us to
         accept returns for unsold titles or defects, or provide adjustments for
         markdowns.  We  establish  a reserve  for future  returns of  published
         titles at the time of sales,  based  primarily on these return policies
         and historical return rates, and we recognize  revenues net of returns.
         Our  provision for sales  returns and  allowances  was $12.1 million at
         March 31, 2001. If return rates or markdowns  significantly  exceed our
         estimates, our business could be seriously harmed.

o        If our new products  have defects, we could lose potential revenues and
         increase our costs;

o        Our  contract  manufacturers,  Sony,  Nintendo  and  JVC,  may not have
         sufficient  production capacity to satisfy our scheduling  requirements
         during any period of sustained  demand.  If manufacturers do not supply
         us  with  finished  titles  on  favorable  terms  without  delays,  our
         operations could be materially  interrupted,  and our business could be
         seriously harmed.

                                      -11-
<PAGE>

o        If an  economic  slowdown  in the  United  States  leads  to  decreased
         consumer  spending on  entertainment  products,  our  results  could be
         adversely affected.

Our future capital needs are uncertain and we may not be able to satisfy them.

         During  fiscal 2001, we raised $40.0  million in equity  financing.  We
believe that existing sources of liquidity and anticipated funds from operations
will satisfy our  projected  working  capital  requirements  through the fall of
2001,  at which time we may need to raise  additional  capital.  Our  ability to
maintain sufficient liquidity through fall of 2001 is particularly  dependent on
us achieving  our projected  sales  forecasts in the period and on the continued
availability of our line of credit with Foothill Capital Corporation. If we need
to raise  additional  capital,  such capital may not be available on  acceptable
terms, if at all. We may also require additional capital to acquire or invest in
complementary  businesses  or products or obtain the right to use  complementary
technologies.  If we issue  additional  equity  securities  to raise funds,  the
ownership  percentage  of  our  existing  stockholders  would  be  reduced.  New
investors  may  demand  rights,  preferences  or  privileges  senior to those of
existing  holders of our common  stock.  Debt  incurred by us would be senior to
equity in the ability of debt holders to make claims on our assets. The terms of
any debt issued could impose  restrictions on our operations.  If adequate funds
are not available to satisfy either short or long-term capital requirements,  we
may be required to curtail our operations significantly or to seek funds through
arrangements  with  strategic  partners or other  parties that may require us to
relinquish material rights to certain of our products, technologies or potential
markets, or we may become insolvent.

Our sales are seasonal, and we depend on strong sales during the holiday season.

         Sales of our titles are seasonal. Our peak shipments typically occur in
the fourth and first calendar quarters (our third and fourth fiscal quarters) as
a result of increased demand during the year-end and after holiday season. If we
do not achieve  strong sales in the second half of each fiscal year,  our fiscal
year results would be adversely affected.

Our business  depends on "hit"  products,  so if we fail to anticipate  changing
consumer preferences we could suffer declining revenues.

         Few interactive entertainment software products have achieved sustained
market  acceptance,  with those "hits"  accounting for a substantial  portion of
revenues in the industry. Our ability to develop a hit title depends on numerous
factors beyond our control, including:

         o        critical reviews;

         o        public tastes and preferences that change rapidly and are hard
                  to predict;

         o        the price and timing of new interactive  entertainment  titles
                  released and distributed by us and our competitors;

         o        the   availability,   price  and  appeal  of  other  forms  of
                  entertainment; and

         o        rapidly changing consumer preferences and demographics.

         If we fail to  accurately  anticipate  and  promptly  respond  to these
factors,  our  sales  could  decline.  If  we do  not  achieve  adequate  market
acceptance of a title, we could be forced to accept substantial  product returns
or grant  significant  markdown  allowances to maintain our  relationships  with
retailers and our access to distribution channels.


If more mass merchants establish exclusive buying  arrangements,  or if one were
to  terminate  its  relationship  with us, our sales and gross  margin  would be
adversely impacted.

         Mass merchants have become the most important distribution channels for
retail  sales of  interactive  entertainment  software.  A number of these  mass
merchants,  including Wal-Mart,  have entered into exclusive buying arrangements
with other software  developers or  distributors,  which prevent us from selling
some of our  products

                                      -12-
<PAGE>

directly to that mass merchant.  If the number of mass  merchants  entering into
exclusive buying arrangements with software  distributors were to increase,  our
ability to sell to those  merchants  would be restricted to selling  through the
exclusive  distributor.  Because we typically earn a lower gross margin on sales
to distributors than on direct sales to retailers, this would have the effect of
lowering our gross margin.

We rely on external developers for the development of many of our titles.

         While we develop  the  majority of our titles  internally,  many of our
titles are developed by third-party developers. A delay in the work performed by
the  third-party  developer  may result in delay of our release of the  affected
product.  The  work by the  third-party  developers  may not  meet  our  quality
standards,  and, as a result,  we may terminate the  development  contracts with
some developers.  Our hardware  licensors (e.g. Sony and Nintendo)  require that
third-party  developers  obtain and maintain  licensor  authorization to develop
games on our behalf that are compatible with the licensor's  hardware  platform;
through no fault of 3DO, the developers'  authorization  to develop games for us
may be terminated by the hardware licensor.

If we needed to write down prepaid  royalties or capitalized  development  costs
below the current  recorded value,  our results of operations could be adversely
affected.

         We typically  enter into  agreements  with  licensors of properties and
developers  of  titles  that  require  advance   payments  of  royalties  and/or
guaranteed  minimum  royalty  payments.  We cannot be assured  that the sales of
products for which such royalties are paid or guaranteed  payments are made will
be sufficient to cover the amount of these required payments.  We capitalize our
advances to developers on our balance sheet as a part of "prepaid royalties." We
analyze our prepaid royality costs quarterly,  and we will take write-offs when,
based on our  estimates,  future  individual  product  contribution  will not be
sufficient to recover our investment.

         We capitalize external use software cost once technological feasibility
is established.  Amortization  of capitalized  software costs is recognized on a
straight-line basis over the estimated economic lives of the related products or
the amount  computed  using the ratio of current gross revenues for a product to
the total of current and anticipated future revenues for that product, whichever
is greater.

The industry competition is intensive and the retail shelf space is limited.

         The   interactive   entertainment   software   industry  is   intensely
competitive and is  characterized  by the frequent  introduction of new hardware
systems and software products. Our competitors vary in size from small companies
to very large corporations which have significantly greater financial, marketing
and product development resources than us. Due to these greater resources,  some
of our  competitors  are  better  able to  undertake  more  extensive  marketing
campaigns,  adopt more  aggressive  pricing  policies,  pay higher fees to third
party software developers and licensors of desirable properties.

         Our competitors include the following:

         o        Other  publishers of  interactive  entertainment  software for
                  personal computer and video game consoles,  including Acclaim,
                  Activision,  Eidos,  Electronic Arts,  Infogrames,  Interplay,
                  Lucas Arts, Take Two Interactive, Midway, Sega, and THQ.

         o        Integrated video game console hardware/software companies such
                  as Sony and  Nintendo,  who  compete  directly  with us in the
                  development of software titles for their respective platforms.

         o        Large diversified entertainment or software companies, such as
                  The Walt  Disney  Company  or  Microsoft,  many of  which  own
                  substantial   libraries   of   available   content   and  have
                  substantially  greater  financial  resources  than us, who may
                  decide to compete  directly with us or to enter into exclusive
                  relationships with our competitors.

         Retailers  of our  products  typically  have a limited  amount of shelf
space  and  promotional  resources.   Publishers  of  interactive  entertainment
software  products  compete  intensely  for high quality  retail shelf


                                      -13-
<PAGE>

space and promotional  support from retailers.  To the extent that the number of
consumer software products increases,  competition for shelf space may intensify
and may require us to increase  our  marketing  expenditures.  Our  business and
financial  condition  may  be  materially  adversely  affected  if  any  of  our
significant  customers  terminate their  relationship  with us or  significantly
reduce the amount of business they do with us.

Our  sales and  accounts  receivable  are  concentrated  in a limited  number of
customers.

         During fiscal 2001, two customers  accounted for 10% or higher of total
revenues and sales to our five largest customers accounted for approximately 49%
of our revenues.

         Our sales are typically made on credit,  with terms that vary depending
upon the customer and the demand for the particular  title being sold. We do not
hold any  collateral to secure  payment by our  customers.  As a result,  we are
subject to credit risks,  which are  increased  when our  receivables  represent
sales to a limited number of retailers or  distributors  or are  concentrated in
foreign markets.  Distributors and retailers in the computer  industry have from
time to time experienced significant fluctuations in their businesses, and there
have been a number of business failures among these entities.  The insolvency or
business  failure of any  significant  distributor  or retailer of our  products
could result in reduced  revenues and write-offs of accounts  receivable.  If we
are  unable to  collect  on  accounts  receivable  as they  become  due and such
accounts are not covered by insurance,  it could adversely  affect our business,
operating results and financial condition.

Sony and Nintendo can  influence the number of games that we can publish as well
as our gross margin and product introduction schedules.

         We depend heavily on non-exclusive licenses with Sony and Nintendo both
for the right to publish titles for their  platforms and for the  manufacture of
our software  designed for use on their  platforms.  Our licenses  with Sony and
Nintendo  require that we obtain their concept approval for each of the products
that we would like to publish,  as well as their approval of the completed games
and all associated artwork and marketing materials.  This approval process could
cause a delay in our  ability  to  release  a new  title  and  cause us to incur
additional  expenses to modify our  products in order to obtain  approval.  As a
result,  the number of titles we are able to publish for these  platforms may be
limited or may be delayed from our originally planned release dates.

         Our license with Sony Computer  Entertainment America ("SCEA") covering
the  publishing  of  PlayStation  2 titles in the  United  States  and Canada is
scheduled  to expire in March 2003,  while our license  with SCEA  covering  the
publishing  of  PlayStation  titles in the United  States,  Canada and Mexico is
scheduled to expire in March 2005. Our license with Sony Computer  Entertainment
Europe  ("SCEE")  covering the  publishing of  PlayStation  2 titles  throughout
Europe,  Australia,  New Zealand, and certain countries in Africa and the Middle
East, is scheduled to expire in March 2003, while our license with SCEE covering
the  publishing  of  PlayStation  titles in such  countries and  territories  is
scheduled  to expire  in  December  2005.  Our  license  with  Nintendo  for the
publishing of N64 titles in the Western Hemisphere is scheduled to expire in May
2004.  Our  license  with  Nintendo  for the  publishing  of N64  titles  in the
principal countries of Western Europe, Australia, New Zealand, South Africa, and
certain countries in Eastern Europe is scheduled to expire in November 2002. Our
license with Nintendo  regarding the  publishing of Game Boy Color titles in the
Western Hemisphere is scheduled to expire in September 2002, and our license for
the principal countries of Western Europe, Australia, New Zealand, South Africa,
and certain  countries in Eastern Europe is scheduled to expire in January 2003.
Our license with Nintendo  regarding the publishing of Game Boy Advanced  titles
in the Western  Hemisphere  is scheduled to expire in May 2004.  If any of these
licenses were terminated or not renewed on acceptable  terms, we would be unable
to develop and publish  software for these  platforms and our business  would be
seriously harmed.

         Both Sony and  Nintendo  are the sole  manufacturers  of the  titles we
publish  under  licenses  from them.  Each  platform  license  provides that the
manufacturer  may  raise our costs  for the  titles at any time and  grants  the
manufacturer  substantial  control  over  whether  and when we can  release  new
titles. The relatively long manufacturing and delivery cycle for cartridge-based
titles  for the  Nintendo  platform  (from  four to six  weeks)  requires  us to
accurately  forecast  retailer and consumer demand for our titles far in advance
of expected  sales.  Nintendo  cartridges are also more expensive to manufacture
than CD-ROMs,  resulting in greater inventory risks for those titles.  Both Sony
and Nintendo also publish  software for their own platforms and also manufacture
titles for all of their other licensees and may choose to give priority to their
own titles or those of other publishers if they have insufficient  manufacturing
capacity or if there is increased demand.

                                      -14-
<PAGE>

If our  international  operations  expand,  we will encounter  risks which could
adversely affect our business.

         Our  products  are sold in  international  markets  both  directly  and
through  licensees,  primarily in Canada,  the United Kingdom and other European
countries,  and to a lesser extent in Asia and Latin America. As a result of our
current  international  sales and our  international  expansion,  we will become
increasingly  subject  to risks  inherent  in  foreign  trade,  which can have a
significant impact on our operating results. These risks include the following:

         o        increased  costs to develop foreign  language  versions of our
                  products;

         o        increased credit risks and collection difficulties;

         o        tariffs and duties;

         o        increased risk of piracy;

         o        shipping delays;

         o        fluctuations in foreign currency exchange rates; and

         o        international political, regulatory and economic developments.

If  Internet-based  gameplay becomes  popular,  we would need to quickly develop
products and establish a viable Internet business model.

         We previously offered a role playing fantasy game called "Meridian 59,"
which was a server-based  Internet game. This type of game's software resided on
a remote server,  and was played only by accessing that server via the Internet.
Meridian 59 did not achieve  significant  market  penetration.  We provided free
play time and other incentives,  such as discounts and contests, to interest the
limited  number  of  consumers  currently  in the  Internet  game  market to try
Meridian 59. We did not establish that any of these incentives, the availability
of  server-based  games on the  Internet or whether the  expenses we incurred in
offering  these  incentives  resulted  in  significant  growth in the use of our
server-based  Internet games or would generate revenues for us in the future. As
a  result  of  these  factors,  we  announced  that  we  would  discontinue  the
availability  of Meridian 59 in June 2000.  The product was offered to users for
free until September 2000. A number of software  publishers who competed with us
have developed or are currently developing  server-based  Internet games for use
by consumers over the Internet. If the Internet becomes a more popular venue for
interactive  software  games,  then we will  need to both  rapidly  develop  and
release games for the Internet,  and also establish a profitable  business model
for Internet-based games.

         In  December  1999,  we were  issued a patent  which  could allow us to
create a new business model in Internet  games and  entertainment.  However,  in
order to fully develop the patent's  potential,  investments will be required in
research and development or to obtain rights to  Internet-related  technologies.
Without the required investment in research and development or without obtaining
rights   regarding  to   technologies   that  would  allow  us  to  exploit  our
Internet-related  patent,  we  cannot be  certain  that we will be able to fully
utilize the patent in a commercially  successful manner. In addition, even if we
are able to use the patent in connection  with the  development  of new Internet
games or other  forms  of  interactive  entertainment  that are  intended  to be
experienced through the Internet,  the development of such products will require
additional  investment  by us. We cannot be certain that such  products  will be
commercially  successful,  nor can we even be  certain  that our  investment  in
developing and marketing such products will be recouped by our sales or licenses
of such products.

We depend on our key  personnel  and our  ability to hire  additional  qualified
personnel.

         Our success is largely  dependent  on the  personal  efforts of certain
personnel,  especially  Trip  Hawkins.  Our success is also  dependent  upon our
ability to hire and retain additional qualified operating,  marketing, technical
and financial personnel. We rely heavily on our own internal development studios
to develop  the  majority of our  products.  The loss of any key  developers  or
groups of  developers  may delay the release of our  products.  Competition  for

                                      -15-
<PAGE>

personnel is intense, especially in the San Francisco Bay Area where we maintain
our headquarters, and we cannot be certain that we will successfully attract and
retain additional qualified personnel.

We rely on a continuous power supply to conduct our operations, and California's
current energy crisis could disrupt our operations and increase our expenses.

         California  is in the midst of an energy  crisis that could disrupt our
operations and increase our expenses.  In the event of an acute power  shortage,
that is,  when power  reserves  for the State of  California  fall  below  1.5%,
California has on some occasions implemented,  and may in the future continue to
implement,  rolling blackouts  throughout  California.  We currently do not have
backup generators or alternate sources of power in the event of a blackout,  and
our  current  insurance  does not  provide  coverage  for any  damages we or our
customers may suffer as a result of any  interruption  in our power  supply.  If
blackouts interrupt our power supply, we would be temporarily unable to continue
operations at our facilities.  Any such  interruption in our ability to continue
operations at our facilities  could damage our  reputation,  harm our ability to
retain existing customers and to obtain new customers,  and could result in lost
revenue,  any of which  could  substantially  harm our  business  and results of
operations.

         Furthermore, the partial deregulation of the energy industry instituted
in 1996 by the California government has caused power prices to increase.  Under
deregulation,   utilities   were   encouraged  to  sell  their   plants,   which
traditionally  had produced most of California's  power,  to independent  energy
companies that were expected to compete  aggressively on price.  Instead, due in
part to a shortage of supply,  wholesale  prices have  skyrocketed over the past
year. If wholesale  prices  continue to increase,  our  operating  expenses will
likely increase, as the majority of our facilities are located in California.

Our business could be adversely  affected by the illegal copying of our software
or by infringement claims brought by or against us.

         Although we use copy-protection  devices, an unauthorized person may be
able  to  copy  our  software  or  otherwise  obtain  and  use  our  proprietary
information. If a significant amount of illegal copying of software published or
distributed by us occurs, our product sales could be adversely impacted.

         Although we make reasonable  efforts to ensure that our products do not
violate the  intellectual  property rights of others,  we cannot be certain that
claims of infringement will not be made. Any such claims, with or without merit,
can be time consuming and expensive to defend

Rating systems for interactive entertainment software,  government censorship or
retailer  resistance  to violent  games could  inhibit our sales or increase our
costs.

         The  home  video  game  industry  requires  interactive   entertainment
software  publishers to identify  products within defined rating  categories and
communicating the ratings to consumers through  appropriate package labeling and
through advertising and marketing  presentations  consistent with each product's
rating. If we do not comply with these requirements,  it could delay our product
introductions and require us to remove products from the market.

