<PAGE>

                                  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                         Commission File Number
          March 31, 1999                                      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)

                       600 Galveston Drive, Redwood City,
                     California 94063 (Address of principal
                         executive offices and zip code)

                                 (650) 261-3000
              (Registrant's telephone number, including area code)

<TABLE>
<S>                                                             <C>
Securities registered pursuant to 12(b) of the Act:                None
Securities registered pursuant to Section 12(g) of the Act:        Common Stock, $.01 Par Value
</TABLE>

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, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $90,706,272 (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, 1999, the number of outstanding shares of the Registrants'
Common Stock was 25,684,787.



                                      1
<PAGE>

                                    PART 1

ITEM 1.   BUSINESS

OVERVIEW

We are a leading developer and publisher of branded interactive entertainment
software. Our software products operate on several multimedia platforms
including personal computers, the Sony PlayStation and Nintendo N64 video
game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color hand-held game and are preparing to develop 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 include Army Men, BattleTanx, Family Game Pack, Heroes of Might and
Magic, High Heat Baseball, and Might and Magic, 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 our software internally in our company-owned studios and have created
an extensive portfolio of versatile technologies that allow us to develop new
software products more quickly and cost-effectively.

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 have significantly increased the
number of retail outlets that sell our products to over 20,000 in fiscal 1999
from approximately 6,000 in fiscal 1998. Our largest retail customers in
fiscal 1999 were Best Buy, Wal-Mart, Electronics Boutique, Babbage's, Toys
"R" Us, Blockbuster Video, Target, Sears, Hollywood Video, KayBee Toys and
Kmart. We have recently enhanced our sophisticated Web site to enable
consumers to directly purchase products from us and to obtain game tips and
chat on-line about our products.

Our software publishing revenues increased 409% to $48.0 million in fiscal
1999 from $9.4 million in fiscal 1998. In fiscal 1999, we released 14 new
products compared to three new releases in fiscal 1998. We are currently
developing over 25 new products that we expect to release in fiscal 2000. In
the quarter ended March 31, 1999, our net income was $2.6 million on revenues
of $23.2 million. In March 1999, we had three different titles in the top ten
lists of games sold, one on each of the Sony PlayStation, Nintendo N64 and
personal computer platforms, according to GameWeek and MCV magazines. We
believe that growth in our software revenues and number of new products
released, as well as achieving our first profitable quarter as a software
company, demonstrate our successful transformation from a video game console
hardware company to a developer and publisher of branded interactive
entertainment software.

Our experienced management team is led by Trip Hawkins, our founder, Chairman
and Chief Executive Officer, who also founded Electronic Arts and served as
its Chairman and Chief Executive Officer.


We filed a registration statement on Form S-3 with the Securities and
Exchange Commission on June 9, 1999 in connection with a proposed public
offering of up to $34.5 million of our Common Stock.


INDUSTRY BACKGROUND

According to the Interactive Digital Software Association, an industry trade
association, the video game and personal computer game software market was
the fastest growing entertainment industry in the United States in 1998,
surpassing books, recorded music and movie box office receipts in percentage
growth. The NPD Group estimates that retail sales of interactive
entertainment software in the United States grew more than 25% to $4.9
billion in 1998 from $3.9 billion in 1997.

Declining prices of video game consoles and personal computers and
lower-cost, higher-quality graphics processors and improved audio
capabilities have led to a growing installed base of platforms and greater
demand for video games. NPD estimates that a total of 20.9 million Sony
PlayStation and Nintendo N64 video game console systems have been sold as of
April 1999. Growth in the installed base of personal computers is also
driving demand for interactive entertainment software. International Data
Corporation estimates that 46 million U.S. households owned a personal
computer in 1998, of which over 71% have played video games on their personal
computers.

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.


                                      2
<PAGE>

The interactive entertainment software market has experienced fluctuations as
a result of new product platform announcements or introductions. The
anticipation of next-generation video game platforms has historically
resulted in decreased sales of interactive entertainment software titles
developed to operate on currently available platforms. We believe that
software developers have historically been reluctant to develop software for
next-generation platforms until they believe the new platforms will be
commercially successful. Once a next-generation platform has achieved market
acceptance, sales of interactive entertainment software have historically
increased. Nintendo has stated that it is in the process of developing a
next-generation video game console system. Sony recently announced the
creation of the next-generation PlayStation game console, which it expects to
introduce in late 2000. Currently, a next-generation PlayStation game console
is being designed to be backwards-compatible with existing PlayStation
software, allowing consumers to play their old PlayStation games on the new
console system. Furthermore, the typical retail prices for the current
versions of Sony and Nintendo video game consoles have declined over the past
few years, most recently from $149 to $129 in May 1999. We believe that the
backwards-compatibility feature and decreasing prices of existing consoles
may mitigate decreases in sales of older software products due to
anticipation of the introduction of next-generation video game consoles.

The interactive entertainment software market can generally be divided into
several game categories or genres. The most popular genres include action,
strategy, adventure/role playing, sports and family entertainment. According
to a May 1999 Game Week magazine reader survey, consumers consider factors
such as brand history, genre, interest of story, high quality graphics, high
quality sound, reliability, pricing, hardware compatibility and ease of
learning when purchasing interactive entertainment software. A limited number
of titles have typically captured a large share of the sales in the
interactive entertainment software market. This 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
gameplay 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.

Competition for shelf space at mass merchants and software electronic stores
has intensified because these high volume retailers often stock only a
limited number of titles that are expected to sell large numbers of units. We
believe retailers consider the historical performance of games and may be
more willing to stock sequels to successful brands rather than unproven
titles. Retailers are also seeking to distribute their advertising budget
across a small number of titles. We believe that these trends have increased
the importance of internally creating and building upon well-known brands by
releasing sequels and line extensions.

INTERACTIVE ENTERTAINMENT SOFTWARE DEVELOPMENT

With 321 studio employees as of March 31, 1999, 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 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 Senior Vice President of Research and 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. As of March 31, 1999, we had 175
employees working on design and art, 109 working on software, audio and video
technology and 37 producers. 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. As of March 31, 1999, 264 of our 321 internal studio employees
focused


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on our six primary brands, of which 126 employees are allocated to games for
the personal computer and Internet platforms, 131 to the Sony platform and 36
to the Nintendo platform. Upon completion and shipment of a new product, the
team members are then assigned to a product in development.

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.