         Legislation is currently pending at both the federal and state level in
the United States and in certain foreign  jurisdictions  to establish  mandatory
video   game   rating   systems.   Mandatory   government-imposed    interactive
entertainment software products rating systems may eventually be adopted in many
countries, including the United States. Due to the uncertainties inherent in the
implementation  of such rating  systems,  confusion in the marketplace may occur
and  publishers  may be required to modify or remove  products  from the market.
However, we are unable to predict what effect, if any, such rating systems would
have on our business.

         Many foreign countries have laws which permit governmental  entities to
censor  the  content  of  certain  works,  including  interactive  entertainment
software.  As a result,  we may be required  to modify  some of our  products or
remove them from the market which could result in additional expense and loss of
revenues.

         Certain  retailers  have in the past  declined  to stock some  software
products because they believed that the content of the packaging  artwork or the
products  would be offensive to the  retailer's  customer  base.  Although  such

                                      -16-
<PAGE>

actions have not yet affected us, we cannot be certain that our  distributors or
retailers will not take such actions in the future.

The market price of our common stock may be volatile.

         Disclosures  of  our  operating  results  (particularly  if  below  the
estimates of securities industry  analysts),  announcements of various events by
us or our competitors, and the development and marketing of new titles affecting
the interactive  entertainment  software industry, as well as other factors, may
cause the market  price of our common stock to change  significantly  over short
periods of time.

Future  acquisitions may strain our operations and anti-takeover  provisions may
prevent an acquisition.

         We have acquired  various  properties and businesses,  and we intend to
continue to pursue  opportunities  by making selective  acquisitions  consistent
with our business strategy, although we may not make any more acquisitions.  The
failure to  adequately  address the financial  and  operational  risks raised by
acquisitions of technology and businesses could harm our business.

         Financial risks related to acquisitions include the following:

         o        potentially dilutive issuances of equity securities;

         o        use of cash resources;

         o        the incurrence of additional debt and contingent liabilities;

         o        large write-offs; and

         o        amortization expenses related to goodwill and other intangible
                  assets.

         Acquisitions also involve operational risks, including:

         o        difficulties   in  assimilating   the  operations,   products,
                  technology,  information systems and personnel of the acquired
                  company;   diversion  of  management's  attention  from  other
                  business concerns;

         o        impairment of relationships with our retailers,  distributors,
                  licensors and suppliers;

         o        inability to maintain uniform standards,  controls, procedures
                  and policies;

         o        entrance  into  markets  in  which  we  have no  direct  prior
                  experience; and

         o        loss of key employees of the acquired company.

         Anti-takeover provisions may prevent an acquisition.  Provisions of our
Amended and Restated Certificate of Incorporation,  Bylaws, Delaware law and the
significant  ownership of common stock by Trip  Hawkins,  our Chairman and Chief
Executive officer, could make it more difficult for a third party to acquire us,
even if the acquisition would be beneficial to our stockholders.


ITEM 2.  PROPERTIES

         As of March 31, 2001,  we leased  174,272  square feet in Redwood City,
California, 7,910 square feet in Austin, Texas, and 16,638 square feet in Agoura
Hills,  California,  for an  aggregate  monthly  rent  expense of  approximately
$549,000.  These facilities  house our  administrative,  research,  development,
design and sales operations.  In addition, we lease 3,600 square feet in London,
Great  Britain,  to house our European  operations.  The lease for 14,922 square
feet of the  Redwood  City  facility  expires  in May  2002.  The  lease for the
remaining  159,350 square feet of the Redwood City facility  expires in November
2012. As part of our restructuring during the year ended March 31,

                                      -17-
<PAGE>

2001, we vacated  approximately 26,000 square feet of our Redwood City facility.
We are  actively  pursuing  the  subleasing  of this space and have accrued $0.8
million at March 31, 2001 for anticipated  lease payments on the unused portion.
The lease for the Austin  facility  expires in March 2002, and the lease for the
Agoura Hills facility expires in May 2005. The London lease expires in September
2001. We believe that these facilities are adequate for our current needs.


ITEM 3.  LEGAL PROCEEDINGS

         We are engaged in certain legal actions  arising in the ordinary course
of  business.  We believe  that we have  adequate  legal  defenses  and that the
ultimate  outcome  of  these  actions  will not have a  material  effect  on our
financial position or results of operations, although we cannot be certain as to
the outcome of such litigation.

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

         There were no matters  submitted to a vote of security  holders  during
the quarter ended March 31, 2001.


                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common  stock is quoted on the  Nasdaq  National  Market  under the
symbol  "THDO". The following  table sets forth the high and low  closing  sales
prices per share of our common stock,  as reported on the Nasdaq National Market
for the periods indicated.

                                                          Closing Sales Prices
                                                          --------------------
                                                             High       Low
                                                             ----       ---

Fiscal Year Ended March 31, 2000:
   First Quarter........................................       $6.99     $4.44
   Second Quarter.......................................       10.06      5.13
   Third Quarter........................................       11.00      7.50
   Fourth Quarter.......................................       15.81      7.19
Fiscal Year Ended March 31, 2001:
   First Quarter........................................        8.50      5.28
   Second Quarter.......................................        9.88      6.19
   Third Quarter........................................        6.50      1.53
   Fourth Quarter.......................................        3.38      1.69

         As of May 31, 2001, there were  approximately  828 holders of record of
47,611,442 shares of outstanding common stock.


DIVIDEND POLICY

         We have never declared or paid any dividends on our capital  stock.  We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable  future.  In  addition,  our line of credit  with  Foothill  Capital
Corporation prohibits the payment of dividends.

ITEM 6.  SELECTED FINANCIAL DATA


         The  selected  consolidated  financial  data as of March  31,  2001 are
derived from consolidated financial


                                      -18-
<PAGE>

statements,  audited by PricewaterhouseCoopers  LLP, independent auditors, which
are  included  elsewhere  in this  annual  report  on Form  10-K.  The  selected
consolidated  financial  data as of March  31,  2000 and 1999 are  derived  from
consolidated  financial  statements,  audited  by KPMG LLP,  which are  included
elsewhere  in  this  annual  report  on Form  10-K.  The  selected  consolidated
financial  data as of March  31,  1998 and 1997 are  derived  from  consolidated
financial  statements,  audited by KPMG LLP, which are not included herein.  The
information   below  should  be  read  in  conjunction   with  "Risk   Factors",
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this annual  report on Form 10-K,  as well as reports and documents
filed by us with the Securities and Exchange Commission.

         Our  initial  business  model  was  to  develop  an  interactive  video
entertainment  platform. In 1993, we launched our entertainment platform, but it
failed to achieve  significant market  acceptance.  In 1997, we sold most of our
hardware systems group assets and focused our operations on our current business
of developing and publishing branded interactive entertainment software.



<TABLE>
<CAPTION>
                                                                            Year Ended March 31,
                                                                            --------------------
                                                         1997           1998        1999           2000       2001
                                                         ----           ----        ----           ----       ----
                                                               (in thousands, except per share and other data)
<S>                                                     <C>          <C>          <C>          <C>         <C>
Consolidated Statements of Operations Data:
Software Publishing
Revenues ............................................   $   9,540    $   9,429    $  48,019    $ 122,234   $  82,765
Cost of revenues ....................................       5,397        3,916       13,778       44,823      44,650

Gross profit ........................................       4,143        5,513       34,241       77,411      38,115
Operating expenses:
Research and development ............................      23,717       16,483       25,939       34,275      48,920
Sales and marketing .................................       5,309        5,612       13,497       31,652      32,929
General and administrative ..........................       6,917        6,399        8,900       11,307      18,469
Restructuring costs .................................        --           --           --           --         1,225
In-process research and development .................       7,700         --           --           --          --

   Total operating expenses .........................      43,643       28,494       48,336       77,234     101,543
Operating income (loss) .............................     (39,500)     (22,981)     (14,095)         177     (63,428)
Amortization of warrant issuance ....................        --           --           --           --        (1,557)
Interest and other income, net(1) ...................       2,115        1,874        1,119          325      (9,147)

Income (loss) before taxes ..........................     (37,385)     (21,107)     (12,976)         502     (74,132)

Hardware Systems
Revenues:
Royalties and license fees ..........................      79,167       29,371         --           --          --
Development systems and other .......................       3,643           90         --           --          --
   Total revenues ...................................      82,810       29,461         --           --          --

Cost of revenues:
Royalties and license fees ..........................         456         --           --           --          --
Development systems and other .......................       2,136           43         --           --          --

   Total cost of revenues ...........................       2,592           43         --           --          --

Gross profit ........................................      80,218       29,418         --           --          --
Operating expenses:
Research and development ............................      18,360        2,664         --           --          --
Sales and marketing .................................       2,734         --           --           --          --
General and administrative ..........................       4,393          923         --           --          --
Stock incentive .....................................        --           --           --           --          --

   Total operating expenses .........................      25,487        3,587         --           --          --

Operating income ....................................      54,731       25,831         --           --          --
Gain on sale of hardware systems assets .............        --         18,032         --           --          --
Net interest and other income (expense) .............        --           --           --           --          --


                                      -19-
<PAGE>
                                                                           Year ended March 31,
                                                        ------------------------------------------------------------
                                                           1997        1998         1999         2000        2001
                                                        ---------    ---------    ---------    ---------   ---------


Income before taxes .................................      54,731       43,863         --           --          --

Consolidated Software Publishing and Hardware Systems
Income (loss) before taxes ..........................      17,346       22,756      (12,976)         502     (74,132)
Income and foreign withholding taxes ................       4,075          219          191          297         124
Net income (loss) before cumulative effect ..........      13,271       22,537      (13,167)         205     (74,256)
Extraordinary loss from early extinguishments of debt        --           --           --           --          (800)
Cumulative effect of accounting change ..............        --           --           --           --        (1,978)
Net income (loss) ...................................   $  13,271    $  22,537    $ (13,167)   $     205   $ (77,034)

Earnings per share:
Basic net income (loss) per share before
   extraordinary charges and cumulative effect change   $    0.48    $    0.85    $   (0.51)   $    0.01   $   (1.79)
Extraordinary charge                                         --           --           --           --     $   (0.02)
Cumulative effect of accounting change                       --           --           --           --     $   (0.04)
Basic net income (loss) per share ...................   $    0.48    $    0.85    $   (0.51)   $    0.01   $   (1.85)
Diluted net income (loss) per share before
   extraordinary charges and cumulative effect change   $    0.46    $    0.83    $   (0.51)   $    0.01   $   (1.79)
Extraordinary charge                                         --           --           --           --     $   (0.02)
Cumulative effect of accounting change                       --           --           --           --     $   (0.04)
Diluted net income (loss) per share .................   $    0.46    $    0.83    $   (0.51)   $    0.01   $   (1.85)

Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments ...   $  33,617    $  34,584    $  13,851    $  21,772   $   4,885
Working capital .....................................      14,067       28,769       15,675       58,140      30,025
Total assets ........................................      44,954       40,447       40,488       97,801      66,632
Short-term debt .....................................        --           --          9,505        8,579       1,800
Total long-term liabilities .........................       1,715         --           --           --          --
Total stockholders' equity ..........................   $  21,399    $  33,578    $  20,115    $  72,816   $  49,934
<FN>
-----------
(1)      For presentation  purposes, net interest and other income (expense) has
         been allocated to software publishing.
</FN>
</TABLE>


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FORWARD-LOOKING STATEMENTS


         This Form 10-K contains  forward-looking  statements that involve risks
and  uncertainties.  We use words such as  "anticipates,"  "believes,"  "plans,"
"expects,"   "future,"   "intends,"   "may,"  "will,"   "should,"   "estimates,"
"predicts,"  "potential,"  "continue"  and similar  expressions to identify such
forward-looking  statements.  These forward-looking  statements include, but are
not limited to,  statements  under "Business" and  "Management's  Discussion and
Analysis of  Financial  Resources  and Results of  Operations".  Forward-looking
statements  are  subject to known and  unknown  risks,  uncertainties  and other
factors  that may cause our actual  results,  levels of  activity,  performance,
achievements  and prospects to be materially  different from those  expressed or
implied by such forward-looking statements. These risks, uncertainties and other
factors  include,  among  others,  those  identified  under "Risk  Factors"  and
elsewhere in this Form 10-K.

         These forward-looking statements apply only as of the date of this Form
10-K.   We  undertake   no   obligation   to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.  In light of these risks,  uncertainties,  and assumptions,
the  forward-looking  events  discussed  in this Form 10-K might not occur.  Our
actual  results  could  differ   materially  from  those  anticipated  in  these
forward-looking  statements  for many  reasons,  including the risks faced by us
described above and elsewhere in this Form 10-K and readers are cautioned not to
place  undue  reliance  on  these  forward  looking  statements,  which  reflect
management's   analysis  only  as  of  the  date  hereof.  Such  forward-looking
statements include statements as to, among others:

         o        our ability to extend our brands  across  multiple  genres and
                  platforms

         o        the timing of the introduction of some new products;

         o        our expectations  regarding the number of new product releases
                  for fiscal 2002;

         o        our  expectations  regarding the timing of the introduction of
                  new platforms;

         o        our  expectation  that the  introduction of new platforms will
                  accelerate the video game cycle;

                                      -20-
<PAGE>

         o        our  expectations  regarding  retailers  preferences  to stock
                  sequels to successful brands

         o        our  expectations   regarding  the  sufficiency  of  our  cash
                  reserves and of our future cash requirements;

         o        our  expectations  regarding cash flow from operations and our
                  available credit facilities;

         o        our  expectations  regarding  our  ability to renew  licensing
                  agreements  with our principal  licensors,  including Sony and
                  Nintendo;

         o        our expectations regarding operating expenses;

         o        our   expectations   that  as  more  advanced   platforms  are
                  introduced,  consumer  demand for software for older platforms
                  may decline; and

         o        our expectation that we have adequate legal defenses for legal
                  actions  arising out of the  ordinary  course of business  and
                  that the  ultimate  outcome of these  actions  will not have a
                  material effect on our financial position.


GENERAL

         You should read the following discussion of our financial condition and
results of operations  together with our consolidated  financial  statements and
the notes to those  statements  included  elsewhere in this Form 10-K. This Form
10-K contains, in addition to historical information, forward-looking statements
that  involved  risks  and  uncertainties.   Our  actual  results  could  differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or  contribute  to such  differences  include  those  discussed
below,  as well as those  discussed  elsewhere  in this  Form  10-K.  See  "Risk
Factors."

OVERVIEW

         We  are a  leading  developer  and  publisher  of  branded  interactive
entertainment  software.  Our software  products  operate on several  multimedia
platforms  including the Sony  PlayStation  and Nintendo 64 video game consoles,
PlayStation  2  computer  entertainment  system,  the  Nintendo  Game Boy  Color
hand-held video game system and on personal  computers and the Internet.  We are
also developing  software for  next-generation  video game consoles.  We plan to
continue to extend our popular brands across multiple  categories,  or "genres,"
and  platforms.  These  brands  currently  include Army Men,  Heroes,  High Heat
Baseball,  Might and Magic, and World Destruction League, many of which have won
industry  awards.  Our software  products  cover a variety of genres,  including
action,  strategy,  adventure/role playing, sports and family entertainment.  We
develop the majority of our software internally in our company-owned studios and
have created an extensive  portfolio of versatile  technologies  that we believe
allow us to develop new software titles more quickly and  cost-effectively  than
our competition. Periodically we utilize external developers and contractors who
possess  specific  skills to supplement  our internal  development  efforts when
management deems it cost effective.

         Revenues consist primarily of revenues from the sale of software titles
published and  distributed  by us and license fees for software  developed by us
and  manufactured,  marketed and distributed by third party licensees in Europe,
Latin  America,  Asia and  Australia.  Software  publishing  revenues are net of
allowances for returns,  price  protection and  discounts.  Software  publishing
revenues  are  recognized  at the time of receipt of our goods by our  customers
based on the  agreed  upon  shipping  terms,  provided  that we have no  related
outstanding  obligations.  Software licensing revenues are typically  recognized
when we fulfill our obligations,  such as delivery of the product master under a
licensing  agreement.  Per-copy royalties that exceed guaranteed minimum royalty
levels are recognized upon cash receipt.

         Prior to fiscal year 2001, our revenue policy was to recognize  revenue
at the time our products were shipped to our  customers.  We changed our revenue
recognition  policy  during fiscal year 2001,  based on  guidelines  provided in
Securities and Exchange  Commission  Staff  Accounting  Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements".  We now recognize revenue at
the point products are received by our customers.  We estimate that our products
typically  take on  average,  three  days  from the point of  shipment  to their
arrival at our customers' sites.

         Cost of revenues  consist  primarily  of direct costs  associated  with
software titles, including manufacturing costs and royalties payable to platform
developers such as Sony and Nintendo and, to a lesser extent,  royalties payable
to

                                      -21-
<PAGE>

third-party   developers  and  licensors.   Cost  of  revenues  for  interactive
entertainment  software varies  significantly by platform.  Cost of revenues for
video game console titles is typically higher than cost of revenues for personal
computer  titles  due to  relatively  higher  manufacturing  and  royalty  costs
associated  with these products.  Cost of revenues for personal  computer titles
primarily consists of the cost of the CD-ROM and packaging.

         Research and  development  expenses  relate to the  development  of new
products  and consist  primarily  of direct and  indirect  salaries and wages of
software  research and  development  personnel,  direct research and development
expenses,  and amounts paid to outside  developers.  Software  development costs
that are not  capitalized are expensed as incurred.  Capitalization  of internal
software   development   costs  begins  upon   establishment   of  technological
feasibility  and ceases when the  product is  available  for general  release to
customers.  Technological  feasibility  is  established  by the  completion of a
detailed  program  design,  or in its absence,  a working  model of the product.
Historically,  the  establishment  of  technological  feasibility  for  internal
development  projects has  substantially  coincided with general  release of the
products and we have not capitalized any software  development costs on internal
development projects, as the eligible costs were determined to be insignificant.
During the fourth  quarter of fiscal 2001, we capitalized  internal  development
costs of  approximately  $0.6  million  for  second-generation  games  for a new
platform due to significant costs being incurred after technological feasibility
was reached.  External  development  costs are  capitalized  once  technological
feasibility  is  established  or if the  development  costs have an  alternative
future use. The criteria for establishing technological feasibility for external
development  projects  is  consistent  with that used for  internal  development
projects noted above.  In the current fiscal year, we began  utilizing  external
developers to translate existing products to alternate platforms and to localize
existing products into various foreign languages.  Technological  feasibility of
the translated and localized  products was established by existing  products and
as a result we capitalized  approximately  $3.0 million of external  development
costs  during  fiscal  2001.  Amortization  of  capitalized  software  costs  is
recognized on a  straight-line  basis over the estimated  economic  lives of the
related  products  or the  amount  computed  using  the ratio of  current  gross
revenues  for a product to the total of current  and  anticipated  future  gross
revenues  for that  product,  whichever  is greater,  and is included in cost of
revenues.  During the year ended March 31, 2001,  we  amortized  $1.3 million of
capitalized software development costs.

         Sales and  marketing  expenses  consist  primarily of  advertising  and
retail marketing support, sales commissions, sales and marketing personnel costs
and other costs.

         General and administration expenses consist primarily of administrative
expenses  related  to  finance,  accounting,   legal,  operations,   information
technology, customer service and other associated costs.

         We expect to continue to incur substantial  expenditures to develop our
business in the future. We expect that our operating results will fluctuate as a
result of a wide variety of factors,  including  the factors  described in "Risk
Factors."

         As of March 31, 2001,  we had  cumulative  federal net  operating  loss
carryforwards of approximately  $171 million for federal income tax purposes and
$20 million for state tax purposes. If not offset against future taxable income,
these net operating loss  carryforwards will expire beginning in fiscal 2009 and
2006, for federal and state tax purposes, respectively.

         As of March 31,  2001,  we had  unused  research  and  development  tax
credits of approximately  $12 million and $9 million  available to reduce future
federal and  California  income taxes,  respectively.  The federal  research and
development  tax credits begin expiring in fiscal 2007. The California  research
and  development  tax credit can be carried  forward  indefinitely.  We also had
foreign tax credits of  approximately  $11.0 million  available to reduce future
federal income taxes,  expiring  through fiscal 2005. There are also minimum tax
credits of approximately  $0.5 million available to reduce future federal income
taxes, which will carry forward indefinitely.

                                      -22-
<PAGE>

RESULTS OF OPERATIONS

         The  following  table sets forth  certain  consolidated  statements  of
operations  data for fiscal 1999,  2000 and 2001  expressed  as a percentage  of
revenues.

                                                       Year Ended March 31,
                                                     1999       2000       2001
                                                     ----       ----       ----

Revenues ........................................  100.0 %     100.0 %   100.0 %
Cost of revenues ................................   28.7 %      36.7 %    53.9 %

Gross profit ....................................   71.3 %      63.3 %    46.1 %
Operating expenses:
   Research and development .....................   54.0 %      28.0 %    59.1 %
   Sales and marketing ..........................   28.1 %      25.9 %    39.8 %
   General and administrative ...................   18.5 %       9.3 %    22.3 %
   Restructuring costs ..........................      --          --      1.5 %

      Total operating expenses ..................  100.6 %      63.2 %   122.7 %

Operating income (loss) .........................  (29.3)%       0.1 %   (76.6)%
Interest expense associated with convertible debt      --          --     (1.9)%
Interest and other income, net ..................    2.3 %       0.3 %   (11.0)%

Income (loss) before taxes ......................  (27.0)%       0.4 %   (89.5)%


FISCAL 2001 COMPARED TO FISCAL 2000

Revenues. Revenues decreased to $82.8 million in fiscal 2001 from $122.2 million
in fiscal 2000.  This  decrease  was due  primarily to a decrease in the average
selling  price per unit due to increased  competition  in a platform  transition
year. Our revenues  consisted  primarily of sales of  interactive  entertainment
software  for  the  PlayStation   game  console,   the  PlayStation  2  computer
entertainment system, Game Boy Color, the Nintendo 64 and the personal computer.

Cost of revenues. Cost of revenues decreased slightly to $44.6 million in fiscal
2001 from $44.8 million in fiscal 2000. This small decrease was primarily due to
an increase in units sold during the year offset by a shift in product  mix. The
amortization  of capitalized  software costs  contributed an increase in cost of
revenues of $1.3 million and $0.0 million in fiscal 2001 and 2000, respectively.
Gross margin  decreased  to 46.1% in fiscal 2001 from 63.3% in fiscal 2000.  The
decrease  was due to lower price  points in fiscal  2001 as pricing  became more
competitive during the platform transition.

Research and development.  Research and development  expenses increased to $48.9
million in fiscal 2001 from $34.3  million in fiscal  2000.  This  increase  was
primarily due to higher on-going  development expenses as we continued to expand
our  product  development  efforts  and began to develop  products  for the next
generation  video game  console  systems in addition  to the current  video game
platforms.   This  increase  was  partially   offset  by  capitalized   external
development costs related to localization and platform  translation  costs after
individual  titles reached technical  feasibility.  These capitalized costs were
approximately  $3.6  million and $0.0 million for the years ended March 31, 2001
and 2000, respectively. Amortization of capitalized development costs is charged
to cost of revenues.

Sales and marketing.  Sales and marketing expenses increased to $32.9 million in
fiscal 2001 from $31.7  million in fiscal 2000.  This increase was primarily due
to  increased  advertising  of  new  products,  marketing  expenses  related  to
increased personnel,  offset by lower marketing development funds for retailers.
We  anticipate  that sales and  marketing  expenses  will  decrease  in absolute
dollars and as a percentage of revenues in the future.

General and  administrative.  General and  administrative  expenses increased to
$18.5 million in fiscal 2001,  from $11.3  million in fiscal 2000.  The increase
was  primarily  due to an increase of $4.0 million in bad debt expense  combined
with an increase in  administrative  and  overhead  expenses as we  continued to
build the  infrastructure  to support the release of new titles.  We expect that
general and administrative expenses will decrease in the future.

                                      -23-
<PAGE>

Restructuring   charge.   During  Fiscal  2001,  we  recorded  $1.2  million  in
restructuring  charges.  These  charges  included  a  reduction  in  force of 69
employees for $0.3 million,  and realized  and anticipated costs of $0.9 million
for a  vacated  portion  of our  headquarters.  We  estimate  that it will  take
approximately  six months to find a suitable  sub-lessee  for the vacated office
space. As of March 31, 2001 we have accrued $0.8 million for  anticipated  costs
associated with finding a sub-lessee.

Net interest and other income. Net interest and other income, excluding interest
expense  associated with a warrant issuance and convertible  debt,  decreased to
$0.2 million in fiscal 2001 from $0.3  million in fiscal  2000.  The decrease in
net  interest  and other  income is  primarily  due to the  decrease in cash and
short-term investment balances. On August 16, 2000 we entered into a convertible
note and warrant purchase  agreement (the  "Agreement") with our Chief Executive
Officer and  Chairman of the Board,  William M. (Trip)  Hawkins  III.  Under the
Agreement,  Mr.  Hawkins  committed  to  lend  us up to  $20.0  million  through
September  30, 2000.  In  consideration  for such  commitment,  we issued to Mr.
Hawkins a fully  exercisable  warrant to purchase 432,432 shares of common stock
for $20 per share.  The warrants have a five-year term.  Using the Black Scholes
valuation  model, we estimated the fair value of the warrants at $3.60 per share
and expensed the  resultant  $1.6  million  debt  discount  over the life of the
promissory notes. The accounting conversion price for the $20.0 million of debt,
based on the value assigned to the debt and the number of common shares the debt
converts into,  was $6.4158.  Accordingly,  we recorded a beneficial  conversion
charge  of $9.3  million  based on the  intrinsic  spread  between  the  $6.4158
accounting  conversion  price and the market price of our common stock on August
23,  2000,  multiplied  by the  number of  common  shares  involved  in the debt
conversion.


FISCAL 2000 COMPARED TO FISCAL 1999

Revenues. Revenues increased to $122.2 million in fiscal 2000 from $48.0 million
in fiscal 1999.  This increase was due primarily to an increase in the number of
new titles released to 31 new titles in fiscal 2000 from 14 new titles in fiscal
1999. Our revenues  consisted  primarily of sales of  interactive  entertainment
software for the Sony PlayStation, the Nintendo 64 and the personal computer.

Cost of revenues.  Cost of revenues  increased  to $44.8  million in fiscal 2000
from $13.8  million in fiscal  1999.  This  increase  was  primarily  due to the
increased  number of software  titles  published  in fiscal 2000  compared  with
fiscal 1999. Gross margin decreased to 63.3% in fiscal 2000 from 71.3% in fiscal
1999. The decrease was due to higher console  product mix in fiscal 2000,  which
had higher per unit cost of goods sold.

Research and development.  Research and development  expenses increased to $34.3
million in fiscal 2000 from $25.9  million in fiscal  1999.  This  increase  was
primarily due to higher on-going  development expenses as we continued to expand
our  product  development  efforts  and began to develop  products  for the next
generation  video game  console  systems in addition  to the current  video game
platforms.

Sales and marketing.  Sales and marketing expenses increased to $31.7 million in
fiscal 2000 from $13.5  million in fiscal 1999.  This increase was primarily due
to marketing  expenses  related to the increase in the number of titles released
during fiscal 2000 over 1999 and the associated  launch costs and advertising of
the releases.

General and  administrative.  General and  administrative  expenses increased to
$11.3 million in fiscal 2000, from $8.9 million in fiscal 1999. The increase was
primarily  due to the increase in  administrative  and  overhead  expenses as we
continued to build the  infrastructure  to support the release of new titles for
the personal  computer,  Sony PlayStation,  Nintendo Color Game Boy, Nintendo 64
and the next generation console platforms.

Net interest and other income.  Net interest and other income  decreased to $0.3
million in fiscal 2000 from $1.1  million in fiscal  1999.  The  decrease in net
interest  and  other  income  is  primarily  due to the  decrease  in  cash  and
short-term investment balances.


                                      -24-

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Our  principal  sources of  liquidity  are  unrestricted  cash and cash
equivalent balances, which were $4.9 million at March 31, 2001 and $21.8 million
at March 31, 2000. The decrease was primarily due to the $43.5 million cash used
in operating activities and $11.9 million in capital expenditures offset by cash
provided by financing activities of $39.8 million.

         In April 2000, we terminated the Coast Business  Credit  revolving line
of credit  agreement.  Concurrently,  we entered into a $50.0 million  revolving
line of credit with Foothill  Capital.  During the third quarter of fiscal 2001,
we determined  that our  borrowing  requirements  were less than the  previously
negotiated  $50.0 million line of credit.  Accordingly,  on December 1, 2000, we
signed an  amendment to the Foothill  Capital  line of credit  agreement,  which
effectively  reduced the  borrowing  capacity  by $20.0  million.  The  Foothill
Capital credit  facility now allows us to borrow up to $30.0 million,  or 85% of
qualified  accounts  receivables,  bearing an  interest  rate of Prime Rate plus
0.25% to 1.25% per annum (8.75% as of March 31, 2001)  depending on our tangible
net worth and will expire on March 31, 2002. Interest expense is due monthly and
the loan balance is due at the  expiration  date of the credit  agreement.  This
agreement contains certain financial  covenants,  including the requirement that
we maintain tangible net worth of not less than $40.0 million.

         In August 2000, we sold two convertible promissory notes totaling $20.0
million to our Chief  Executive  Officer and  Chairman of the Board,  William M.
(Trip) Hawkins III.  Associated  with the issuance of the promissory  notes,  we
issued a warrant to  purchase  432,432  shares of Common  Stock with an exercise
price of $20 per share to Mr. Hawkins.  The notes were  convertible to shares of
Common Stock at a price of $6.9375 per share.  In September  2000, the notes and
accrued interest were converted to 2,899,641 shares of Common Stock.

         During the year ended March 31, 2001, we recognized interest expense of
$1.6  million  associated  with  the  issuance  of  warrants  and  $9.3  million
associated  with  convertible  debt  (see Note 6 to the  Consolidated  Financial
Statements).

         In  October  2000,  we sold  6,464,647  shares of  common  stock at the
stock's  closing price on October 31, 2000 of $3.09375 per share. As part of the
transaction we also issued warrants to purchase 1,292,929 shares of common stock
with an exercise price of $3.7125 per share. Mr. Hawkins purchased  4,848,485 of
these shares and was issued 969,997 of the warrants on terms equivalent with the
third party purchaser.

         We believe that  existing  sources of liquidity and  anticipated  funds
from operations will satisfy our projected working capital  requirements through
the fall of 2001,  at which time we may need to raise  additional  capital.  Our
ability to maintain  sufficient  liquidity  through fall of 2001 is particularly
dependent on us achieving our projected  sales  forecasts for the period and the
continued  availability of our line of credit with Foothill Capital Corporation.
If we need to raise  additional  capital,  such  capital may not be available on
acceptable terms, if at all. Additional  financing may result in substantial and
immediate dilution to existing stockholders. If adequate funds are not available
to satisfy either short or long-term capital requirements, we may be required to
curtail our operations  significantly or to seek funds through arrangements with
strategic  partners or other parties that may require us to relinquish  material
rights to certain of our products,  technologies or potential markets, or we may
become insolvent.


RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998,  the FASB issued SFAS No. 133,  Accounting for Derivative
Instruments  and Hedging  Activities.  SFAS No. 133  establishes  accounting and
reporting standards for derivative financial  instruments and hedging activities
and requires us to recognize all  derivatives as either assets or liabilities on
the balance  sheet and measure  them at fair value.  Gains and losses  resulting
from  changes in fair value would be accounted  for  depending on the use of the
derivative and whether it is designated and qualifies for hedge accounting. SFAS
No. 133, as amended by SFAS No.137,  will be adopted by us in the first  quarter
of fiscal 2002 and is not  expected to have a material  impact on our  financial
statements.


                                      -25-
<PAGE>

ITEM 7(a).  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         Our exposure to market rate risk for changes in interest  rates relates
primarily  to our  investment  portfolio.  We do not  use  derivative  financial
instruments  in our investment  portfolio.  We place our  investments  with high
quality  issuers and, by policy,  limit the amount of credit exposure to any one
issuer.  We are averse to principal loss and ensure the safety and  preservation
of our invested  funds by limiting  default,  market and  reinvestment  risk. We
classify our cash  equivalents  and short-term  investments as fixed-rate if the
rate of  return  on such  instruments  remains  fixed  over  their  term.  These
fixed-rate investments include fixed-rate U.S. government securities,  municipal
bonds,  time  deposits  and  certificates  of  deposit.  We  classify  our  cash
equivalents,  short-term investments and restricted cash as variable-rate if the
rate of return on such investments varies based on the change in a predetermined
index or set of indices  during  their  term.  These  variable-rate  investments
primarily include money market accounts held at various  securities  brokers and
banks. The table below presents the amounts and related weighted  interest rates
of our investment portfolio at March 31, 2001:


Short-term investments                Average          Cost         Fair Value
----------------------             Interest Rate  (in thousands)  (in thousands)
                                   -------------  --------------  --------------

Fixed rate.......................       5.23%          $7,315      $7,328


         The  aggregate  fair value of the our  restricted  cash included in our
investment  portfolio  as of March  31,  2001,  by  contractual  maturity  date,
consisted of the following:

                                                        Aggregate Fair Value
                                                           (in thousands)
                                                        --------------------

Due in one year or less.............................            $5,961

                                      -26-
<PAGE>

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

QUARTERLY RESULTS  OF OPERATIONS

         The following table sets forth extracts from our unaudited consolidated
statements of operations for each of the eight quarterly periods ended March 31,
2001.  The data for the  quarterly  periods  for fiscal  2000 show the  proforma
effect  of  applying  SAB  101  throughout   fiscal  2000,  and  reconciles  the
differences with those amounts previously  reported.  The data for the quarterly
periods  ended for fiscal  2001 show the  effect of  restating  the first  three
quarters of fiscal 2001 as if the  provisions of SAB 101 had been  applied,  and
reconciles the differences with those amounts  previously  reported.  You should
read this  information with our  consolidated  financial  statements and related
notes listed under the heading "(a)(1) Financial  Statements" of Item 14 hereof,
which  financial  statements  are  incorporated  herein  by  reference.  We have
prepared these unaudited  exhibits on a basis consistent with audited  financial
statements.  You should not draw any  conclusions  about our future results from
the operating results presented for any of these quarters.