Our internal studios have developed a library of over 15 proprietary
interactive entertainment software engines with over 10 additional engines in
development. Our Library Group maintains our collection of software engines
and other technology and helps to identify available tools to be shared by
our various product teams to facilitate the development of new products.
While an engine is initially developed for one product, our development staff
can often efficiently adapt an engine to new products. Our library is
composed of over 90 software modules, representing collectively more than
125,000 lines of tested software code. We also use a suite of 17 internally
developed software tools to speed product development. During fiscal 2000 we
intend to develop our ability to localize products for selected European
countries using internal resources. The development cycle of our new products
is difficult to predict, but typically ranges from 12 to 24 months for a
first-generation title. Sequels or line extensions typically can be developed
more quickly and less expensively than first-generation titles by utilizing
our previously developed technology.

We have contracted with outside development firms to port several of our
current software titles to the Nintendo Game Boy Color hand-held video game
platform until we establish the internal capabilities to develop software for
this platform.

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. Products
for the video game console platform generally require a more significant
investment in the production of a television campaign.

In addition to our 35-person internal sales and marketing organization, which
focuses on sales to major North American retailers and distributors, we also
utilize 10 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 Canada, 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. We have recently decreased our
reliance on distributors and expect to continue to increase direct sales to
retailers, particularly for video game console products. The number of retail
outlets that sold our products increased to over 20,000 in fiscal 1999 from
approximately 6,000 in fiscal 1998. Our largest retailers in fiscal 1999 were:

<TABLE>
                   <S>                             <C>
                      Best Buy                       Target
                      Wal-Mart                       Sears
                      Electronics Boutique           Hollywood Video
                      Babbage's                      KayBee Toys


                                      4
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                      Toys "R" Us                    Kmart
                      Blockbuster Video
</TABLE>

In fiscal 1999, sales to each of Best Buy and Navarre, a distributor,
represented more than 10% of our total software publishing revenues. Sales to
our five largest retailers and distributors accounted for approximately 64%
of our software publishing revenues in fiscal 1998 and 51% of our software
publishing revenues in fiscal 1999. Some of our major retailers also
purchased personal computer platform products from our distributors and these
sales are not reflected in the percentage of revenues figures listed above.
However, we believe that if we included sales through distributors, direct
and indirect sales to Wal-Mart would have represented more than 10% of our
total revenues in fiscal 1999.

INTERNATIONAL. We currently license the software code, user manuals and
packaging for our interactive entertainment software products for
manufacture, distribution and marketing of our products in Europe, Latin
America, Asia and Australia. By licensing the manufacturing, distribution and
marketing of our products to third parties, we have been able to maintain a
worldwide presence in the interactive entertainment software market without
significant investment in sales, marketing and manufacturing infrastructure.
We plan to expand our operations in Europe by the end of fiscal 2000 and
shift more emphasis to directly selling in Europe rather than licensing our
products to third parties for distribution. We believe we can ultimately
increase our revenues and improve our operating margins on products sold in
Europe by decreasing our dependence on third party licensees.

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

         -        PRODUCTS. For each of our brands, the site contains a detailed
                  description of each product and its gameplay. Users can also
                  download to their computers a demo containing a few levels of
                  each game, a video clip showing actual gameplay, an animated
                  description of the game and actual screenshots from each game.
                  Users have the ability to download artwork including box art
                  and character renderings and wallpaper containing artwork from
                  each game that the user can display on a computer desktop. Our
                  Web site also provides support for each product allowing users
                  to download updates and modifications to our software, and
                  providing responses to frequently asked questions and
                  communication with our customer service department.

         -        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.

         -        THE 3DO STORE. This section of the site allows consumers to
                  purchase our products online directly from us.

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 has granted us a non-exclusive license to develop and distribute game
software on CD-ROMs for use on the Sony PlayStation console in the United
States and Canada, under which we pay Sony a per unit royalty for each unit
manufactured. Sony is the exclusive manufacturer of products licensed under
this agreement. The agreement grants us a license to use proprietary Sony
software and hardware to develop titles for the PlayStation and to use Sony
trademarks to market, distribute and sell titles for the PlayStation. We
retain all right, title, and interest in and to our software. 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. The license expires in September 1999 and is terminable earlier
by Sony for our breach, instances related to debt and insolvency, or
significant change of control of our company. We are currently negotiating
with Sony to renew our PlayStation license and expand its geographic
territory.

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 video game software
and sell such software for the BattleTanx brand for play on the Nintendo 64
system throughout the Western Hemisphere. Development of new games for use


                                      5
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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
granted Nintendo an exclusive right with respect to BattleTanx, which
prohibits us from releasing BattleTanx on any other platform for a one-year
period commencing December 1998. Under the agreement, after licensing a
product, we buy discrete quantities of licensed game software units from
Nintendo for sale. The license expires in December 1999 and is terminable
earlier by Nintendo for breach or instances related to our debt and
insolvency. Currently, the agreement only covers the BattleTanx brand, but we
are negotiating with Nintendo to expand the license to other brands and
extend the license term.

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 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.

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, GT Interactive Software, Interplay, LucasArts 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 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.

INTELLECTUAL PROPERTY

We hold copyrights on our products, product literature and advertising and
other materials, and hold trademark rights in our name, our logo, and some of
our product names and publishing labels. We have licensed certain products to
third parties for


                                      6
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manufacture and distribution in particular geographic markets outside North
America, and receive royalties on such licenses. We currently outsource
product development for the Nintendo Game Boy Color hand-held video game
platform to third party developers. We contractually retain all intellectual
property rights related to such 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 methods to protect our proprietary rights.
We own or license various copyrights and trademarks. While we provide
"shrinkwrap" license agreements or limitations on use with 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 interactive entertainment software products
were to occur, our operating results could be materially adversely affected.

We rely on existing copyright laws to prevent unauthorized distribution of
our software. 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. Legal protection of our rights may be ineffective in
such countries, and 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. In addition, 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 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 communication 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. If we were 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
business may be seriously harmed.

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 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.


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<PAGE>

EMPLOYEES

As of March 31, 1999, we employed 353 full-time employees and 46 independent
contractors. These persons provided services in the following areas: 321 in
product development, 26 in sales and marketing, and 52 in finance,
administration, distribution and legal services.




RISK FACTORS

OUR QUARTERLY OPERATING RESULTS FREQUENTLY VARY SIGNIFICANTLY DUE TO FACTORS
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:

         -        the timing and number of new title introductions;

         -        the mix of sales of higher and lower margin products in a
                  quarter;

         -        market acceptance of our titles;

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

         -        announcements and introductions of new hardware platforms;

         -        product returns;

         -        changes in pricing policies by us and our competitors;

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

         -        delays in shipment.

For these reasons, you should not rely on period-to-period comparisons of our
financial results as indications of 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 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
third and fourth calendar quarters (our second and third fiscal quarters) as
a result of increased demand during the year-end holiday season. If we do not
achieve strong sales in the second half of each calendar year, our fiscal
year results would be adversely affected.

A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF
BRANDS, SO A DECLINE IN A BRAND'S POPULARITY MAY HARM OUR RESULTS.