<TABLE>
<CAPTION>
                                                           Fiscal Quarter Ended                       Fiscal Quarter Ended
                                               ----------------------------------------     ----------------------------------------
                                               June 30,   Sep. 30,    Dec. 31,  Mar. 31,   June. 30,  Sep. 30,   Dec. 31,   Mar. 31,
                                                 1999       1999        1999     2000        2000       2000       2000       2001
                                                 ----       ----        ----     ----        ----       ----       ----       ----
<S>                                            <C>        <C>        <C>       <C>        <C>        <C>        <C>        <C>
Revenues as previously reported                $ 13,072   $ 20,705   $ 41,157  $ 47,299   $  7,856   $ 22,935   $ 29,904   $ 18,975
  Effect of change in accounting principle         --         --         --        --        3,094     (1,830)     1,830       --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Revenues after the effect of SAB 101             13,072     20,705     41,157    47,299     10,950     21,105     31,734     18,975
                                               --------   --------   --------  --------   --------   --------   --------   --------

Gross Margin as previously reported               9,187     12,004     26,797    29,423      3,564      8,191     14,353     10,029
  Effect of change in accounting principle         --         --         --        --        1,978     (1,287)     1,287       --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Gross Margin after the effect of SAB 101          9,187     12,004     26,797    29,423      5,542      6,904     15,640     10,029
                                               --------   --------   --------  --------   --------   --------   --------   --------

Net income (loss) before extraordinary items     (6,773)    (5,923)     1,409    11,492    (25,462)   (16,733)   (21,559)   (12,480)
  Extraordinary Item                               --         --         --        --         (800)      --         --         --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Net income (loss) as previously reported         (6,773)    (5,923)     1,409    11,492    (26,262)   (16,733)   (21,559)   (12,480)
  Effect of change in accounting principle         --         --         --        --        1,978     (1,287)     1,287       --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Net income(loss) after the effect of SAB 101   $ (6,773)  $ (5,923)  $  1,409  $ 11,492    (24,284)  $(18,020)  $(20,272)  $(12,480)
                                               --------   --------   --------  --------   --------   --------   --------   --------

Net income (loss) per share - Basic
before extraordinary item, as
previously reported                            $  (0.26)  $  (0.18)  $   0.04  $   0.32   $  (0.69)  $  (0.45)  $  (0.48)  $  (0.26)
  Extraordinary Item                               --         --         --        --         (.02)      --         --         --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Net income (loss) per share - Basic,
as previously reported                            (0.26)     (0.18)      0.04      0.32      (0.71)     (0.45)     (0.48)     (0.26)
  Effect of change in accounting principle         --         --         --        --         0.05      (0.04)      0.03       --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Net income (loss) per share - Basic, after
the effect of SAB 101                          $  (0.26)  $  (0.18)  $   0.04  $   0.32   $  (0.66)  $  (0.49)  $  (0.45)  $  (0.26)
                                               --------   --------   --------  --------   --------   --------   --------   --------

Net income (loss) per share - Diluted
before extraordinary item, as
previously reported                            $  (0.26)  $  (0.18)  $   0.03  $   0.26   $  (0.69)  $  (0.45)  $  (0.48)  $  (0.26)
  Extraordinary Item                               --         --         --        --         (.02)      --         --         --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Net income (loss) per share - Basic,
as previously reported                            (0.26)     (0.18)      0.03      0.26      (0.71)     (0.45)     (0.48)     (0.26)
  Effect of change in accounting principle         --         --         --        --         0.05      (0.04)      0.03       --
                                               --------   --------   --------  --------   --------   --------   --------   --------
Net income (loss) per share - Basic, after
the effect of SAB 101                          $  (0.26)  $  (0.18)  $   0.03  $   0.26   $  (0.66)  $  (0.49)  $  (0.45)  $  (0.26)
                                               --------   --------   --------  --------   --------   --------   --------   --------
</TABLE>

                                                                -27-


<PAGE>

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         On March 13, 2001,  we dismissed  KPMG LLP ("KPMG") as our  independent
public  accountants,  a capacity in which KPMG had served for several years. The
decision to change our independent  public  accountants was approved by our full
Board of Directors and our Audit Committee.

         During the fiscal years ended March 31, 1999 and March 31, 2000 and the
subsequent  interim period  preceding the change in  accountants,  there were no
disagreements  with KPMG on any matter of  accounting  principles  or practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreements,  if not resolved to the  satisfaction of KPMG,  would have caused
KPMG to make reference to the subject matter of the  disagreements in connection
with its reports on our financial  statements for the years ended March 31, 1999
and March 31, 2000. In addition,  KPMG's reports on our financial statements for
the years  ended  March 31, 1999 and March 31,  2000  contained  an  unqualified
opinion.

         KPMG's  letter  to the  Audit  Committee  related  to its  audit of our
consolidated  financial  statements  for the fiscal  year ended  March 31,  2000
included no significant reportable conditions.

         On   March   13,   2001,   we   selected   PricewaterhouseCoopers   LLP
("PricewaterhouseCoopers")   to   replace   KPMG  as  our   independent   public
accountants.  During the year ended March 31,  2000 and  through the  subsequent
period ended January 11, 2001, we did not consult with PricewaterhouseCoopers on
items which (i) were or should have been subject to SAS 50 or (ii) concerned the
subject matter of a disagreement  or reportable  event with KPMG as described in
Item  304(a)(2) of  Regulation  S-K.  PricewaterhouseCoopers  also advises us on
federal, state and local tax matters.

         We  have   authorized  KPMG  to  respond  fully  to  the  inquiries  of
PricewaterhouseCoopers.  We also provided KPMG with a copy of the disclosures it
made in Item 4 of the  Current  Report  filed on Form 8-K dated  March 20,  2001
("Form 8-K").  KPMG  furnished us with a letter  addressed to the Securities and
Exchange Commission stating that it agrees with certain statements made by us in
the Form 8-K. We filed a copy of KPMG's  letter as Exhibit 16.1 to the Form 8-K,
which was incorporated by reference therein.


                                    PART III

ITEM 10.  EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

         The following  table sets forth certain  information  for our executive
officers and directors as of March 31, 2001.

<TABLE>
<CAPTION>

Name                                    Age                            Position
----                                    ---                            --------
<S>                                      <C> <C>
W. M. (Trip) Hawkins III.............    47  Chairman of the Board and Chief Executive Officer
James Alan Cook......................    52  Executive Vice President, General Counsel & Secretary
Stephen E. Fowler....................    42  Executive Vice President, 3DO & President, 3DO Europe Ltd.
Richard J. Hicks, III................    40  Executive Vice President, Product Development
David J. Klein.......................    45  Sr. Vice President, Sales
Kathleen McElwee.....................    46  Sr. Vice President, Finance & Chief Financial Officer
Paul D. Patterson....................    48  Managing Director, 3DO Europe Ltd.
William A. Hall......................    69  Director
Charles Hirschhorn...................    43  Director
H. William Jesse, Jr.................    49  Director
Dominic Wheatley.....................    41  Chairman of the Board, 3DO Europe Ltd.
</TABLE>

Trip  Hawkins,  the  founder of 3DO,  has been  Chairman  of the Board and Chief
Executive  Officer since September



                                      -28-

<PAGE>

1991. He also served as President of 3DO from September 1991 until October 1995,
and he served as Secretary  from  September  1991  through  February  1993.  Mr.
Hawkins' term as a Director expires at the 2001 Annual Meeting of Stockholders.

James Alan Cook became  Executive Vice President,  General Counsel and Secretary
of 3DO in April 1996.  He had been Senior Vice  President,  General  Counsel and
Secretary  since July 1994,  and from January 1993 until July 1994, he served as
Vice  President,  General  Counsel and Secretary of 3DO. From January 1990 until
January 1993, he was a partner in the law firm of Cook and Lefevre.

Stephen E. Fowler was appointed  Executive Vice President,  3DO and President of
3DO Europe, Ltd. in July 2000.  Previously,  he served as Senior Vice President,
Operations of 3DO and President of 3DO Europe, Ltd. from June 1999 to July 2000;
Senior Vice President,  Sales & Operations from April 1998 to June 1999;  Senior
Vice  President,  Operations  from  May  1997 to  April  1998;  Vice  President,
Operations from October 1995 to May 1997;  Vice President,  Developer & Customer
Services from June 1994 to October 1995; and Senior Director, Developer Services
from January 1993 to June 1994.

Richard J. Hicks III was appointed Executive Vice President, Product Development
in June 2000. Previously he served as Senior Vice President, Product Development
from November 1998 to July 2000 and Vice  President,  Product  Development  from
October 1997 to November  1998.  He was  co-founder  of New Wave  Entertainment,
Inc., an  interactive  entertainment  software  company,  and served as its Vice
President, Software Development from July 1995 to August 1997.

David J.  Klein  joined  3DO as Vice  President,  Sales  in  March  2000 and was
promoted to Senior Vice President, Sales in July 2000. Prior to joining 3DO, Mr.
Klein was  President  and Chief  Operating  Officer of ASC  Games,  a video game
publisher, from September 1995 to March 2000.

Kathleen McElwee joined 3DO in July 2000 as Senior Vice President of Finance and
Chief Financial Officer. Formerly she was CFO at Lightspan, Inc., a developer of
educational software,  from January 1999 to July 2000. She was with Galoob Toys,
a developer and marketer of toys, from November 1995 to January 1999,  where she
was  promoted  to CFO  from her  position  as Vice  President  of  Planning  and
Analysis.  Ms. McElwee has held  management  positions at IBM, Dun & Bradstreet,
and Canteen Corporation.

Paul  Patterson  joined 3DO as  Managing  Director  of 3DO Europe Ltd. in August
1999.  From 1996 to July 1999, he was Managing  Director of Infogrames UK Ltd, a
video game  publisher.  From 1986 to 1993,  he held various  sales  positions at
Ocean  Software  Limited,  a video game  company,  and from 1993 to 1996, he was
their Deputy Managing Director.

William A. Hall has been a director since June 1997. Mr. Hall has been a partner
in Lincolnshire  Management,  Inc., a private equity investment firm, since June
1994. Since 1993, he has also been the Vice Chairman and majority stockholder of
U.S. Animation, Inc., a video animation conglomerate,  and since 1991, the owner
of W.A.H. Management/Consulting,  a management consulting firm. He founded Sight
& Sound  Distributing  Company,  a  wholesale  distributor  of video  media,  in
December  1984 and served as its  President  and Chief  Executive  Officer until
1999. Mr. Hall is also a director of Chromium Graphics,  Inc.; Northsound Music,
Inc.;  Orlimar  Golf;  Valley Media,  an  international  distributor  of CDs and
videos; and Lincolnshire Management,  Inc. Mr. Halls' term as a Director expires
at the 2002 Annual Meeting of Stockholders.

Charles  Hirschhorn was appointed to the Board of Directors in February 2001. In
December 1999,  Mr.  Hirschhorn  founded  Fountain  Productions,  an independent
content production company for theatrical motion pictures and television movies.
From September 1997 to December 1999, he was President of Walt Disney Television
and Television  Animation and Executive Vice President Production of Walt Disney
Motion  Pictures  Group.  From June 1996 to September  1997,  he was  President,
Disney  Telefilms;  and from February  1995 to June 1996, he was Executive  Vice
President of Hollywood Pictures.  Mr. Hirschhorn's term as a Director expires at
the 2001 Annual Meeting of Stockholders.

H. William Jesse,  Jr. has been a Director since  September 1997. He is Chairman
of Jesse.Hansen&Co,  strategic - and financial advisors to high-growth  consumer
companies. He founded the firm in 1986 and served as its President and

                                      -29-


<PAGE>

CEO through March of 1998.  Since 1988, Mr. Jesse has served as Chairman and CEO
of Vineyard  Properties  Corporation,  a developer of wine grape vineyards.  Mr.
Jesse has served as Chairman  of the Board of Peet's  Coffee & Tea,  Inc.  since
January 2001,  and he has been a director of the company since August 1998.  Mr.
Jesse also  serves on the board of  directors  of The Wine Group,  Inc.;  Online
Partners,  Inc.; Food.com; and ExTerra Credit Recovery, Inc. Mr. Jesse's term as
a Director expires at the 2003 Annual Meeting of Stockholders.

Dominic  Wheatley was appointed  Chairman of the Board of 3DO Europe Ltd. in May
1999. He is also Chairman of Highway Capital Plc, and investment firm;  director
of Telecom  Plus Plc, a  telecommunications  company;  and a director of Statpro
Group Plc, a company specializing in investment analysis software.  Mr. Wheatley
founded Domark Software (later renamed Eidos),  a video game publisher,  in 1984
and served as Chief Operating  Officer of Eidos Plc and Chief Executive  Officer
of Eidos Interactive from 1984 through 1996.

         Our Amended and Restated  Certificate of Incorporation  and Amended and
Restated Bylaws provide that the Board is divided into three classes,  with each
class serving  staggered  three-year  terms. Mr. Hawkins and Mr. Hirschhorn will
stand for re-election at the 2001 annual meeting of stockholders.  Mr. Hall will
stand for re-election at the 2002 annual meeting of stockholders. Mr. Jesse will
stand for re-election at the 2003 annual meeting of  stockholders.  Each officer
serves at the discretion of the Board of Directors.


ITEM 11.  EXECUTIVE COMPENSATION

         Information  required by this Item not  otherwise  contained  herein is
incorporated  herein by reference  from our proxy  statement for the 2001 annual
meeting of stockholders.

                           SUMMARY COMPENSATION TABLES

         The following table sets forth the compensation paid by us to our Chief
Executive Officer and the four most highly compensated  executive officers other
than the Chief Executive  Officer  (collectively  the "Named  Officers") for the
fiscal year ended March 31, 2001.

<TABLE>
<CAPTION>
                                                          Annual
                                                          ------
                                                       Compensation
                                                       ------------
                                                                                       Long-Term
                                                  Fiscal                             Compensation          All Other
Name and Principal Position                        Year       Salary      Bonus      Options/SARs #      Compensation(1)
---------------------------                        ----       ------      -----      --------------      ------------
<S>                                                <C>       <C>         <C>             <C>             <C>
Trip Hawkins.....................................  2001      $250,076        -0-         2,925,000              $660
   Chairman and Chief                              2000      $295,000        -0-           500,000              $660
   Executive Officer                               1999      $295,792        -0-           440,000              $660
James Alan Cook..................................  2001      $311,346        -0-           280,000              $660
   Executive Vice President,                       2000      $297,308    $15,000            25,000       $509,098(2)
   General Counsel, and Secretary                  1999      $289,954        -0-            40,000              $660
Stephen E. Fowler................................  2001      $299,932        -0-           300,000         $2,329(3)
   Executive Vice President, 3DO &                 2000      $222,577    $35,400            75,000       $654,812(4)
   President, 3DO Europe, Ltd.                     1999      $212,023        -0-            60,000         $9,085(5)
Richard J. Hicks III.............................  2001      $278,782        -0-           300,000              $660
   Senior Vice President,                          2000      $214,615    $30,000            50,000              $565
   Product Development                             1999      $180,262        -0-           120,000        $10,498(6)
Kathleen McElwee.................................  2001      $142,406        -0-           360,000        $45,502(7)
   Senior Vice President, Finance &
    Chief Financial Officer


                                                        -30-

<PAGE>
-----------
<FN>
(1)   The amounts include premiums paid by 3DO for group term life insurance.
(2)   Includes  a gain of  $508,438  realized  upon the sale of shares  acquired
      through the exercise of vested stock options.
(3)   Includes  compensation of $1,669 realized upon the sale of shares acquired
      through the 1994 Employee Stock Purchase Plan.
(4)   Includes compensation of $57,936 realized upon the sale of shares acquired
      through  the 1994  Employee  Stock  Purchase  Plan and a gain of  $596,876
      realized upon the sale of shares  acquired  through the exercise of vested
      stock options.
(5)   Includes  compensation of $8,245 realized upon the sale of shares acquired
      through the 1994 Employee Stock Purchase Plan.
(6)   Includes  a gain of  $9,893  realized  upon  the sale of  shares  acquired
      through the Employee Stock Purchase Plan.
(7)   Includes $45,029 in relocation expenses reimbursed by 3DO.
</FN>
</TABLE>

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
         The following table sets forth certain information concerning grants of
stock options to each of the Named  Officers  during the fiscal year ended March
31, 2001. The table also sets forth  hypothetical gains or "options spreads" for
the options at the end of their respective ten-year terms. These gains are based
on the assumed rates of annual  compound stock price  appreciation of 5% and 10%
from the date the option was granted over the full option term. Actual gains, if
any, on option exercises are dependent on the future performance of 3DO's Common
Stock and overall market conditions.

<CAPTION>
                                                     Individual Grants

                                             % of Total
                                               Options                            Potential Realizable Value
                                  Number of    Granted                               At Assumed Annual Rates
                                 Securities      to                                of Stock Price Appreciation
                                 Underlying  Employees                                  For Option Term(3)
                                  Options    in Fiscal   Exercise   Expiration          ---------------
         Name                    Granted(1)   Year(2)     Price       Date              5%            10%
         ----                     --------   ---------   --------   ----------          ---           ----
<S>                               <C>        <C>         <C>        <C>         <C>              <C>
         Cook, James Alan......    200,000       1.73%     $6.94      8/16/10   $  872,591.29    $2,211,317.66
                                    80,000        .69%     $1.78      3/23/11   $   89,620.00    $  227,114.67
                                  --------      -----                           -------------    -------------
               Total...........    280,000       2.42%                          $  962,211.29    $2,438,432.33
                                  ========      =====                           =============    =============

         Fowler, Stephen E.....    200,000       1.73%     $6.94      8/16/10   $  872,591.29    $2,211,317.66
                                   100,000        .86%     $1.78      3/23/11   $  112,025.00    $  283,893.35
                                  --------      -----                           -------------    -------------
               Total...........    300,000       2.59%                          $  984,616.29    $2,495,211.01
                                  ========      =====                           =============    =============

         Hawkins, Trip.........  2,925,000      25.28%     $1.53      12/5/10   $2,816,852.05    $7,138,456.15
                                  --------      -----                           -------------    -------------
               Total...........  2,925,000      25.28%                          $2,816,852.05    $7,138,456.15
                                  ========      =====                           =============    =============

         Hicks III, Richard J..    200,000       1.73%     $6.94      8/16/10   $  872,591.30    $2,211,317.66
                                   100,000        .86%     $1.78      3/23/11   $  112,025.00    $  283,893.35
                                  --------      -----                           -------------    -------------
               Total...........    300,000       2.59%                          $  984,616.30    $2,495,211.01
                                  ========      =====                           =============    =============

         McElwee, Kathleen         280,000       2.42%     $6.94      8/16/10   $1,221,627.81    $3,095,844.73
                                    80,000        .69%     $1.78      3/23/11   $   89,620.00    $  227,114.67
                                  --------      -----                           -------------    -------------
               Total...........    360,000       3.11%                          $1,311,247.81    $3,322,959.40
                                  ========      =====                           =============    =============
<FN>
(1)      The  options  referenced  in the  foregoing  table are  intended  to be
         incentive stock options to the extent  permitted by applicable law. Our
         1993 Incentive Stock Plan (the "Incentive  Plan") also provides for the
         grant of  non-qualified  stock options.  Incentive stock options may be
         granted  under the  Incentive  Plan at an  exercise  price no less than
         market value on the date of grant.  For so long as the Company's Common
         Stock is listed on the Nasdaq National Market, the fair market value is
         the closing sale price for the Common Stock. Non-qualified

                                                           -31-

<PAGE>


         options  may be  granted  at an  exercise  price of no less than 85% of
         market value on the date of grant. Options generally become exercisable
         as to  25%  of  the  shares  subject  to  the  option  one  year  after
         commencement  of  employment  or the option  grant date,  and as to the
         remainder in equal monthly  installments  (accrued on a monthly  basis)
         over the succeeding 36 months. In addition,  options accelerate in full
         and become immediately  exercisable upon a merger,  unless such options
         are  assumed  or  replaced  by  equivalent  options  by  the  successor
         corporation. Options generally terminate on the earlier of three months
         after  termination of the  optionee's  employment by or services to the
         Company, or ten years after grant.

(2)      We  granted  options to  purchase 11,711,075 shares of common
         stock to employees in fiscal 2001.

(3)      The 5% and  10%  assumed  annualized  rates  of  compound  stock  price
         appreciation  are based on the exercise prices shown in the table,  are
         mandated by the rules of the Securities and Exchange  Commission and do
         not represent our estimate or a projection by us of future Common Stock
         prices.
</FN>
</TABLE>

                          FISCAL YEAR-END OPTION VALUES

         None of the Named Officers  exercised  options to purchase common stock
during the  fiscal  2001.  The  following  table  shows the number and values of
unexercised in-the-money options held by the Named Officers:

<TABLE>
<CAPTION>
                                      Number of Securities             Value Of Unexercised
                                Underlying Unexercised Options          In-The-Money Shares
                                       At March 31, 2001                 At March 31, 2001
                                       -----------------                 -----------------
 Name                              Exercisable  Unexercisable        Exercisable   Unexercisable
 ----                              -----------  -------------       ----------------------------
<S>                                  <C>           <C>              <C>            <C>
Cook, James Alan.............        676,835       422,165          $      0.00    $   17,496.00
Fowler, Stephen E............        234,166       442,834                 0.00        21,870.00
Hawkins, Trip................      2,693,001     2,931,999           342,736.87     1,028,210.62
Hicks III, Richard J.........        197,084       457,916                 0.00        21,870.00
McElwee, Kathleen R..........              0       360,000                 0.00        17,496.00
                                   ---------    ----------          -----------    -------------
    Total....................      3,801,086     4,614,914          $342,736.87    $1,106,942.62
                                   =========    ==========          ===========    =============
</TABLE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table  sets  forth  information  known  to us  for  the
beneficial ownership of our common stock as of March 31, 2001:

         o     each stockholder  known by us to own beneficially more than 5% of
               our common stock;

         o     each director;

         o     each of our chief  executive  officer  and four other most highly
               compensated executive officers; and

         o     all directors and executive officers as a group.

                                      -32-

<PAGE>

         As of March 31,  2001,  there were  47,517,487  shares of common  stock
outstanding.  This number does not include shares of treasury  stock.  Except as
otherwise  indicated,  we believe that the beneficial owners of the common stock
listed  below,  on the  information  furnished by such owners,  have sole voting
power and investment power over those shares, subject to community property laws
where applicable.

<TABLE>
<CAPTION>
                                                                                            Shares Beneficially
                                                                                                 Owned (1)
                                                                                                 ---------
                                                                                             Number     Percent
                                                                                             ------     -------
<S>                                                                                         <C>           <C>
Trip Hawkins(2)..........................................................................   18,496,959    38.9%
William A. Hall(3).......................................................................      138,350     *
H. William Jesse, Jr.(4).................................................................      135,500     *
Charles Hirschhorn(5)....................................................................       12,500     *
James A. Cook(6).........................................................................      709,940     1.5
Stephen E. Fowler(7).....................................................................      276,627     *
Richard J. Hicks, III(8).................................................................      266,403     *
Kathleen McElwee(9)......................................................................        5,501     *
All executive officers and directors as a group (11 persons)(10).........................   18,791,687    42.5%
<FN>
-----------

* Less than 1% of the outstanding shares of common stock.

(1)      Beneficial  ownership is determined in accordance with the rules of the
         Securities and Exchange  Commission.  In computing the number of shares
         beneficially  owned by a person and the  percentage  ownership  of that
         person,  shares of common stock  subject to options or warrants held by
         that person that are currently  exercisable or will become  exercisable
         within 60 days after March 31, 2001, are deemed outstanding, while such
         shares are not deemed outstanding for purposes of computing  percentage
         ownership of any other person.  Unless otherwise indicated in the table
         above,  the address of each of the  individuals  listed in the table is
         100 Cardinal Way, Redwood City, California 94063.
(2)      Includes  2,853,501  shares  subject to an option and 1,402,429  shares
         subject to warrants exercisable within 60 days of March 31, 2001.
(3)      Includes 107,500 shares subject to an option exercisable within 60 days
         of March 31, 2001.
(4)      Includes 102,500 shares subject to an option exercisable within 60 days
         of March 31, 2001.
(5)      Includes 12,500 shares subject to an option  exercisable within 60 days
         of March 31, 2001.
(6)      Includes 696,832 shares subject to an option exercisable within 60 days
         of March 31, 2001.
(7)      Includes 247,000 shares subject to an option exercisable within 60 days
         of March 31, 2001.
(8)      Includes 208,916 shares subject to an option exercisable within 60 days
         of March 31, 2001.
(9)      Includes 0 shares  subject to an option  exercisable  within 60 days of
         March 31, 2001.
(10)     Includes shares held  beneficially by executive  officers and directors
         as shown in the foregoing table and 4,350,416 shares subject to options
         exercisable within 60 days of March 31, 2001.
</FN>
</TABLE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  required by this Item is incorporated  herein by reference
from our proxy statement for the 2001 annual meeting of stockholders.

                                      -33-
<PAGE>

<TABLE>
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<CAPTION>
14(a)(1)  Financial Statements                                                                                          Page(s) in
                                                                                                                         Form 10-K
                                                                                                                          ---------
<S>                                                                                                                         <C>
          Report of Independent Accountants for PricewaterhouseCoopers LLP..............................................       35
          Independent Auditor's Report for KPMG LLP.....................................................................       36
          Consolidated Balance Sheets as of March 31, 2000 and 2001.....................................................       37
          Consolidated Statements of Operations for the years ended March 31, 1999, 2000 and 2001.......................       38
          Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 2000 and 2001.............       39
          Consolidated Statements of Cash Flows for the years ended March 31, 1999, 2000 and 2001.......................       40
          Notes to Consolidated Financial Statements....................................................................    41-53

14(a)(2)  Financial Statement Schedules
          Information required by this Item is included in the Notes to Consolidated Financial Statements
</TABLE>
14(a)(3)  Exhibits

  Number                             Exhibit Title
  ------                             -------------
     3.01  -  Registrant's Restated Certificate of Incorporation.(1)
     3.05  -  Registrant's Delaware Bylaws, as amended.(1)
     4.01  -  Form of Specimen Certificate for Registrant's Common Stock.(1)
    10.01  -  1991  Incentive  Stock  Plan of the  Registrant.(1)
    10.02  -  1993 Incentive  Stock  Plan of the  Registrant.(1)
    10.03  -  Form of  Restricted Stock Purchase Agreement of the Registrant.(1)
    10.04  -  Form of Incentive Stock Option Agreement of the Registrant.(1)
    10.05  -  Form of Nonstatutory Stock Option  Agreement of the Registrant.(1)
    10.06  -  401(k) Plan of the Registrant.(1)
    10.07  -  Employment Agreement between the Registrant and William M. Hawkins
              III dated as of February 1993.(1)
    10.07A -  Amendment to Employment Agreement between the Registrant and
              William M. Hawkins III, dated as of March 22, 1994.(2)
    10.08  -  Form of Indemnity Agreement.(1)
    10.09  -  Lease  between   Seaport  Centre  Venture  Phase  I  and  the
              Registrant for office space at 600 Galveston Drive,  Building 5,
              Redwood City, California.(3)
    10.09A -  First Amendment to Lease between Seaport Centre Venture Phase I
              and the Registrant for office space at 600 Galveston Drive,
              Building 5, Redwood City, California.(2)
    10.09B -  Second Amendment to Lease between Seaport Centre Venture Phase I
              and the Registrant for office space at 600 Galveston Drive,
              Building 5, Redwood City, California.(4)
    10.10  -  1994 Employee  Stock  Purchase Plan of the  Registrant (5)
    10.11  -  1995 Director Option Plan of the Registrant (5)
    10.12  -  Loan and Security Agreement by and among The 3DO Company
              (California),  The 3DO Company (Delaware), 3DO Europe, certain
              lenders as signatories and Foothill Capital  Corporation dated
              April 6,  2000. (7)
    10.12A -  First  Amendment  to Loan and  Security Agreement by and among
              The 3DO Company (California), The 3DO Company (Delaware),
              3DO Europe, certain lenders as signatories and Foothill Capital
              Corporation.
    10.12B -  Second Amendment to Loan and Security Agreement by and among
              The 3DO Company (California), The 3DO Company (Delaware),
              3DO Europe, certain lenders as signatories and Foothill Capital
              Corporation.
    10.12C -  Third Amendment to Loan and Security Agreement by and among
              The 3DO Company (California), The 3DO Company (Delaware),
              3DO  Europe,  certain  lenders as  signatories  and Foothill
              Capital   Corporation.
    10.13  -  Lease between Seaport Plaza Associates, LLC and the Registrant for
              office space at 100 Cardinal Way, Redwood City, California, dated
              July 12, 1999.
    16.01  -  Letter of KPMG LLP regarding change in certifying accountant (7).
    21.01  -  List  of  Subsidiaries  of  the Registrant.
    23.01  -  Consent of PricewaterhouseCoopers, LLP.
    23.02  -  Consent of KPMG LLP.
    24.01  -  Power of Attorney.
-----------
(1)      Incorporated by reference to the  same-numbered  exhibit filed with the
         Registrant's Registration Statement on Form S-1 No. 33-59166
(2)      Incorporated by reference to the exhibits 10.21A, 10.34A, 10.36, 10.37,
         10.38 and 10.39 filed with the Registrant's  Registration  Statement on
         Form S-1 No. 33-71364.
(3)      Incorporated by reference to the exhibits 10.34,  10.40 and 10.41 filed
         with the  Registrant's  Annual  Report on Form 10-K for the year ended
         March 31, 1994
(4)      Incorporated  by  reference  to  the  exhibit  10.34B  filed  with  the
         Registrant's  Annual  Report on Form 10-K for the year ended  March 31,
         1995.
(5)      Incorporated by reference to the exhibits 10.46, 10.47, 10.48 and 10.49
         filed  with the  Registrant's  Annual  Report on Form 10-K for the year
         ended March 31, 1997.
(6)      Incorporated   by  reference  to  the  exhibit  10.16  filed  with  the
         Registrant's  Annual  Report on Form 10-K for the year ended  March 31,
         2000.
(7)      Incorporated by reference to the exhibit 16.1 filed with Registrant's
         form 8-K No. 000-21336.
14(b)    Reports on Form 8-K:
         A current  report on Form 8-K was filed on March 20, 2001 to report the
         appointment   of   PricewaterhouseCoopers,   LLP  as  our   independent
         accountants.
14(c)    Exhibits:
         The  registrant  hereby  incorporates  as part of this  Form  10-K  the
         exhibits listed in Item 14(a)3, as set forth above.
14(d)    Financial  Statement  Schedules:
         Information  required by this Item is included in Notes to Consolidated
         Financial Statements.

                                      -34-
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
of The 3DO Company:

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statement  of income,  of  shareholders'  equity and of cash flows
present  fairly,  in all material  respects,  the financial  position of The 3DO
Company  and its  subsidiaries  at March  31,  2001,  and the  results  of their
operations  and their cash flows for the year ended March 31, 2001 in conformity
with accounting  principles  generally accepted in the United States of America.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audit of these  statements  in accordance  with
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.


/s/ PricewaterhouseCoopers, LLP

San Jose, California
May 9, 2001

                                      -35-

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
of The 3DO Company:

         We have audited the accompanying  consolidated balance sheet of The 3DO
Company and  subsidiaries  as of March 31,  2000,  and the related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
years in the two-year period ended March 31, 2000. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all material  respects,  the financial  position of The 3DO
Company  and  subsidiaries  as of  March  31,  2000,  and the  results  of their
operations  and their  cash flows for each of the years in the  two-year  period
ended  March 31,  2000,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.

                                  /s/ KPMG LLP

Mountain View, California
May 3, 2000

                                      -36-

<PAGE>

<TABLE>
THE 3DO COMPANY AND  SUBSIDIARIES  CONSOLIDATED  BALANCE  SHEETS (in  thousands,
except per share amounts)
<CAPTION>

                                                                                                       March 31,
                                                                                                       ---------
                                                                                                  2000          2001
                                                                                                  ----          ----
                                                              ASSETS
<S>                                                                                             <C>            <C>
Current assets:
   Cash and cash equivalents................................................................    $ 21,772       $ 4,885
   Accounts receivable, net of allowance of $10,907 and $12,143, respectively...............      51,760        31,834
   Inventory................................................................................       7,607         4,423
   Prepaid assets...........................................................................       1,655         1,893
   Prepaid royalties and capitalized software costs.........................................         262         2,448
   Other current assets.....................................................................          69         1,240
                                                                                               ---------      --------
          Total current assets..............................................................      83,125        46,723

Property and equipment, net.................................................................       5,689        13,337
Restricted cash.............................................................................       8,240         5,961
Deposits and other assets...................................................................         747           611
                                                                                               ---------      --------
          Total assets......................................................................    $ 97,801      $ 66,632
                                                                                               =========      ========

                                               LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable.........................................................................     $ 1,954       $ 3,349
   Accrued expenses.........................................................................      12,222        10,526
   Deferred revenue.........................................................................         205           361
   Short term debt..........................................................................       8,579         1,800
   Other current liabilities................................................................       2,025           662
                                                                                               ---------      --------

           Total current liabilities........................................................      24,985        16,698
                                                                                               ---------      --------
Commitments (Note 11)

Stockholders' equity:
   Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued..............           -             -
    Common stock, $0.01 par value; 125,000 shares authorized; 40,909 shares in 2000 and
        51,775 shares in 2001 issued........................................................         409           518
   Additional paid-in capital...............................................................     214,446       269,764
   Accumulated other comprehensive loss.....................................................        (342)       (1,617)
   Accumulated deficit......................................................................    (127,635)     (204,669)
   Treasury stock, at cost, 4,220 shares....................................................     (14,062)      (14,062)
                                                                                               ---------      --------
           Total stockholders' equity.......................................................      72,816        49,934
                                                                                               ---------      --------

           Total liabilities and stockholders' equity.......................................    $ 97,801      $ 66,632
                                                                                               =========      ========

                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                                -37-

<PAGE>

<TABLE>
          THE 3DO COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
<CAPTION>

                                                                                                Years Ended March 31,
                                                                                                ---------------------
                                                                                             1999           2000        2001
                                                                                             ----           ----        ----
<S>                                                                                        <C>           <C>          <C>
Revenues...............................................................................    $ 48,019      $122,234    $  82,765
Cost of Revenues.......................................................................      13,778        44,823       44,650
                                                                                           --------      ---------   ----------

Gross profit...........................................................................      34,241        77,411       38,115
                                                                                           --------      ---------   ----------
Operating expenses:
   Research and development............................................................      25,939        34,275       48,920
   Sales and marketing.................................................................      13,497        31,652       32,929
   General and administrative..........................................................       8,900        11,307       18,469
   Restructuring costs.................................................................           -             -        1,225
                                                                                           --------      ---------   ----------

      Total operating expenses.........................................................      48,336        77,234      101,543
                                                                                           --------      ---------   ----------

Operating income (loss)................................................................     (14,095)          177      (63,428)

Amortization of warrant issuance.......................................................           -             -       (1,557)
Interest and other income, net.........................................................       1,119           325       (9,147)
                                                                                           --------      ---------   ----------

Income (loss) before income and foreign withholding taxes, extraordinary charges and
   cumulative effect of a change in accounting policy..................................     (12,976)          502      (74,132)

Income and foreign withholding taxes...................................................         191           297          124
                                                                                           ---------     ---------    ---------

Income (loss) before extraordinary charges and cumulative effect of a change in
    accounting policy..................................................................     (13,167)          205      (74,256)

  Extraordinary loss from early extinguishment of debt.................................           -             -         (800)
  Cumulative effect of accounting change...............................................           -             -       (1,978)
                                                                                           ---------     ---------    ----------

Net income (loss)......................................................................    $(13,167)     $    205     $(77,034)
                                                                                           =========     =========    ==========

Earnings (loss) per share:
 Basic before extraordinary charge and cumulative effect change........................    $  (0.51)     $   0.01      $ (1.79)
   Extraordinary charge................................................................           -             -        (0.02)
   Cumulative effect of accounting change..............................................           -             -        (0.04)
                                                                                           ---------     ---------     ---------
 Basic net income (loss) per share.....................................................    $  (0.51)     $   0.01      $ (1.85)
                                                                                           =========     =========     =========

 Diluted before extraordinary charge and cumulative effect change......................    $  (0.51)     $   0.01      $ (1.79)
   Extraordinary charge................................................................           -             -        (0.02)
   Cumulative effect of accounting change..............................................           -             -        (0.04)
                                                                                           ---------     ---------     ---------
 Diluted net income (loss) per share...................................................    $  (0.51)     $   0.01      $ (1.85)
                                                                                           =========     =========     =========

Shares used to compute basic net income (loss) per share...............................      25,602        32,458       41,551
                                                                                           =========     =========     =========

Shares used to compute diluted net income (loss) per share.............................      25,602        38,872       41,551
                                                                                           =========     =========     =========