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In fiscal 1999, three brands accounted for approximately 75% of our revenues.
Titles in the Army Men brand represented 31%, BattleTanx represented 19%, and
Might and Magic represented 25% of our total revenues in fiscal 1999. 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 may 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.

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:

         -        critical reviews;

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

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

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

         -        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 relationship with retailers and our access
to distribution channels.

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 consoles, including the Nintendo N64 and Sony PlayStation. 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.

TITLES WE DEVELOP FOR NEW PLATFORMS MAY NOT BE SUCCESSFUL.

If we design new titles or develop sequels to operate on a new platform, we
will be required to make substantial development investments well in advance
of the platform introduction. If the new platform does not achieve initial or
continued market acceptance, then our titles may not sell many copies and we
may not recover our investment in product development.

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.

The complexity of product development, uncertainties associated with new
technologies and the porting of our products to new platforms makes it
difficult to introduce new products on a timely basis. We have experienced
delays in the introduction of some new products. We anticipate that we will
experience delays in the introduction of new products, including some
products currently under development. We may also experience delays in
receiving approval of our games from Sony and Nintendo. Delays in the
introduction of products, especially in the third calendar quarter, could
significantly harm our operating results.

IF OUR NEW PRODUCTS HAVE DEFECTS, WE COULD LOSE POTENTIAL REVENUES AND
INCREASE OUR COSTS.


                                      9
<PAGE>

Software products such as those we offer frequently contain errors or
defects. Despite extensive product testing, in the past we have released
products with software errors. This is likely to occur in the future as well.
We offer warranties on our products, and may be required to repair or replace
our defective products. Although we periodically offer software patches for
our personal computer products, such errors may result in a loss of or delay
in market acceptance and cause us to incur additional expenses and delays to
fix these errors.

OUR GROSS MARGINS CAN BE SIGNIFICANTLY AFFECTED BY THE MIX OF PRODUCTS WE
SELL.

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 N64 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 N64 platforms.

IF WE DO NOT REDUCE COSTS OR PROPERLY ANTICIPATE FUTURE COSTS, OUR GROSS
MARGIN MAY DECLINE.

We anticipate that the average selling prices of our products may decrease in
the future in response to a number of factors, particularly competitive
pricing pressures and sales discounts. Therefore, to control our gross
margin, we must also seek to reduce our costs of production. The costs of
developing new interactive entertainment software have increased in recent
years due to such factors as:

         -        the increasing complexity and robust content of interactive
                  entertainment software;

         -        increasing sophistication of hardware technology and consumer
                  tastes; and

         -        increasing costs of licenses for intellectual properties.

If our average selling prices decline, we must also increase the rate of new
product introductions and our unit sales volume to maintain or increase our
revenue. Furthermore, our budgeted research and development and sales and
marketing expenses are partially based on predictions regarding sales of our
products. To the extent that these predictions are inaccurate, our operating
results may suffer.

IF NEW PLATFORMS ARE ANNOUNCED OR INTRODUCED, SALES OF OUR EXISTING TITLES
COULD DECLINE SUDDENLY.

Historically, the anticipation or introduction of next-generation video game
platforms has resulted in decreased sales of interactive entertainment
software for existing platforms. Sega has introduced its Dreamcast system in
Japan and expects to introduce it in the United States and Europe in late
1999. We currently do not expect to publish products for this platform. Sony
has recently announced the development of the next generation of the
PlayStation. Nintendo has stated that it is in the process of developing a
new video game platform. If sales of current models of multimedia personal
computers or video game consoles level off or decline as a result of the
anticipated release of new platforms or other technological changes, sales of
our software titles developed for current platforms can be expected to
decrease. We expect that as more advanced platforms are introduced, consumer
demand for software for older platforms may decline. As a result, our titles
developed for such platforms may not generate sufficient sales to make such
titles profitable. Obsolescence of software or platforms could leave us with
increased inventories of unsold titles and limited amounts of new titles to
sell to consumers.

OUR MARKETS ARE HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.

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


                                      10
<PAGE>

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:

         -        We compete primarily with other publishers of interactive
                  entertainment software for personal computer and video game
                  consoles, including Acclaim Entertainment Inc., Activision,
                  Inc., Eidos plc, Electronic Arts, GT Interactive Software
                  Corp., Interplay Entertainment Corp., LucasArts Entertainment
                  Company and THQ Inc.

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

         -        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, may decide
                  to compete directly with us or to enter into exclusive
                  relationships with our competitors.

IF WE DO NOT COMPETE SUCCESSFULLY FOR RETAIL SHELF SPACE, OUR SALES WILL
DECLINE.

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 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. 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. Retailers and distributors also consider marketing
support, quality of customer service and historical performance in selecting
products to sell. Our products constitute a relatively small percentage of
any retailer's sales volume, and we cannot be certain that retailers will
continue to purchase our products or to provide our products with adequate
levels of shelf space and promotional support.

IF MORE MASS MERCHANTS ESTABLISH EXCLUSIVE BUYING ARRANGEMENTS, 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 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.

OUR SALES AND ACCOUNTS RECEIVABLE ARE CONCENTRATED IN A LIMITED NUMBER OF
CUSTOMERS.

Sales to our five largest customers accounted for approximately 64% of our
revenues in fiscal 1998 and 51% of our revenues in fiscal 1999. Our sales are
made primarily on a purchase order basis, without long-term agreements. The
loss of our relationships with principal customers or a decline in sales to
any principal customer could harm our business.

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.

RETURNS OR EXCHANGES OF OUR TITLES MAY HARM OUR BUSINESS.


                                      11
<PAGE>

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 $6.9 million in fiscal 1999. If return rates or markdowns
significantly exceed our estimates, our business could be seriously harmed.

SONY AND NINTENDO CAN INFLUENCE THE NUMBER OF GAMES THAT WE CAN PUBLISH AND
TIMING OF OUR PRODUCT RELEASES.

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 approval for title proposals as well as
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 the product and obtain
approval. As a result, the number of titles we are able to publish for these
platforms may be limited.

The license with Sony terminates in September 1999 and the license with
Nintendo terminates in December 1999. We are currently negotiating with both
Sony and Nintendo to renew and expand the scope of these licenses. If any of
these licenses were terminated or not renewed on acceptable terms, we would
be unable to develop and publish software developed for these platforms and
our business would be seriously harmed.

SONY AND NINTENDO CAN INFLUENCE OUR GROSS MARGIN AND PRODUCT INTRODUCTION
SCHEDULES IN WAYS WE CANNOT CONTROL.

Each of Sony and Nintendo is the sole manufacturer of the titles we publish
under license 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. Each of
Sony and Nintendo also publishes software for its own platform and also
manufactures titles for all of its other licensees and may choose to give
priority to its own titles or those of other publishers if it has
insufficient manufacturing capacity or if there is increased demand.

IF OUR CONTRACT MANUFACTURERS DO NOT HAVE SUFFICIENT CAPACITY OR DELAY
DELIVERIES, OUR REVENUES WOULD BE HARMED.

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.

WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND OUR INTERNATIONAL OPERATIONS AND
REVENUES.

We currently have an office in the United Kingdom with limited staffing. We
intend to expand the scope of our international operations, which will
require us to enhance our management information systems and establish sales,
marketing and distribution infrastructure in markets in which we do not have
significant experience. If we are unable to expand our international
operations effectively and quickly, we may not generate additional revenues
from international sales, while our expenses may have already increased. This
could have an adverse impact on our profitability.

We are in the process of negotiating for licenses from Sony and Nintendo to
sell our products in Europe. We cannot be certain that we will be able to
obtain these licenses on acceptable terms.

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:


                                      12
<PAGE>

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

         -        increased credit risks and collection difficulties;

         -        tariffs and duties;

         -        increased risk of piracy;

         -        shipping delays;

         -        fluctuations in foreign currency exchange rates; and

         -        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 offer a role playing fantasy game called "Meridian 59," which is a
server-based Internet game. This type of game's software resides on a remote
server, and can be played only by accessing that server via the Internet.
Meridian 59 has not achieved significant market penetration. We provide 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 have not yet established that any of these incentives, the
availability of server-based games on the Internet or whether the expenses we
incur in offering these incentives will result in significant growth in the
use of our server-based Internet games or generate revenues for us in the
future. A number of software publishers who compete 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.

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 our products. The loss of any key developers
or groups of developers may delay the release of our products. Competition
for 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.

OUR INTERNAL DESIGN STUDIOS AND OUR MANUFACTURING SOURCES ARE VULNERABLE TO
DAMAGE FROM NATURAL DISASTERS.

All of our internal design studios and most of our manufacturing sources are
vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. Our California internal
design studios are located on or near known earthquake fault zones. If a
natural disaster occurs, our ability to develop and distribute our products
would be seriously, if not completely, impaired. The insurance we maintain
against fires, floods, earthquakes and general business interruptions may not
be adequate to cover our losses in any particular case.

ILLEGAL COPYING OF OUR SOFTWARE ADVERSELY AFFECTS OUR SALES.

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.
Policing illegal use of software is extremely difficult, and software piracy
is expected to persist. In addition, the laws of some foreign countries in
which our software is distributed do not protect us and our intellectual
property rights to the same extent as the laws of the U.S.

WE MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.


                                      13
<PAGE>

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 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 their intellectual property rights. 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 DEPEND ON LICENSES FROM THIRD PARTIES FOR THE DEVELOPMENT OF ONE OF OUR
BRANDS.

We license various rights for use in our High Heat Baseball brand. If we were
unable to maintain or renew those licenses, we would be unable to release
additional sequels and line extensions for that brand.

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.

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

THE YEAR 2000 RISK MAY ADVERSELY AFFECT US.

The inability of many existing computers to recognize and properly process data
as the Year 2000 approaches may cause many computer software applications to
fail or reach erroneous results. Any failure by us, our third-party suppliers or
customers to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain of our business operations. We have
not yet adopted a Year 2000 contingency plan.

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.

OUR FUTURE CAPITAL NEEDS ARE UNCERTAIN AND WE MAY NOT BE ABLE TO SATISFY THEM.


We expect the net proceeds from the offering of up to an aggregate of $34.5
million of our Common Stock, cash expected to be generated from operations
and available borrowings under our credit facilities should be sufficient to
meet our working capital and capital expenditure needs for at least the next
12 months. After that, we may need to raise additional funds, which 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

                                      14
<PAGE>

stockholders, including the investors in this offering, 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 debtholders to make claims on our assets. The terms
of any debt issued could impose restrictions on our operations. If we cannot
raise needed funds on acceptable terms, we may not be able to develop or
enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.

FUTURE ACQUISITIONS MAY STRAIN OUR OPERATIONS.

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:

         -        potentially dilutive issuances of equity securities;

         -        use of cash resources;

         -        the incurrence of additional debt and contingent liabilities;

         -        large write-offs; and

         -        amortization expenses related to goodwill and other intangible
                  assets.

Acquisitions also involve operational risks, including:

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

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

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

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

         -        loss of key employees of the acquired company.

WE HAVE NO INTENTION OF PAYING DIVIDENDS.

We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends for the foreseeable future. In
addition, our line of credit with Coast Business Credit prohibits the payment of
dividends.

ANTI-TAKEOVER PROVISIONS MAY PREVENT AN ACQUISITION.

Provisions of our Amended and Restated Certificate of Incorporation, Bylaws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.

ITEM 2.   FACILITIES

As of March 31, 1999, we leased 50,488 square feet in Redwood City,
California, 12,500 square feet in San Mateo, California, 7,900 square feet in
Austin, Texas, and 14,300 square feet in Agoura Hills, California, for an
aggregate monthly rent expense of approximately $177,000. These facilities
house our administrative, research, development and sales operations. The
lease for the Redwood City facility expires in July 2001. The lease for
approximately 7,800 square feet of the San Mateo facility expired and


                                      15
<PAGE>

we subleased the remaining space in May 1999. The lease for the Austin
facility expires in September 2000, and the lease for the Agoura Hills
facility expires in January 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, 1999.


                                      16
<PAGE>

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.

<TABLE>
<CAPTION>

                                                             CLOSING SALES PRICES
                                                       ----------------------------------
                                                            HIGH               LOW
                                                       ----------------   ---------------
              <S>                                      <C>                <C>
                Fiscal Year Ended March 31, 1998:
                           First Quarter                  $       5.19       $      2.75
                           Second Quarter                         4.50              3.25
                           Third Quarter                          3.75              2.00
                           Fourth Quarter                         3.59              2.00

                Fiscal Year Ended March 31, 1999:
                           First Quarter                  $       4.03       $      2.63
                           Second Quarter                         3.91              2.75
                           Third Quarter                          4.81              2.00
                           Fourth Quarter                         6.50              3.69
</TABLE>


As of May 31, 1999, there were approximately 784 holders of record of
25,684,787 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 Coast
Business Credit prohibits the payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>