                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                                -38-

<PAGE>

<TABLE>
                              THE 3DO COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
                               EQUITY FOR THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001 (in thousands)
<CAPTION>

                                                                   Accumulated
                                       Common Stock   Additional      Other                   Treasury
                                       ------------    Paid-in    Comprehensive  Accumulated    Stock   Stockholders' Comprehensive
                                      Shares  Amount   Capital    Income (Loss)   Deficit      at Cost     Equity     Income (Loss)
                                      ------  ------   -------    -------------   -------      -------     ------     -------------
<S>                                   <C>     <C>      <C>          <C>          <C>          <C>          <C>          <C>
Balances as of March 31, 1998         29,018  $  290   $159,938     $   (290)    $(114,673)   $ (11,687)   $ 33,578

Net loss                                   -       -          -            -       (13,167)           -     (13,167)    $(13,167)
Unrealized gain from investments           -       -          -           35             -            -          35           35
Sale of common stock through
   employee stock plans and other
    plans                                742       7      2,037            -             -            -       2,044            -
Repurchase of 3DO shares                   -       -          -            -             -       (2,375)     (2,375)           -
                                     -------  -------  --------     --------     ---------    ---------    --------     --------
Balances as of March 31, 1999         29,760     297    161,975         (255)     (127,840)     (14,062)     20,115     $(13,132)
                                                                                                                        ========

Net Income                                 -       -          -            -           205            -         205     $    205
Unrealized loss from investments           -       -          -          (41)            -            -         (41)         (41)
Foreign currency translation               -       -          -          (46)            -            -         (46)         (46)
Sale of common stock through
   employee stock plans and other
   plans                               2,064      21      6,126            -             -            -       6,147            -
Sale of common stock through
   secondary offering, net of
   issuance costs of $2,964            9,085      91     46,345            -             -            -      46,436            -
                                     -------  -------  --------     --------     ---------    ---------    --------     --------
Balances as of March 31, 2000         40,909     409    214,446         (342)     (127,635)     (14,062)     72,816     $    118
                                                                                                                        ========

Net Loss                                   -       -          -            -       (77,034)           -     (77,034)    $(77,034)
Unrealized gain from investments           -       -          -           39             -            -          39           39
Foreign currency translation               -       -          -       (1,314)            -            -      (1,314)      (1,314)
Sale of common stock through employee
   stock plans and other plans         1,501      15      4,490            -             -            -       4,505            -
Issuance of common stock through
   conversion of debt, net of
   issuance costs of $42               2,900      29     20,045            -             -            -      20,074            -
Warrants issued in conjunction with
   convertible debt                        -       -      1,557            -             -            -       1,557            -
Beneficial conversion charge
   associated with the issuance of
   convertible debt                        -       -      9,309            -             -            -       9,309            -
Sale of common stock through private
   placement, net of issuance costs
   of  $18                             6,465      65     19,917            -             -            -      19,982            -
                                     -------  -------  --------     --------     ---------    ---------    --------     --------
Balances as of March 31, 2001         51,775  $  518  $ 269,764     $ (1,617)    $(204,669)   $ (14,062)   $ 49,934     $(78,309)
                                     =======  =======  ========     ========     =========    =========    ========     ========

                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                                -39-

<PAGE>

<TABLE>
                       THE 3DO COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
<CAPTION>

                                                                                                   Years Ended March 31,
                                                                                                   ---------------------
                                                                                             1999           2000           2001
                                                                                             ----           ----           ----
<S>                                                                                        <C>           <C>            <C>
Cash flows from operating activities:
   Net income (loss)..................................................................     $(13,167)     $    205       $(77,034)
      Adjustments to reconcile net income (loss) to net cash used in operating
        activities:
        Depreciation and amortization.................................................        2,973         2,596          4,481
        Loss on disposal of property and equipment....................................            -             -            234
        Amortization of warrant issuance..............................................            -             -          1,557
        Non-cash charge for conversion of accrued interest into common stock                      -             -            116
        Non-cash interest charge associated with beneficial conversion  feature
           from issuance of convertible debt..........................................            -             -          9,309
        Changes in operating assets and liabilities:
           Accounts receivable, net...................................................      (20,561)      (30,983)        19,926
           Prepaid and other assets...................................................         (232)       (1,515)        (3,907)
           Inventory..................................................................         (446)       (6,733)         3,184
           Accounts payable...........................................................        1,364            95          1,395
           Accrued expenses...........................................................        4,058         5,696         (1,697)
           Other liabilities..........................................................       (1,255)           27         (1,248)
           Deferred revenue...........................................................          133          (280)           156
                                                                                           --------      --------       --------

        Net cash used in operating activities.........................................      (27,133)      (30,892)       (43,528)
                                                                                           --------      --------       --------
Cash flows from investing activities:
           Sale of short-term investments.............................................        6,814        11,554             39
           Capital expenditures.......................................................       (2,507)       (4,517)       (11,918)
                                                                                           --------      --------       --------

           Net cash provided by (used in) investing activities........................        4,307         7,037        (11,875)
                                                                                           --------      --------       --------
Cash flows from financing activities:
            Restricted cash...........................................................            -        (8,240)         2,279
            Proceeds from debt........................................................        9,505             -         19,958
            Repayment of debt.........................................................            -          (926)        (6,780)
            Proceeds from secondary offering, net.....................................            -        46,436              -
            Repurchase of 3DO shares..................................................       (2,375)            -              -
            Proceeds from issuance of common stock from stock plans, net..............        2,044         6,147          4,505
            Proceeds from issuance of other common stock, net.........................            -             -         19,982
            Payments on capital lease obligations.....................................         (301)            -           (114)
                                                                                           --------      --------       --------

            Net cash provided by financing activities.................................        8,873        43,417         39,830
                                                                                           --------      --------       --------
Effect of foreign currency translation................................................            -           (46)        (1,314)

Net increase (decrease) in cash and cash equivalents..................................      (13,953)       19,516        (16,887)

Cash and cash equivalents at beginning of year........................................       16,209         2,256         21,772
                                                                                           --------      --------       --------

Cash and cash equivalents at end of year..............................................     $  2,256      $ 21,772       $  4,885
                                                                                           ========      ========       ========
Supplemental disclosures of cash flow information:
   Cash paid during the year
            Interest..................................................................     $     20      $  1,031       $    929
                                                                                           ========      ========       ========
            Taxes.....................................................................     $      6      $     19       $     89
                                                                                           ========      ========       ========
Supplemental disclosures of non-cash financing activities:
            Issuance of common stock for convertible notes payable                         $      -      $      -       $ 19,958
            Unrealized gain (loss) on investments                                          $     35      $    (41)      $     39
            Unrealized loss on foreign currency translation                                $      -      $    (46)      $ (1,314)

                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                                -40-

<PAGE>

THE 3DO COMPANY AND  SUBSIDIARIES  NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS
MARCH 31, 1999, 2000, AND 2001

NOTE 1.  SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

         In April 1993, The 3DO Company was  incorporated as a Delaware  holding
company. The accompanying Consolidated Financial Statements include the accounts
of The 3DO  Company  and its wholly  owned  subsidiaries  (The  "Company"),  3DO
Europe,  Ltd. and Studio 3DO K.K. The Company  develops  and  publishes  branded
interactive  entertainment software for multiple platforms.

         In fiscal 2001,  the  Company's  net revenues  significantly  decreased
compared to fiscal 2000,  primarily as a result of the industry  transition from
32-bit and 64-bit to 128-bit game  consoles  and  software.  Net  revenues  were
impacted by increased competition,  lower average selling prices for Playstation
and Nintendo 64 game console software,  lack of availability of Playstation game
consoles for part of the year and limited availability of Playstation 2 computer
entertainment  systems  during  the  fiscal  year.  As a result of these  market
conditions and the Company's investment in the product development, particularly
for next generation game consoles, the Company sustained net losses and negative
cash flows from  operations  for the year ended March 31, 2001 and expects these
conditions  to  continue in the near term.  Management  believes  that  existing
sources of liquidity  and  anticipated  funds from  operations  will satisfy our
projected working capital  requirements  through the fall of 2001, at which time
the Company  may need to raise  additional  capital.  The  Company's  ability to
maintain sufficient liquidity through the fall of 2001 is particularly dependent
on its achieving  projected  sales  forecasts in the period and on the continued
availability of its line of credit. Additional financing, whether through public
or private equity or debt financing,  collaborative or other  arrangements  with
corporate  sources  or  stockholders  or  other  sources  of  financing  to fund
operations,  may not be  availabe,  or if  available,  on  terms  acceptable  to
management.

Basis of Presentation

         All  significant  intercompany  balances  and  transactions  have  been
eliminated in consolidation.  Certain  prior-year amounts have been reclassified
to conform to the current year's presentation.

Use of Estimates

         The preparation of consolidated financial statements in conformity with
generally accepted  accounting  principles  requires  management to make certain
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  consolidated  financial  statements and the reported  results of operations
during the reporting period. Actual results could differ from those estimates.

Cash Equivalents and Short-term Investments

         Cash  equivalents  include  highly liquid  investments  with  remaining
maturities  of 90 days or less at the date of purchase.  The carrying  amount of
cash and cash  equivalents are considered to approximate fair value based on the
short maturities of those financial instruments.

         The Company has classified  its  investments in certain debt and equity
securities as "available-for-sale." Such investments are recorded at fair value,
with  unrealized  gains and losses recorded as accumulated  other  comprehensive
income (loss) in stockholders'  equity,  until realized.  Fair value is based on
quoted  market  prices  for these  investments.  Realized  gains and  losses are
recorded in the  accompanying  consolidated  statements of  operations  and were
insignificant during the periods presented. The cost of securities sold is based
upon the  specific  identification  method.  As of March 31, 2000 and 2001,  the
Company has  approximately  $8.2  million and $6.0 million in  restricted  cash,
respectively.  The restricted cash balance primarily consist of cash equivalents
and is pledged as  collateral to support  various  letters of credit for various
leases entered into by the Company.

Concentration of Credit Risk

         Financial   instruments  that   potentially   subject  the  Company  to
concentrations of credit risk are primarily cash, cash  equivalents,  short-term
investments,   and  accounts  receivable.  The  Company's  investment  portfolio
consists of diversified investment-grade securities. The Company's policy limits
the amount of credit  exposure to investments in any one issue,  and the Company
believes no  significant  concentration  of credit  risk exists with  respect to
these investments.

         In fiscal 2001,  sales to two customers  represented 19% and 11% of our
total software publishing revenues.  Accounts receivable for these two customers
at March 31, 2001, were 27% and 5%,  respectively.  In fiscal 2000, sales to the
top customer  represented 20% of our total software  publishing  revenues.  This
customer  represented  13% of accounts  receivable  at March 31, 2000. In fiscal
1999,  sales  to the  top two  customers  represented  12% and 11% of our  total
software  publishing  revenues.  Each  of  these  customers  represented  11% of
accounts  receivable at March 31, 1999.  In addition,  sales to our largest five
customers  accounted for  approximately  51%, 40%, and 49% of revenue for fiscal
year 1999, 2000 and 2001, respectively.

         The Company holds several  non-exclusive  licenses with two significant
Original  Equipment  Manufacturers  ("OEMs"),  the  loss of which  would  have a
significant impact on operating results.

         The Company sources  production from three OEMs. There are currently no
available,  alternative  production sources for the products manufactured by two
of these OEMs.

         Credit  risk in  receivables  is  limited to  distributors,  retailers,
software  developers,  software  licensees and  affiliated  labels.  The Company
performs ongoing credit  evaluations of its customers'  financial  condition and
requires  prepayments  when  deemed  necessary.  The  Company  does not hold any
collateral to secure payment from customers.

                                      -41-
<PAGE>
Inventories

         Inventories, which consist  primarily of finished  goods, are valued at
the lower of cost (average cost) or market. We estimate the net realizable value
of slow moving and  obsolete  inventory on a title by title basis and charge the
excess of cost over market to cost of revenues.

Property and Equipment

         Property  and  equipment  are  recorded  at  cost.   Depreciation   and
amortization are calculated using the  straight-line  method over the shorter of
the estimated useful lives or lease terms, if applicable,  of the assets,  which
range from one to five years.

Accounting for Impairment of Long-Lived Assets

         The Company  reviews  its  long-lived  assets  including  goodwill  for
impairment in accordance  with Statement of Financial  Accounting  Standards No.
121  "Accounting  for the  Impairment  of Long-lived  Assets and for  Long-lived
Assets to be  Disposed  of"("SFAS  No.  121"),  whenever  events or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Recoverability  of  assets  including  goodwill  held  and used is
measured by a comparison  of the carrying  amount of an asset to future net cash
flows expected to be generated by the asset. If such assets  including  goodwill
are  considered to be impaired,  the  impairment to be recognized is measured by
the amount by which the carrying  amount of the assets exceeds the fair value of
the assets.  No such  impairments  have been  identified  to date.  Assets to be
disposed  of are  reported at the lower of their  carrying  amount or fair value
less cost to sell.

Intangible Assets

         Intangible assets, primarily goodwill from the acquisition of New World
Computing in June 1996, are stated at cost less accumulated amortization and are
included  in  other   assets.   Amortization   of  goodwill  is  computed  on  a
straight-line  basis over the estimated useful life of approximately five years.
For fiscal 1999, 2000, and 2001,  goodwill  amortization  totaled  approximately
$448,000 per year. As of March 31, 2000 and 2001,  accumulated  amortization  of
intangibles was $2.5 million and $3.0 million, respectively.

Capitalization of Developed Software Costs for External Use

         Costs related to research and development of new software  products are
charged to research  and  development  expenses as incurred.  Capitalization  of
internal software  development costs begins upon  establishment of technological
feasibility  and ceases when the  product is  available  for general  release to
customers.  Technological  feasibility  is  established  by the  completion of a
detailed  program  design,  or in its absence,  a working  model of the product.
Historically,  the  establishment  of  technological  feasibility  for  internal
development  projects has  substantially  coincided with general  release of the
products and the Company had not capitalized any software  development  costs on
internal  development  projects,  as the eligible  costs were  determined  to be
insignificant. During the fourth quarter of fiscal 2001, the Company capitalized
internal development costs for second generation games for a new platform due to
significant  costs being incurred after  technological  feasibility was reached.
The Company capitalized approximately $0.6 million of internal development costs
during fiscal 2001.

         External   development   costs  are  capitalized   once   technological
feasibility  is  established  or if the  development  costs have an  alternative
future use. The criteria for establishing technological feasibility for external
development  projects  is  consistent  with that used for  internal  development
projects  noted  above.  During the  current  fiscal  year,  the  Company  began
utilizing  external  developers  to  translate  existing  products to  alternate
platforms  and to localize  existing  products into various  foreign  languages.
Technological   feasibility  of  the  translated  and  localized   products  was
established  by the existing  products  and as a result the Company  capitalized
approximately  $3.0 million of external  development  costs during  fiscal 2001.
Amortization  of  capitalized  software  costs is recognized on a  straight-line
basis over the estimated  economic  lives of the related  products or the amount
computed using the ratio of current gross revenues for a product to the total of
current and  anticipated  future gross  revenues for that product,  whichever is
greater,  and is included in cost of revenues.  During Fiscal 2001,  the Company
amortized $1.3 million of capitalized software costs.

         When events or  circumstances  indicate the carrying  value of internal
use   software   might  not  be   recoverable,   the  Company  will  assess  the
recoverability  of these assets by determining  whether the  amortization of the
asset  balance over its  remaining  life can be recovered  through  undiscounted
future  operating  cash  flows  of  the  acquired  operations.   The  amount  of
impairment,  if any, is recognized to the extent that the carrying value exceeds
the  projected  discounted  future  operating  cash flows and is recognized as a
write  down of the  asset.  In  addition,  when it is no  longer  probable  that
computer  software being developed will be placed in service,  the asset will be
recorded at the lower of its carrying  value or fair value,  if any, less direct
selling  costs.  To date, no impairment  charges have been recorded  against the
cost of internal use software.

                                      -42-
<PAGE>

Stock-Based Compensation

         The Company accounts for stock-based employee compensation arrangements
in  accordance  with  provision of Accounting  Principals  Board Opinion No. 25,
"Accounting for Stock issued to Employees,"  ("APB No.25") and complies with the
disclosure  provisions  of Statement of Financial  Accounting  Standard No. 123,
"Accounting for Stock Based  Compensation"  ("SFAS No. 123").  Under APB No. 25,
compensation  expense is based on the  difference,  if any, on the date of grant
between the fair market value of the  Company's  stock and the  exercise  price.
Stock  based  compensation  to  non-employees  is based on the fair value of the
option or warrant estimated using the  Black-Scholes  model on the date of grant
in  compliance  with the Emerging  Issues Task Force No. 96-18  "Accounting  for
Equity  Instruments  that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services". Compensation expense resulting from
non-employee  options  is  amortized  using the  multiple  options  approach  in
compliance   with  Financial   Interpretation   No.  28  "Accounting  for  Stock
Appreciation Rights and Other Variable Stock Option or Award Plans".

         In  March  2000,  the  Financial   Accounting  Standards  Board  issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock  Compensation,  an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the  application  of  Opinion  No. 25 for (a) the  definition  of  employee  for
purposes of applying Opinion No. 25, (b) the criteria for determining  whether a
plan qualifies as a  noncompensatory  plan, (c) the accounting  consequences  of
various  modifications to the terms of a previously fixed stock option or award,
and (d) the  accounting  for an  exchange  of  stock  compensation  awards  in a
business combination.  FIN 44 is effective July 1, 2000, but certain conclusions
cover specific  events that occur either after December 15, 1998, or January 12,
2000.  The  adoption of FIN 44 did not have a material  impact on the results of
the operations or financial position of the Company.