                                                                             YEAR ENDED MARCH 31,
                                                -------------------------------------------------------------------------------
                                                    1995             1996            1997           1998             1999
                                                --------------  ---------------  -------------  --------------  ---------------
                                                               (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S>                                               <C>             <C>               <C>            <C>              <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
SOFTWARE PUBLISHING
Revenues.......................................        $3,287           $7,330         $9,540          $9,429          $48,019
Cost of revenues...............................        $1,526           $3,989          5,397           3,916           13,778
                                                --------------  ---------------  -------------  --------------  ---------------
Gross profit...................................        $1,761           $3,341          4,143           5,513           34,241
Operating expenses:
   Research and development....................         6,433           13,002         23,717          16,483           25,939
   Sales and marketing.........................         1,527            2,015          5,309           5,612           13,497
   General and administrative..................         1,471            3,034          6,917           6,399            8,900
   In-process research and development.........            --               --          7,700              --               --
                                                --------------  ---------------  -------------  --------------  ---------------
      Total operating expenses.................         9,431           18,051         43,643          28,494           48,336
Operating income (loss)........................       (7,670)         (14,710)       (39,500)        (22,981)         (14,095)
Net interest and other income (expense)(1).....          437               684         2,115           1,874            1,119
                                                --------------  ---------------  -------------  --------------  ---------------
Income (loss) before taxes.....................      $(7,233)        $(14,026)      $(37,385)       $(21,107)        $(12,976)
                                                --------------  ---------------  -------------  --------------  ---------------

HARDWARE SYSTEMS
Revenues:
   Royalties and license fees..................       $18,593          $24,074        $79,167         $29,371               --
   Development systems and other...............         8,500            6,514          3,643              90               --
                                                --------------  ---------------  -------------  --------------  ---------------
      Total revenues...........................        27,093           30,588         82,810          29,461               --
Cost of revenues:


                                                               17
<PAGE>

   Royalties and license fees..................         2,200              694            456              --               --
   Development systems and other...............         3,451            3,231          2,136              43               --
                                                --------------  ---------------  -------------  --------------  ---------------
      Total cost of revenues...................         5,651            3,925          2,592              43               --
                                                --------------  ---------------  -------------  --------------  ---------------
Gross profit...................................        21,442           26,663         80,218          29,418               --
Operating expenses:
   Research and development....................        30,050           28,182         18,360           2,664               --
   Sales and marketing.........................        15,176            5,746          2,734              --               --
   General and administrative..................         6,033            6,501          4,393             923               --
   Stock incentive.............................         8,359               --             --              --               --
                                                --------------  ---------------  -------------  --------------  ---------------
      Total operating expenses.................        59,618           40,429         25,487           3,587               --
                                                --------------  ---------------  -------------  --------------  ---------------
Operating income...............................      (38,176)         (13,766)         54,731          25,831               --
Gain on sale of hardware systems assets........            --               --             --          18,032               --
Net interest and other income (expense)........            --               --             --              --               --
                                                --------------  ---------------  -------------  --------------  ---------------
Income before taxes............................     $(38,176)        $(13,766)        $54,731         $43,863               --
                                                --------------  ---------------  -------------  --------------  ---------------

CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE
SYSTEMS
Income (loss) before taxes.....................     $(45,409)        $(27,792)        $17,346         $22,756        $(12,976)
Income and foreign withholding taxes...........           853            6,876          4,075             219              191
Net income (loss)..............................     $(46,262)        $(34,668)        $13,271         $22,537        $(13,167)
Basic net income (loss) per share..............       $(2.04)          $(1.36)          $0.48           $0.85          $(0.51)
Diluted net income (loss) per share............       $(2.04)          $(1.36)          $0.46           $0.83          $(0.51)
</TABLE>



(1) For presentation purposes, net interest and other income (expense) has
    been allocated to software publishing.



<TABLE>
<CAPTION>

                                                                                   MARCH 31,
                                                        --------------------------------------------------------------
                                                           1995         1996         1997         1998        1999
                                                        -----------  -----------  -----------  ----------  -----------
  <S>                                                   <C>          <C>          <C>         <C>        <C>
   CONSOLIDATED BALANCE SHEET DATA:
   Cash, cash equivalents and short-term investments.      $14,346      $50,145      $33,617     $34,584    $13,851
   Working capital...................................       10,826       (6,951)      14,067      28,769     15,675
   Total assets......................................       34,161       63,330       44,954      40,447     40,488
   Short-term debt...................................           --           --           --          --      9,505
   Total long-term liabilities.......................        6,529        1,831        1,715          --         --
   Total stockholders' equity........................       15,685          131       21,399      33,578     20,115
</TABLE>



                                      18
<PAGE>

                           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 "Management's Discussion and Analysis of
Financial Resources and Results of Operations" and "Business."
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 prospectus 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 prospectus. Such forward-looking
statements include statements as to, among others:


         -        our proposed public offering of common stock;
         -        the timing of the introduction of some new products;
         -        the expectations regarding the decrease in average selling
                  prices;
         -        our ability to reduce manufacturing costs;
         -        our expectations that as more advanced platforms are
                  introduced, consumer demand for software for older platforms
                  may decline;
         -        our expectations as to the change in the distribution channels
                  for interactive software;
         -        our cash flow from operations and our available credit
                  facilities;
         -        our expectations as to our future cash requirements;
         -        our expectations as to our international expansion and hiring
                  personnel for the European expansion;
         -        our expectations as to the retention of future earnings;
         -        our expectations regarding the future development of our
                  business;
         -        our expectations regarding negative cash flows;
         -        our expectations regarding operating expenses;
         -        our expectations regarding the success and cost of the Year
                  2000 working group;
         -        our expectations regarding the development of Year 2000
                  contingency plans;
         -        our expectations regarding the effect of recent accounting
                  pronouncements;
         -        our expectations regarding product releases;
         -        our expectations regarding the localization of our products
                  for European countries; and
         -        our expectations regarding the planned increase of sales
                  directly to retailers in North America.


                                      19
<PAGE>

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

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 INVOLVE 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 personal computers, the Sony PlayStation and Nintendo N64 video
game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color and are planning to develop 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 include Army Men, BattleTanx, Family Game Pack, Heroes of Might and
Magic, High Heat Baseball, and Might and Magic, 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 our software internally in our company-owned studios and have created
an extensive portfolio of versatile technologies that allow us to develop new
software titles more quickly and cost-effectively.

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.


We filed a registration statement on Form S-3 with the Securities and
Exchange Commission on June 9, 1999 in connection with a proposed public
offering of up to $34.5 million of our Common Stock


Software publishing 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 shipment, 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 distribution agreement. Per-copy royalties that
exceed guaranteed minimum royalty levels are recognized as earned. We
recognize revenue from our Meridian 59 online service monthly upon customers'
usage.

Cost of software publishing revenues consists primarily of direct costs
associated with software titles, including manufacturing costs and royalties
payable to


                                      20
<PAGE>

platform developers such as Sony and Nintendo and, to a lesser extent,
royalties payable to third-party developers. 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 consist primarily of personnel and support
costs. Internal development costs of software titles are expensed as incurred
and included in research and development expenses.

Sales and marketing expenses primarily consist of advertising and retail
marketing support, sales commissions, sales and marketing personnel costs and
other 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, 1999, we had cumulative federal net operating loss
carryforwards of $100.6 million for federal income tax purposes, which if not
offset against future taxable income, will expire in fiscal 2009 through
2019. As of March 31, 1999, we had cumulative California net operating loss
carryforwards of $6.8 million, which if not offset against future taxable
income, will expire in fiscal 2002 through 2004.

EXIT FROM HARDWARE SYSTEMS OPERATIONS

Our initial business model was to license our technology to hardware
manufacturers and software developers to enable the establishment of a
32-bit, CD-ROM-based, interactive video entertainment platform, the 3DO
Interactive Multiplayer system. The 3DO Multiplayer was launched in October
1993, but failed to achieve significant market acceptance. All of our
hardware licensees have ceased manufacturing and distributing the 3DO
Multiplayer and all third-party software development for the platform has
also ceased.

In December 1995, we licensed our 64-bit next-generation M2 technology to
Matsushita Electric Industrial Co., Ltd. for an upfront license fee of $100.0
million plus royalties. Revenue from this transaction was recognized using
the percentage-of-completion method. In April 1996, we agreed to modify the
M2 system design in exchange for approximately $4.5 million paid in
installments in fiscal 1997 and 1998. In July 1997, we relinquished our
rights to:

         -        develop and distribute software and peripherals compatible
                  with hardware products developed by Matsushita or its
                  sublicensees that incorporate the M2 technology;

         -        develop and distribute M2-compatible authoring systems; and

         -        receive royalties with respect to Matsushita's potential use
                  of the M2 technology.

In exchange, Matsushita returned to us approximately 3.2 million shares of
our common stock. We recognized $11.0 million of non-cash revenues in
connection with this transaction in fiscal 1998.

In February 1996, we agreed to modify the three-dimensional graphics portion
of our M2 technology related to semiconductors and licensed it to Cirrus
Logic, Inc. We received $2.5 million that we recognized as revenue under the
percentage-of-completion method. In October 1997, in settlement of
litigation, Cirrus paid us to satisfy its past and future license fees, and
advance royalty and engineering service payment obligations. We recognized
this payment as revenue in fiscal 1998.

In June 1997, we sold or licensed most of the assets of our former hardware
systems group to Samsung Electronics Co. Ltd. for $20.0 million. We
recognized a gain of $18.0 million associated with the sale of these assets.
We then focused our operations on developing and publishing branded
interactive entertainment software.


                                      21

<PAGE>




RESULTS OF SOFTWARE PUBLISHING OPERATIONS

The following table sets forth certain consolidated statements of operations
data related to our software publishing operations for fiscal 1997, 1998 and
1999 expressed as a percentage of revenues. We have not included similar
information for our hardware systems operations because we believe that such
information is not helpful in understanding our current operations.

<TABLE>
<CAPTION>

                                                     1997        1998        1999
                                                     ----        ----        ----
                                                         YEAR ENDED MARCH 31,
<S>                                              <C>         <C>         <C>
Revenues....................................         100.0%      100.0%      100.0%
Cost of revenues............................          56.6        41.5        28.7
                                                   ----------  ---------  ----------
Gross profit................................          43.4        58.5        71.3
Operating expenses:
   Research and development.................         248.6       174.8        54.0
   Sales and marketing......................          55.6        59.5        28.1
   General and administrative...............          72.5        67.9        18.5
   In-process research and development......          80.7          --          --
                                                   ----------  ---------  ----------
      Total operating expenses..............         457.4       302.2       100.6
                                                   ----------  ---------  ----------
Operating loss..............................        (414.0)     (243.7)      (29.3)
Net interest and other income...............          22.2        19.9         2.3
                                                   ----------  ---------  ----------
Loss before taxes...........................        (391.8)%    (223.8)%     (27.0)%
                                                   ==========  =========  ==========
</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

SOFTWARE PUBLISHING

REVENUES. Revenues increased by $38.6 million, or 409%, to $48.0 million in
fiscal 1999 from $9.4 million in fiscal 1998. This increase was due primarily
to an increase in the number of new titles released to 14 new titles in
fiscal 1999 from three new titles in fiscal 1998. Revenues in fiscal 1999
consisted primarily of sales of interactive entertainment software for the
personal computer, and to a lesser extent, the Sony PlayStation and the
Nintendo N64. Revenues in fiscal 1998 consisted primarily of sales of
personal computer software.


                                      23
<PAGE>

COST OF REVENUES. Cost of revenues increased by $9.9 million, or 252%, to
$13.8 million in fiscal 1999 from $3.9 million in fiscal 1998. This increase
was primarily due to the increased number of software titles published in
fiscal 1999 compared with fiscal 1998. Gross margin increased to 71.3% in
fiscal 1999 from 58.5% in fiscal 1998. This increase was due primarily to the
release of titles in fiscal 1999 which had higher per unit wholesale prices
and lower allowances for returns and price protection.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by
approximately $9.5 million, or 57%, to $25.9 million in fiscal 1999 from
$16.5 million in fiscal 1998. 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 video game console
systems in addition to the personal computer. Research and development
expenses as a percentage of revenues decreased to 54.0% in fiscal 1999 from
174.8% in fiscal 1998 as revenues grew at a faster rate than research and
development expenses due in part to cost savings from the use of our
proprietary tools and technology in developing new products.

SALES AND MARKETING. Sales and marketing expenses increased $7.9 million, or
141%, to $13.5 million in fiscal 1999 from $5.6 million in fiscal 1998. This
increase was primarily due to marketing expenses related to the release of
ten personal computer titles, three Sony PlayStation titles and one Nintendo
N64 title in fiscal 1999, compared to the release of three new personal
computer titles in fiscal 1998. We also incurred substantial marketing
expenses for our television ad campaigns for BattleTanx for the N64 and Army
Men 3D for the PlayStation in fiscal 1999. Sales and marketing expenses as a
percentage of revenues decreased to 28.1% in fiscal 1999 from 59.5% in fiscal
1998 as revenues grew at a faster rate than sales and marketing expenses due
in part to sales of new products in brands for which we were able to take
advantage of brand name recognition generated by our previous advertising
campaigns. We anticipate that sales and marketing expenses will increase in
the future as additional software titles are released.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$2.5 million, or 39%, to $8.9 million in fiscal 1999, from $6.4 million in
fiscal 1998. 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 and
Nintendo N64 platforms. We expect that general and administrative expenses
will continue to increase in the future.