Revenue Recognition

         Revenue from the sale of software  titles  published and distributed by
the Company is recognized at the time of receipt of the Company's goods by their
customers  based on the  agreed  upon  shipping  terms.  Prior to the  Company's
adoption of Staff Accounting Bulletin No. 101 on April 1, 2000, revenue from the
sales of software titles  published and distributed by the Company was recogized
at the time of shipment.  The Company permits its customers to exchange software
titles  published  and  distributed  by the Company,  within  certain  specified
periods,  and provides price protection on certain unsold merchandise.  Software
publishing revenue is reflected net of allowances for returns,  price protection
and discounts. Software licensing revenue is recognized upon persuasive evidence
of an arrangement,  3DO's fulfillment of its obligations (e.g.,  delivery of the
product  golden master) under any such licensing  agreement,  and  determination
that collection of a fixed or determinable license fee is considered  reasonably
assured.  Per-copy  royalties  on sales that  exceed the minimum  guarantee  are
recognized as earned.  Revenue from the Company's on-line service was recognized
monthly based on usage. The Company establishes  allowances for expected product
returns based on historical  trends,  in accordance  with SFAS No.48,  " Revenue
Recognition When Right of Return Exists".

         In December 1999, the Securities and Exchange  Commission  issued Staff
Accounting  Bulletin  No. 101 ("SAB  101"),  Revenue  Recognition  in  Financial
Statements.  SAB 101 provides guidance on applying generally accepted accounting
principles to revenue  recognition  issues in financial  statements.  In October
2000, the SEC Staff released a frequently  asked  questions  document to provide
additional  guidance on  implementing  SAB 101. The Company  adopted SAB 101 and
changed its revenue  recognition  policy  accordingly,  effective April 1, 2000,
based on guidance provided therein. The effect of SAB 101 was to include in both
fiscal 2000 and fiscal  2001,  revenue of $3.1 million and cost of goods sold of
$1.1 million.  The impact of SAB 101 did not have a significant effect in fiscal
1999.  The net effect of $2.0  million was  recorded as a  cumulative  effect of
accounting change during fiscal 2001.

Advertising Expenses

         Advertising  costs are  expensed as incurred.  Cooperative  advertising
with  distributors  and retailers is expensed  when  spending is committed.  For
fiscal  1999,  2000,  and  2001,   advertising  expenses  totaled  approximately
$10,330,000, $17,300,000 and $17,700,000, respectively.

         During the first  quarter of fiscal 2002,  the Company will be required
to adopt EITF Issue No. 00-25 "Accounting for  Consideration  from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products."
The Task  Force  reached  a  consensus  that  consideration  from a vendor  to a
purchaser  of a vendor's  products is presumed to be a reduction  to the selling
prices fo the vendor's  products and,  therefore,  should be  characterized as a
reduction of revenue in the vendor's income  statement.  During fiscal 2001, the
Company expensed  approximately  $3.0 million of Co-op advertising which will be
reclassified in future periods.

Income Taxes

         The Company uses the liability  method of accounting  for income taxes.
Under the liability  method,  deferred tax assets and liabilities are recognized
for  the  future  tax  consequences  attributable  to  differences  between  the
financial  statement  carrying  amounts of existing  assets and  liabilities and
their respective tax bases. A valuation allowance is

                                      -43-

<PAGE>

recorded to reduce deferred tax assets to the amount expected to be realized.

Foreign Currency Translation

         The functional  currencies of the Company's  foreign  subsidiaries  are
their local  currencies.  The Company  translates assets and liabilities to U.S.
dollars at the current  exchange rate as of the  applicable  balance sheet date.
Revenue and expenses are  translated at the average  exchange  rates  prevailing
during the period.  Adjustments  resulting  from the  translation of the foreign
subsidiaries'   financial   statements   are  recorded  as   accumulated   other
comprehensive  income  (loss) in  stockholders'  equity.  Gains and losses  from
foreign  currency  transactions  which  are  insignificant,  are a result of the
effect of exchange rate changes on transactions  denominated in currencies other
than the functional currencies.

Net Income (Loss) Per Share

         Basic earnings per share is computed using the weighted  average number
of shares of common stock  outstanding.  Diluted  earnings per share is computed
using the weighted  average  number of shares of common stock  outstanding  and,
when dilutive,  common  equivalent  shares from options and warrants to purchase
common stock using the treasury stock method.

<TABLE>
         The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the periods presented:
<CAPTION>

                                                                                                  For the years ended March 31,
                                                                                                  ------------------------------
                                                                                                  1999         2000         2001
                                                                                                  ----         ----         ----
<S>                                                                                            <C>           <C>         <C>
Income (loss) before extraordinary charges and cumulative effect of a change in
   accounting policy ......................................................................    $ (13,167)    $    205    $ (74,256)
  Extraordinary loss from early extinguishment of debt ....................................            -            -         (800)
  Cumulative effect of accounting change ..................................................            -            -       (1,978)
                                                                                               ----------    ---------   ----------
Net income (loss)..........................................................................    $ (13,167)    $    205    $ (77,034)
                                                                                               ==========    =========   ==========
Shares used to compute basic net income (loss) per share-weighted average number of common
   shares outstanding......................................................................       25,602       32,458       41,551
Effect of common equivalent shares-stock options outstanding using the treasury stock method           -        6,414            -
                                                                                               ----------    ---------   ----------
Shares used to compute diluted net income (loss) per share.................................       25,602       38,872       41,551
                                                                                               ==========    =========   ==========
Basic before extraordinary charge and cumulative effect charge ............................    $   (0.51)    $   0.01    $   (1.79)
  Extraordinary charge ....................................................................            -            -        (0.02)
  Cumulative effect of accounting change ..................................................            -            -        (0.04)
                                                                                               ----------    ---------   ----------
Basic net income (loss) per share..........................................................    $   (0.51)    $   0.01    $   (1.85)
                                                                                               ==========    =========   ==========
Diluted before extraordinary charge and cumulative effect charge ..........................    $   (0.51)    $   0.01    $   (1.79)
  Extraordinary charge ....................................................................            -            -        (0.02)
  Cumulative effect of accounting change ..................................................            -            -        (0.04)
                                                                                               ----------    ---------   ----------
Diluted net income (loss) per share........................................................    $   (0.51)    $   0.01    $   (1.85)
                                                                                               ==========    =========   ==========
</TABLE>

         Options to purchase  11,421,526,  4,552,300  and  21,868,856  shares of
common stock were  excluded  from the  Company's  dilutive net income (loss) per
share  calculations  in fiscal 1999, 2000 and 2001,  respectively  because their
effect  was  anti-dilutive.  These  anti-dilutive  shares had  weighted  average
exercise  prices of $3.24,  $10.29  and  $4.22 in  fiscal  1999,  2000 and 2001,
respectively.

         Warrants to purchase  1,725,361  shares of common  stock were  excluded
from the Company's  dilutive net loss per share  calculations for the year ended
March 31, 2001  because  their  effect was  anti-dilutive.  These  anti-dilutive
shares had weighted  average  exercise  prices of $7.79 for fiscal 2001.

Comprehensive Income

         Effective  April 1, 1998,  the Company  adopted  Statement of Financial
Accounting  Standards No. 130, Reporting  Comprehensive  Income.  This Statement
requires that all items recognized  under accounting  standards as components of
comprehensive  earnings  be reported in an annual  financial  statement  that is
displayed with the same prominence as other annual  financial  statements.  This
statement  also requires that an entity  classify  items of other  comprehensive
earnings by their nature in an annual financial  statement.  For example,  other
comprehensive  earnings may include foreign  currency  translation  adjustments,
minimum  pension  liability  adjustments  and  unrealized  gains  and  losses on
marketable  securities  classified  as   available-for-sale.   Annual  financial
statements for prior periods were reclassified, as required. The Company's total
comprehensive losses are included in the Statement of Stockholders' Equity.

                                      -44-
<PAGE>

Recent Accounting Pronouncements

         In June 1998,  the FASB issued SFAS No. 133,  Accounting for Derivative
Instruments  and Hedging  Activities.  SFAS No. 133  establishes  accounting and
reporting standards for derivative financial  instruments and hedging activities
and  requires  the Company to  recognize  all  derivatives  as either  assets or
liabilities  on the  balance  sheet and measure  them at fair  value.  Gains and
losses  resulting from changes in fair value would be accounted for depending on
the use of the  derivative  and whether it is designated and qualifies for hedge
accounting.  SFAS No. 133, as amended by SFAS No.137  "Accounting for Derivative
Instruments  and  Hedging  Activities--Deferral  of the  Effective  Date of FASB
Statement No. 133", and SFAS No. 138 "Accounting for Derivative  Insturments and
Hedging Activities--An  Amendment of SFAS 133" will be adopted by the Company in
the first  quarter of fiscal 2002 and is not expected to have a material  impact
on its financial statements.

         In November, 2000, the EITF published their consensus on EITF Issue No.
00-27,   Application  of  EITF  Issue  No.  98-5,  "Accounting  for  Convertible
Securities  with  Beneficial  Conversion  Features  or  Contingently  Adjustable
Conversion  Ratios,"  to  Certain  Convertible  Instruments.  See  Note  6 for a
description of the effect of EITF 00-27 on the Financial Statements.


                                      -45-


<PAGE>

NOTE 2.  ALLOWANCE FOR DOUBTFUL ACCOUNTS, RETURNS AND PRICE PROTECTION

         The  following  summarizes  the activity for the allowance for doubtful
accounts, returns and price protection for fiscal years 1999, 2000 and 2001:

                                                        Year ended March 31,
                                                        --------------------
                                                         2000        2001
                                                         ----        ----
                                                           (in thousands)

Balance at beginning of year........................    $4,017      $10,907
Additions...........................................    20,642       20,112
Deductions..........................................   (13,752)     (18,876)
                                                       --------     --------

Balance at end of year..............................   $10,907      $12,143
                                                       ========     ========

NOTE 3.  PROPERTY AND EQUIPMENT

       Property and equipment as of March 31, 2000 and 2001, consisted of:

                                                                March 31,
                                                                ---------
                                                            2000        2001
                                                            ----        ----
                                                              (in thousands)

Computer and manufacturing equipment (3 years)........... $11,749      $16,667
Furniture, fixtures and leasehold improvements
  (5 - 12 years) ........................................   3,637        8,685
Computer software (3 years)..............................   3,347        4,490
                                                          -------      -------

Property and equipment, at cost..........................  18,733       29,842
Less accumulated depreciation and amortization........... (13,044)     (16,505)
                                                          -------      -------

Property and equipment, net.............................. $ 5,689      $13,337
                                                          =======      =======

For fiscal 1999,  2000, and 2001,  depreciation  expense  totaled  approximately
$2,534,000, $2,128,000 and $4,033,000, respectively.

NOTE 4.  ACCRUED EXPENSES

         Accrued  expenses  as of March  31,  2000 and  2001,  consisted  of the
following:

                                                                March 31,
                                                                ---------
                                                             2000       2001
                                                             ----       ----
                                                             (in thousands)

Accrued compensation..................................     $ 3,525    $ 3,449
Accrued market development fund.......................       1,612      1,072
Accrued royalties.....................................         124         55
Accrued marketing expenses............................       2,207      1,218
Other.................................................       4,754      4,732
                                                           -------    -------
Total.................................................     $12,222    $10,526
                                                           =======    =======

                                      -46-

<PAGE>
NOTE 5.  SHORT-TERM DEBT

         In April  2000,  the  Company  terminated  the  Coast  Business  Credit
revolving line of credit  agreement.  The early  extinguishment  of this line of
credit resulted in an  extraordinary  charge of $0.8 million for the termination
fees paid. Concurrently, the Company entered into a $50.0 million revolving line
of credit with a bank.

         During the third quarter of fiscal 2001,  the Company  determined  that
its  borrowing  requirements  were less  than the  previously  negotiated  $50.0
million line of credit.  Accordingly, on December 1, 2000, the Company signed an
amendment  to the  line of  credit  agreement,  which  effectively  reduced  the
borrowing capacity by $20.0 million.  The credit facility now allows the Company
to borrow up to $30.0 million, or 85% of qualified accounts receivables, bearing
an interest  rate of the bank's Prime Rate plus 0.25% to 1.25% per annum (10.25%
as of March 31,  2001)  depending on the  company's  tangible net worth and will
expire on March 31, 2002.  Accrued  interest is due monthly and the loan balance
is due in April of 2002. This agreement  contains certain  financial  covenants,
including the requirement that the Company  maintains  tangible net worth of not
less than $40.0  million and prohibits  the Company from paying  dividends.  The
Company met all covenants  during  fiscal year 2001.  As of March 31, 2001,  our
outstanding loan balance under this facility was approximately $1.8 million.

NOTE 6.  CONVERTIBLE DEBT

         On August 16,  2000 the Company  entered  into a  convertible  note and
warrant purchase  agreement (the "Agreement") with the Company's Chief Executive
Officer and  Chairman of the Board,  William M. (Trip)  Hawkins  III.  Under the
Agreement,  Mr. Hawkins  committed to lend the Company up to $20 million through
September 30, 2000. In consideration for such commitment,  the Company issued to
Mr.  Hawkins a fully  exercisable  warrant  to  purchase  432,432  shares of the
Company's  common stock for $20 per share.  The warrants have a five-year  term.
Using the Black Scholes valuation model, the Company estimated the fair value of
the  warrants at $3.60 per share and expensed  the  resultant  $1.6 million debt
discount over the expected life of the  promissory  notes.  Assumptions  used to
calculate estimated fair value include:  dividend yield of 0%, volatility of 85%
and a risk free rate of 6.0%.

         On the same day,  pursuant to the  Agreement,  the Company  sold a $2.0
million convertible promissory note to Mr. Hawkins. The note was due and payable
upon the earlier of demand by the holder or August 16, 2003, accrued interest at
10.25% and was  convertible  into shares of Common Stock at a stated  conversion
price in the Agreement of $6.9375 per share which was the market price of common
stock on the date of the  Agreement.  Conversion  of the  note  was  subject  to
Hart-Scott-Rodino  clearance.  Under the terms of the promissory  note, the debt
was mandatorily  convertible into common stock upon receiving such clearance. On
September  13, 2000 the $2.0 million note and accrued  interest  were  converted
into 290,474 shares of Common Stock.

         On  August  23,  2000 the  Company  sold the  remaining  $18.0  million
convertible  promissory note to Mr.  Hawkins.  The note was due and payable upon
the  earlier of demand by the holder or August 23,  2003,  accrued  interest  at
10.25% and was  convertible  into shares of Common Stock at a stated  conversion
price of $6.9375 per share,  the market price of common stock on the date of the
Agreement. The market value of the common stock on the August 23, 2000 draw down
was $9.6250.  On September 13, 2000 the $18.0 million note and accrued  interest
were converted into 2,609,167 shares of Common Stock.

         The $20.0 million  proceeds were allocated to the debt and the warrants
resulting in $18.4 million assigned to the debt and $1.6 million assigned to the
warrants  on a relative  fair value  basis.  The  resultant  $1.6  million  debt
discount, arising from the proceeds allocated to the warrant, was amortized as a
non-cash charge to interest expense in the quarter ended September 30, 2000. The
accounting  conversion  price for the $20.0 million of debt,  based on the value
assigned to the debt and the number of common  shares the debt converts into was
$6.4158.  Accordingly,  the Company recorded a beneficial  conversion  charge of
$9.3  million  based on the  intrinsic  spread  between the  $6.4158  accounting
conversion  price and the market price of the  company's  common stock on August
23,  2000,  multiplied  by the  number of  common  shares  involved  in the debt
conversion.  Such  charge was  recorded  as a  cumulative  catch-up  to non-cash
interest expense in the quarter ended December 31, 2000.

         As previously reported,  during the second quarter, the company did not
record a  beneficial  conversion  charge.  As a result  of a new rule  issued on
November 16,  2000,  the  Securities  and Exchange  Commission  required  that a
cumulative  catch-up  adjustment be made as of the  beginning of a  registrant's
quarter including November 16, 2000 to record the beneficial  conversion feature
using the accounting  conversion price.  Accordingly,  the $9.3 million non-cash
charge was reflected as a cumulative  catch-up in the quarter ended December 31,
2000.

NOTE 7.  COMMON STOCK

         On October 31, 2000 the Company sold  6,464,647  shares of Common Stock
at the  stock's  closing  price that day of $3.09375  per share.  As part of the
transaction the Company also issued 1,292,929 warrants with an exercise price of
$3.7125 per share.  The Company's  Chief  Executive  Officer and Chairman of the
Board,  William M. (Trip) Hawkins III,  purchased  4,848,485 of these shares and
was issued 969,997 warrants on terms equivalent to a third party purchaser.

         In August 1999, the Company completed a secondary offering of 5,282,793
shares of its common stock at a price of $8.375 per share.  The Company received
approximately  $46.4  million  in  net  proceeds  after  deducting  underwriting
discounts and commissions and offering expenses.

         On August 16, 2000, in conjunction with Mr. Hawkin's commitment to lend
the Company up to $20 million

                                      -47-

<PAGE>

through  September 30, 2000, the Company issued Mr. Hawkins a fully  exercisable
warrant to purchase  432,432  shares of the  Company's  Common Stock for $20 per
share. The warrants were valued at $1.6 million using the Black-Scholes  pricing
model and the following  assumptions:  0% dividend  rate, 85%  volatility,  6.0%
discount  rate and a five year term.  The value of the warrant was recorded as a
discount to the  convertible  debt and  amortized  as interest  expense over the
period August 16, 2000 to September 13, 2000 when the convertible note converted
into 2,899,641 shares of Common Stock.

         On October 31, 2000, in  conjunction  with the Company's sale of shares
of Common Stock to Mr.  Hawkins and a third-party  investor,  the Company issued
fully exercisable  warrants to purchase 1,292,929 shares of the Company's common
stock for $3.7125 per share. No value has been allocated to the warrants because
both the value of the warrant and the  capital  surplus on the common  stock are
equal.