NET INTEREST AND OTHER INCOME. Software publishing has incurred negative cash
flows during fiscal 1998 and 1999, and we primarily have relied upon cash
generated from the sale or license of hardware systems technology to fund
software publishing operations. (See notes G and H of the notes to the
consolidated financial statements.) For presentation purposes all net
interest and other income (expense) has been allocated to software
publishing. Net interest and other income decreased by $0.8 million to $1.1
million in fiscal 1999 from $1.9 million in fiscal 1998. The decrease in net
interest and other income is primarily due to the decrease in cash and
short-term investment balances.

HARDWARE SYSTEMS

In fiscal 1998, we licensed and sold substantially all of the assets of our
former hardware systems group.

FISCAL 1998 COMPARED TO FISCAL 1997

SOFTWARE PUBLISHING

REVENUES. Revenues were relatively consistent at $9.4 million in fiscal 1998
and $9.5 million in fiscal 1997. We released three new products in fiscal
1998 compared with four new products in fiscal 1997.

COST OF REVENUES. Cost of revenues decreased by $1.5 million, or 27%, to $3.9
million in fiscal 1998 from $5.4 million in fiscal 1997. Gross margin
increased to 58.5% in fiscal 1998 from 43.4% in fiscal 1997. This absolute
dollar decrease and gross margin increase were primarily due to higher
royalty expense incurred in fiscal 1997 because most of the titles released
in fiscal 1997 required royalty payments to third-party developers, compared
to only two of the four titles released in fiscal 1998.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased by $7.2
million, or 31%, to $16.5 million in fiscal 1998 from $23.7 million in fiscal
1997. This decrease was primarily due to a reduction in headcount in December
1997.

SALES AND MARKETING. Sales and marketing expenses increased by $0.3 million
or 6%, to $5.6 million in fiscal 1998 from $5.3 million in fiscal 1997. Sales
and marketing expenses remained relatively constant from fiscal 1997 to
fiscal 1998 primarily due to relatively constant software publishing revenues
and number of new products released.


                                      24
<PAGE>

GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$0.5 million, or 7%, to $6.4 million in fiscal 1998 from $6.9 million in
fiscal 1997. This decrease was primarily due to a reduction in headcount in
December 1997.

IN-PROCESS RESEARCH AND DEVELOPMENT. In June 1996, we purchased certain
assets and assumed certain liabilities of New World Computing, Inc., a
personal computer platform game developer in exchange for one million shares
of our common stock and $5.0 million in cash. We accounted for the
acquisition using the purchase method of accounting. A one-time charge of
$7.7 million was recorded in the first quarter of fiscal 1997, representing
the amount of the purchase price assigned to in-process research and
development because the acquired technology had not yet reached technological
feasibility and had no other future alternative uses. At the time of the
acquisition, a total of 12 products were in development. We estimated that
the average aggregate percentage of completion for those products was
approximately 47% at the time of the acquisition. Of the 12 products in
development, four were subsequently cancelled and four were completed and
released, but generated minimal revenues. The remaining four products were
completed and released with modest market success. However, the average
percentage of completion for those products was only approximately 33% at the
time of the acquisition. We used an income approach in valuing the acquired
in-process research and development. The income approach reflects the present
value of the operating cash flows generated by the in-process research and
development after taking into account the cost to complete the projects, the
relative risk of the projects and an appropriate discount rate to reflect the
time value of investment capital. Also included as part of the purchase price
were intangibles valued at $3.1 million, which are being amortized on a
straight-line basis over a period of approximately five years.

NET INTEREST AND OTHER INCOME. Net interest and other income decreased by
$0.2 million to $1.9 million in fiscal 1998 from $2.1 million in fiscal 1997.
This decrease in net interest and other income is primarily due to a decrease
in cash and short-term investment balances as a result of cash being used in
our operations.

HARDWARE SYSTEMS

ROYALTIES AND LICENSE FEES. Royalties and license fee revenues decreased by
$49.8 million, or 63%, to $29.4 million in fiscal 1998 from $79.2 million in
fiscal 1997. Revenues recognized in connection with the M2 agreement with
Matsushita were $23.0 million in fiscal 1998 and $73.5 million in fiscal
1997. Royalty and license fee revenues also included $3.5 million related to
our agreement with Cirrus Logic in fiscal 1998 and $2.5 million in fiscal
1997.

DEVELOPMENT SYSTEMS AND OTHER. Development systems and other revenues
decreased by $3.6 million, or 98%, to $0.1 million in fiscal 1998 from $3.6
million in fiscal 1997. This decrease was primarily due to the sale of our
hardware systems group to Samsung in June 1997.

COST OF REVENUES. Cost of royalties and license fees revenues was $0.5
million in fiscal 1997. We did not record cost of royalties and license fees
revenues in fiscal 1998 due to the sale of our hardware systems group in
fiscal 1998.

GAIN ON SALE OF HARDWARE SYSTEMS ASSETS. In fiscal 1998, we sold or licensed
most of the assets of our former hardware systems group, including certain
technologies and related intellectual property rights and approximately $1.5
million in equipment to Samsung for $20.0 million, realizing a gain of $18.0
million.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash and cash equivalent balances and
short-term investment balances, which were $13.9 million at March 31, 1999
and $34.6 million at March 31, 1998. This decrease was primarily due to net
cash used in operations of $27.1 million and capital expenditures of $2.5
million in fiscal 1999.

In July 1997, our board of directors approved a stock repurchase plan which
authorized us to purchase up to $5.0 million of our stock on the open market
or in block trades, from time to time as management deems appropriate, if the
market price of our stock remains below certain levels. As of March 31, 1999,
we had reacquired over one million shares. The repurchase plan will remain in
effect until rescinded by our board of directors.

In fiscal 1999, we entered into two line of credit agreements. Our agreement
with Coast Business Credit allows us to borrow up to $20.0 million or 60% of
qualified accounts receivable. Borrowings under this line of credit bear
interest at a rate of prime plus 2.0% (9.75% as of March 31, 1999). This line
of credit expires in March 2002. Our agreement with Coast Business Credit


                                      25
<PAGE>

contains financial covenants. See note P of the notes to consolidated
financial statements. As of March 31, 1999, no borrowings were outstanding
under this facility. Our agreement with Merrill Lynch & Co. allows us to
borrow up to $20.0 million or 90% of the cash balance in the pledged
collateral account. Borrowings under this line of credit bear interest at a
rate of the 30-day commercial paper rate plus 2.10% (6.94% as of March 31,
1999). This line of credit expires in November 2000. As of March 31, 1999,
the outstanding loan balance was approximately $9.5 million. On April 1,
1999, we repaid the outstanding borrowings to Merrill Lynch and borrowed $9.5
million from Coast Business Credit.