NOTE 8.  STOCK PLANS

Employee Stock Purchase Plan

         The  Company has an  Employee  Stock  Purchase  Plan  whereby  eligible
employees may authorize payroll deductions of up to 20% of their compensation to
purchase shares at 85% of the lower of the fair market value of the common stock
on the date of commencement of the two-year  offering period, or on the last day
of each six-month purchase period. The Employee Stock Purchase Plan commenced in
September  1994. In fiscal 1999, 2000 and 2001,  358,297,  818,110 and 1,035,289
shares, respectively, were issued by the Company to employees at a price ranging
from $2.18 to $2.87, $2.18 to $5.47 and $1.99 to $6.14 per share,  respectively.
The weighted-average  fair value of the rights issued to employees to purchase a
share of stock under the Stock Purchase Plan was $1.67, $5.05 and $1.99 at March
31, 1999, 2000 and 2001, respectively.  As of March 31, 1999, 2000 and 2001, the
Company had 1,564,664,  746,552 and 2,211,263  shares,  respectively,  of common
stock reserved for future issuance under the Employee Stock Purchase Plan.

Stock Option Plan

         The Company's  1993  Incentive  Stock Plan (the "Plan")  authorizes the
granting of incentive and non-qualified  stock options and stock purchase rights
to employees.  Incentive  options must be granted with exercise  prices at least
equal to the fair  market  value of the  common  stock on the date of grant,  as
determined by the Company's Board of Directors.  Non-qualified stock options and
stock purchase rights must be granted with exercise prices at least equal to 85%
of the fair market value of the common stock on the grant date, as determined by
the Board of Directors.  Stock options  generally vest 25% or 20% one year after
the option holder's date of employment and  thereafter,  ratably over a three or
four year period.  Unexercised  options  generally  expire 10 years from date of
grant.

         As of  March  31,  1999,  2000 and  2001,  20,783,869,  26,302,138  and
35,362,095  shares,  respectively,  of common  stock  have been  authorized  for
issuance under the Plan.

Director Option Plan

         The  Company's  1995  Director   Option  Plan  (the  "Director   Plan")
authorizes the granting of non-qualified  stock options to each outside director
on the date such person first becomes an Outside Director. The exercise price of
the options is the fair market  value per share of the common stock on the grant
date. The stock options vest over a 48 or 60-month period.  Unexercised  options
expire ten years from the date of grant.

         As of March 31,  1999,  2000 and 2001,  700,000  shares of common stock
have been authorized for issuance under the Director Plan.

                                      -48-

<PAGE>

<TABLE>
         Activity  under  the Plan for  fiscal  1999,  2000  and  2001,  were as
follows:
<CAPTION>

                                                                                  Options Outstanding
                                                                                  -------------------
                                                            Options
                                                          Available For                      Weighted Average
                                                             Grant             Shares        Exercise Prices
                                                             -----             ------        ---------------
<S>                                                       <C>                <C>                 <C>
Outstanding as of March 31, 1998...................        6,329,873         8,475,070          $  3.07
Authorized.........................................        2,547,489                 -                -
Granted............................................       (4,926,250)        4,926,250             3.49
Terminated.........................................        1,595,558        (1,595,558)            3.17
Exercised..........................................                -          (384,236)            3.16
                                                          ----------        ----------          -------
Outstanding as of March 31, 1999...................        5,546,670        11,421,526          $  3.24
Authorized.........................................        6,071,516                 -               -
Granted............................................       (5,269,900)        5,269,900             7.81
Terminated.........................................        1,689,510        (1,689,510)            3.85
Exercised..........................................                         (1,246,055)            2.99
                                                          ----------        ----------          -------
Outstanding as of March 31, 2000...................        8,037,796        13,755,861          $  4.94
Authorized.........................................        9,059,957                 -                -
Granted............................................      (11,711,075)       11,711,075             3.83
Terminated.........................................        3,131,360        (3,131,360)            6.01
Exercised..........................................                -          (466,720)            3.61
                                                          ----------        ----------          -------
Outstanding as of March 31, 2001...................        8,518,038        21,868,856          $  4.22
                                                          ==========        ==========          =======
</TABLE>

         The  weighted-average  fair values of options granted during 1999, 2000
and 2001 with exercise prices equal to market value were $2.13, $5.11 and $2.45,
respectively.

         As of March 31, 1999, 2000 and 2001, 2,998,633, 3,930,338 and 7,048,770
options,  respectively,  were exercisable  under the Plan. The  weighted-average
exercise price for the shares  exercisable at March 31, 1999, 2000 and 2001 were
$3.10, $3.23, and $3.14, respectively.

<TABLE>
         The following table  summarizes  information  about fixed stock options
outstanding and currently exercisable at March 31, 2001:
<CAPTION>

                                                          Options Outstanding                          Options Exercisable
                                                          -------------------                          -------------------
                                                                 Weighted-
                                                                  average        Weighted-
                                                                 Remaining        average                            Weighted-
                                                Number          Contractual       Exercise         Number             average
Exercise Price                                Outstanding     Life (in years)      Price        Outstanding       Exercise Price
--------------                                -----------     ---------------      -----        -----------       --------------
<S>                                             <C>                 <C>              <C>           <C>                   <C>
$ 1.53...................................       3,121,500           9.68             $1.53         734,479               $1.53
$ 1.78 to $ 2.28.........................       4,452,760           9.33             $1.87         506,358               $2.12
$ 2.97 to $ 3.50.........................       4,865,900           6.45             $3.24       3,702,754               $3.25
$ 3.59 to $ 5.94.........................       2,089,889           7.89             $4.35         921,419               $4.04
$ 6.13 to $ 6.94.........................       5,538,219           9.02             $6.77         640,638               $6.57
$ 7.36 to $13.97.........................       1,800,588           8.64             $9.36         543,122               $9.20
                                                ---------                                        ---------
$ 1.53 to $13.97.........................      21,868,856           7.75             $4.22       7,048,770               $3.14

</TABLE>

Pro Forma Net Income (Loss)

                                      -49-

<PAGE>

<TABLE>
         Pursuant to SFAS No. 123,  "Accounting for  Stock-Based  Compensation,"
the Company is required to disclose the pro forma  effects on net income  (loss)
and net income  (loss) per share data as if the  Company  had elected to use the
fair value  approach to account for all its  employee  stock-based  compensation
plans. Had compensation cost for the Company's plans been determined  consistent
with the fair value approach enumerated in SFAS No. 123, the Company's pro forma
net income and pro forma net  income  per share for fiscal  1999,  2000 and 2001
would have been as indicated below:
<CAPTION>

                                                                               Year Ended March 31,
                                                                               --------------------
                                                                         1999          2000           2001
                                                                         ----          ----           ----
<S>                                                                   <C>                <C>        <C>
Net income (loss) as reported....................................     $(13,167)          $205       $(77,034)
Pro forma........................................................     $(20,130)      $(10,006)      $(89,695)
Net income (loss) per basic share as reported....................       $(0.51)         $0.01         $(1.85)
Pro forma........................................................       $(0.79)        $(0.31)        $(2.16)
Net income (loss) per diluted share as reported..................       $(0.51)         $0.01         $(1.85)
Pro forma........................................................       $(0.79)        $(0.26)        $(2.16)
</TABLE>

<TABLE>
         The fair value of employee  stock options and employee  stock  purchase
plan rights are  estimated on the date of grant using the Black  Scholes  option
pricing model with the following  weighted-average  assumptions for fiscal 1999,
2000 and 2001:
<CAPTION>

                                                                                          Option Plan                 ESPP
                                                                                          -----------                 ----
                                                                                     1999     2000    2001    1999    2000    2001
                                                                                     ----     ----    ----    ----    ----    ----
<S>                                                                                  <C>      <C>     <C>     <C>     <C>     <C>
Weighted-average risk free rate..................................................    5.51%    6.24%   5.27%   5.82%   6.19%   4.85%
Expected life of options/rights (in years).......................................     3.5      3.5     3.5    2 years with 6 month
                                                                                                                   increments
Annualized stock price volatility................................................      84%      85%     90%     84%     78%     90%
Dividend yield...................................................................       -        -       -       -       -       -
</TABLE>


NOTE 9.  NET INTEREST AND OTHER INCOME

<TABLE>
         Net  interest  and other  income for the fiscal  years  ended March 31,
1999, 2000 and 2001, consisted of the following:
<CAPTION>

                                                                                   Year Ended March 31,
                                                                                   --------------------
                                                                                 1999       2000       2001
                                                                                 ----       ----       ----
                                                                                     (in thousands)
<S>                                                                             <C>       <C>      <C>
Interest income.........................................................        $1,134    $1,349   $ 1,188
Beneficial conversion charge associated with the issuance of convertible
   debt ................................................................             -         -    (9,309)
Interest expense........................................................           (20)   (1,033)     (931)
Other income (expense), net.............................................             5         9       (95)
                                                                                ------    ------   -------
                                                                                $1,119    $  325   $(9,147)
                                                                                ======    ======   =======
</TABLE>

NOTE 10.  INCOME TAXES

         The provision for income taxes consisted of the following:

                                      -50-

<PAGE>


                                                  Year Ended March 31,
                                                  ---------------------
                                                  1999     2000    2001
                                                  ----     ----    ----
                                                      (in thousands)
Current:
   Federal......................................  $   -    $  52   $  (8)
   State and local..............................      1      (17)     48
   Foreign......................................    190      262      84
                                                  -----    -----   -----
Total current...................................    191      297     124
Total deferred..................................      -        -       -
                                                  -----    -----   -----
Total income taxes..............................  $ 191    $ 297   $ 124
                                                  =====    =====   =====


         The differences between the statutory income tax rate and the Company's
effective tax rate,  expressed as a percentage  of income  before  provision for
income taxes, for the years ended March 31, 1999, 2000 and 2001 were as follows:

                                                      Year Ended March 31,
                                                      --------------------
                                                    1999       2000      2001
                                                    ----       ----      ----

Provision at statutory federal tax rate.........   (34.0)%     34.0 %   (34.0)%
Valuation allowance.............................    35.8 %    (40.8)%    44.1 %
Alternative minimum tax.........................       -       50.0 %    (8.8)%
Foreign tax, withholding and other..............    (0.3)%     39.1 %     2.3 %
Other...........................................       -        2.0 %    (3.4)%
                                                   -------     ------    ------
                                                     1.5 %     84.3 %     0.2 %
                                                   =======     ======    ======


         The tax effect of temporary  differences  that give rise to significant
portions of deferred tax assets as of March 31, 2000 and 2001,  are presented as
follows:

                                                       Year Ended March 31,
                                                          2000         2001
                                                          ----         ----
                                                          (in thousands)

Deferred tax asset:
   Depreciation and amortization......................  $ 2,370      $   923
   Deferred revenue...................................       94          144
   Research and development capitalized expenses......   12,563        9,153
   Net operating loss carryforwards...................   33,466       58,429
   Tax credit carryforwards...........................   27,246       32,367
   Other..............................................   (1,323)       7,030
                                                        -------      -------
Total gross deferred tax assets.......................   74,416      108,046
Less valuation allowance..............................  (74,416)    (108,046)
                                                        -------      -------
Net deferred tax assets...............................  $     -      $     -
                                                        =======      =======

         The  valuation  allowance  increased  $34.0  million  in  fiscal  2001.
Approximately  $3.0  million of the  valuation  allowance is related to benefits
associated  with employee stock options,  which will be allocated to equity when
realized.

         As of March 31, 2001, the Company had cumulative  federal net operating
loss  carryforwards  of  approximately  $168.0  million for  federal  income tax
purposes and $19.0 million for state tax purposes.  If not offset against future
taxable income,  they will expire beginning in fiscal 2009 and 2006, for federal
and state tax purposes, respectively.

                                      -51-
<PAGE>

         As of March 31, 2001, the Company had unused  research and  development
tax credits of approximately  $12.0 million and $9.0 million available to reduce
future federal and California income taxes,  respectively.  The federal research
and development tax credit expires beginning in fiscal year 2007. The California
research and  development tax credit can be carried  forward  indefinitely.  The
Company also had foreign tax credits of approximately $11.0 million available to
reduce future federal income taxes, expiring through fiscal 2005. There are also
minimum tax credits of  approximately  $0.5 million  available to reduce  future
federal income taxes, which will carry forward indefinitely.

NOTE 11.  LEASE COMMITMENTS

         The  Company  leases  its  facilities  under  several  operating  lease
agreements.   The  Company   also  leases   certain   office   equipment   under
non-cancelable operating leases. Rental expense for fiscal 1999, 2000, and 2001,
were $1.5 million, $2.9 million and $5.2 million, respectively.

         Future minimum lease payments under non-cancelable  operating leases as
of March 31, 2001 are as follows:


   March 31,
   ---------

   2002........................................................  $ 8,116
   2003........................................................    7,593
   2004........................................................    7,266
   2005........................................................    6,306
   2006........................................................    6,375
   Thereafter..................................................   47,040
                                                                 -------
   Total minimum lease payments................................  $82,696
                                                                 =======

NOTE 12.  GEOGRAPHIC, SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION

         The Company  adopted the provisions of SFAS No. 131,  Disclosure  about
Segments of an Enterprise and Related Information,  during fiscal 1999. SFAS No.
131 establishes  standards for the reporting by public  business  enterprises of
information about operating segments,  products and services,  geographic areas,
and major  customers.  The method for determining  what information to report is
based on the way that  management  organizes the operating  segments  within the
Company  for  making   operational   decisions  and   assessments  of  financial
performance.  The Company's chief  operating  decision maker is considered to be
the  Company's  Chief  Executive   Officer  (CEO).  The  CEO  reviews  financial
information  presented on a  consolidated  basis  accompanied  by  disaggregated
information  about  revenues  by  products  for  purposes  of  making  operating
decisions and assessing financial performance.  Therefore, the Company considers
that it  operates  in a  single  operating  segment:  interactive  entertainment
software products.

<TABLE>
         The disaggregated  financial information on a product basis reviewed by
the CEO is as follows (in thousands):
<CAPTION>

                                                             Year Ended March 31,
                                                             --------------------
                                                          1999       2000         2001
                                                          ----       ----         ----
<S>                                                      <C>         <C>         <C>
Revenues:
   PC..................................................  $26,818     $29,948     $11,838
   Playstation video game console......................   11,417      54,719      30,275
   Playstation 2 computer entertainment system.........        -         165      16,189
   Nintendo 64.........................................    8,593      32,402      15,275
   Gameboy Color.......................................        -       3,885       8,753
   Other...............................................    1,191       1,115         435
                                                         -------    --------     -------
Total revenues.........................................  $48,019    $122,234     $82,765
                                                         =======    ========     =======
</TABLE>
                                      -52-

<PAGE>

         The  Company's  software  publishing  export sales are  principally  to
Europe and  Asia/Pacific.  In each of fiscal 1999 and 2000, less than 10% of the
Company's total net revenues were derived from international software publishing
sales. During fiscal 2001,  international  software publishing sales totaled 21%
of revenues.  The Company had software  publishing  export  sales,  primarily to
Japan and the United Kingdom, of approximately $4.2 million,  $7.3 million,  and
$17.2 million for the fiscal 1999, 2000, and 2001,  respectively.  The Company's
assets are primarily located in its corporate office in the United States.

NOTE 13.  RESTRUCTURING CHARGE

         During fiscal 2001, the Company  recorded $1.2 million in restructuring
charges.  These  charges  included a reduction in force of 69 employees for $0.3
million,  and  realized  and  anticipated  costs of $0.9  million  for a vacated
portion  of  its   headquarters.   The  Company  estimates  that  it  will  take
appoximately  six months to find a suitable  sub-lessee  for the vacated  office
space.  As of March 31, 2001,  the Company has accrued $0.8 million  accrued for
anticipated costs associated with finding a sub-lessee.


                                      -53-

<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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:

                                     THE 3DO COMPANY
                                     a Delaware Corporation
                                     By:



Date: June 29, 2001                         Kathleen R. McElwee

                                            Senior Vice President,
                                            Chief Financial Officer
                                            (Duly Authorized Officer)




<TABLE>
Pursuant to the  requirements  of the Securities and Exchange act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.
<CAPTION>

         Signature                            Title                                       Date
         ---------                            -----                                       ----

<S>                             <C>                                                     <C>
  William M. Hawkins, III   Chairman of the Board of Directors and
                            Chief Executive Officer (Principal Executive Officer)   June 29, 2001

      William A. Hall       Director                                                June 29, 2001


   H. William Jesse, Jr.    Director                                                June 29, 2001


     Charles Hirschhorn     Director                                                June 29, 2001
</TABLE>

                                      -56-
<PAGE>


<TABLE>
INDEX TO EXHIBITS*
<CAPTION>


  Exhibit
  Number                           Exhibit Name
  ------                           ------------
<S>         <C>
   10.12A  First  Amendment to Loan and Security  Agreement by and among The 3DO
           Company (California), The 3DO Company (Delaware), 3DO Europe, certain
           lenders as signatories and Foothill Capital Corporation
   10.12B  Second Amendment to Loan and Security  Agreement by and among The 3DO
           Company (California), The 3DO Company (Delaware), 3DO Europe, certain
           lenders as signatories and Foothill Capital Corporation
   10.12C  Third  Amendment to Loan and Security  Agreement by and among The 3DO
           Company (California), The 3DO Company (Delaware), 3DO Europe, certain
           lenders as signatories and Foothill Capital Corporation
   10.20   Lease between  Seaport Plaza  Associates,  LLC and the Registrant for
           offices located at 100 Cardinal Way, Redwood City, California,  dated
           July 12, 1999
   21.01   List of Subsidiaries of the Registrant.
   23.01   Consent of PricewaterhouseCoopers LLP.
   23.02   Consent of KPMG LLP.
</TABLE>

-----------

     *     Only exhibits  actually filed are listed.  Exhibits  incorporated  by
           reference are set forth in the exhibit listing included in Item 14 of
           the Report on Form 10-K.


                                      -57-