We expect to continue to incur negative cash flows in fiscal 2000, primarily
due to our continued investment in the internal development of entertainment
software titles that are scheduled to be released in the next fiscal year and
beyond, which include additional capital expenditures primarily for computer
equipment. In addition, we anticipate that a substantial portion of our
operating expenses in fiscal 2000 will be related to marketing and
advertising, as we continue to raise the brand awareness of our products. We
anticipate that the net proceeds of the offering of up to $34.5 million of
our Common Stock, cash from operations, and available borrowings under our
credit facilities should be sufficient to fund our activities for at least
the next 12 months. We cannot be certain that additional capital will not be
required in fiscal 2000 because cash flows will be affected by the rate at
which we release products and the resulting sale of these products, the
market acceptance of such products and the levels of advertising and
promotions required to promote market acceptance of our products. The level
of financing required beyond fiscal 2000 will depend on these and other
factors. If we need to raise additional funds through public or private
financing, we cannot be certain that additional financing will be available
or that, if available, it will be available on terms acceptable to us.
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.






                                      26
<PAGE>

YEAR 2000 COMPLIANCE

Many existing computer systems and related software applications, and other
control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Such
systems, applications, and/or devices could fail or create erroneous results
unless corrected to properly recognize and process data related to the Year
2000. We rely on such computer systems, applications and devices in operating
and monitoring all major aspects of our business, including, but not limited
to, our financial systems (such as general ledger, billing, accounts payable
and payroll modules), customer service, internal networks and
telecommunications equipment, and end products. We also rely, directly and
indirectly, on the external systems of various independent business
enterprises, such as our customers, licensors, contract manufacturers,
suppliers, creditors, and financial organizations, and of governments, both
domestically and internationally, for the accurate exchange of data and
related information.

We have formed a Year 2000 working group to organize, manage, and report on
our Year 2000 remediation efforts. The Year 2000 working group consists of
approximately 20 individuals from all levels of management and covering all
areas of our operations. We have retained an experienced Year 2000 project
manager to lead this working group.

The Year 2000 working group has identified a four-phase approach to
determining, addressing, and reporting on Year 2000 readiness. This approach
is expected to identify areas of operations that could reasonably be expected
to have adverse effects on us should they fail to adequately address their
own Year 2000 issues.

Phase 1 (Inventory) involves a comprehensive inventory of systems, software,
and business relationships. We have substantially completed inventorying and
analyzing our remaining centralized computer and embedded systems to identify
any potential Year 2000 issues and will take corrective action based on the
results of analysis. We have inventoried a representative sample of our
desktop hardware and software and consider this phase essentially complete.
An automated final sweep of all desktop hardware and software is scheduled
during July 1999. This final sweep is a new portion of this Phase, added to
ensure completeness. Phase 2 (Risk Assessment) requires detailed analysis of
each item or relationship identified in Phase 1.

Phase 3 (Remediation Planning) creates project plans to correct or address
individual system, software, or business partner issues identified in the
first two phases. We are replacing or upgrading hardware and software that
are known to be Year 2000 non-compliant. Phase 4 (Remediation) implements
those plans, correcting or replacing systems, software, or business partners
as required. We have upgraded our financial and accounting systems to the
most recent version. We believe our database and financial applications are
Year 2000 compliant. These systems are used to automate order entry, accounts
receivable, accounts payable, purchasing, fixed asset and general ledger
functions. We have upgraded our electronic data interchange (EDI) systems to
be Year 2000 compliant and have participated in National Retail Federation
(NRF) testing. The successful completion of the NRF testing is reflected on
the NRF Web site.

As of March 31, 1999, our overall progress by phase was as follows:


<TABLE>
<CAPTION>

                                                             PERCENTAGE                    EXPECTED
                                                           COMPLETED AS OF                COMPLETION
                             PHASE                         MARCH 31, 1999                    DATE
              ------------------------------------   ----------------------------   -----------------------
           <S>                                                <C>                      <C>
              Phase 1 - Inventory                               98%                          July 1999
              Phase 2 - Risk Assessment                         85%                        August 1999
              Phase 3 - Remediation Planning                    40%                        August 1999
              Phase 4 - Remediation                             15%                       October 1999
</TABLE>


We are surveying our critical suppliers, licensees, contract manufacturers,
distributors, and other vendors to determine if their operations and the
products and services that they provide to us are Year 2000 compliant. We
intend to mitigate our risks with respect to the failure of third parties to
be Year 2000 ready, including developing contingency plans, where practical.
However, such failures remain a possibility and could harm our business. To
date, we have received responses from more than half of our critical
suppliers, manufacturers, distributors and other vendors. These responses
have been analyzed as they arrive. We are in the process of contacting
significant parties who have not responded.


                                      27
<PAGE>

In several cases, our business with our customers and suppliers is conducted
through the use of EDI systems. In each case where EDI is used, we are in the
process of conducting electronic testing with these businesses. We expect
that this electronic testing will be completed by August 1999.

Due to the nature of our products, many of them contain no date-related
processing. Therefore, many of them should not be affected by the Year 2000
date change. However, our Year 2000 working group is in the process of
developing tests for all of our significant products to determine the effects
of the Year 2000 change. We have developed tests for these products and
expect to complete testing of all of our current products by July 1999. While
we expect to find few date-related issues with our products, we have not
fully identified such impact and may or may not incur expenses related to the
remediation of Year 2000 problems in our existing products.

COST

We expect to incur costs during the next three quarters related to the
planning and remediation described above. Our current estimate (including the
Year 2000 issues identified to date) is that the costs associated with the
Year 2000 issue should not have a material adverse effect on our results of
operations or financial position in any quarter. However, we are not certain
that we have fully identified such impact or whether we can resolve it
without disruption of our business or incurring significant expense. We have
incurred approximately $0.4 million in expenditures to date related to the
Year 2000 issue.

RISKS AND UNCERTAINTIES

If we fail to find and correct a significant Year 2000 issue, our normal
business operations could be interrupted. We currently expect to
substantially complete remediation and validation of our internal systems, as
well as to develop contingency plans for certain internal systems, by the end
of the first quarter of fiscal 2000. However, if implementation of
replacement upgraded systems or software is delayed, if significant new
non-compliance issues are identified, or if contingency plans fail, our
results of operations or financial condition could be adversely affected. Our
risks include the following:

SOFTWARE DEVELOPMENT SCHEDULES. Our software development teams rely on a
variety of systems and software tools to develop products. If these systems
and tools are not functioning properly, product release schedules, which span
the Year 2000 rollover, could be adversely affected. We rely on external
contractors to develop components of some of our products. If a contractor
with a significant contribution to a project should fail to adequately
address the Year 2000 issue, this could have adverse effects on the
development schedule for one or more of our products.

FACILITIES OPERATIONS. We rely on systems and software to run our security
and telecommunications systems. Although both of these components at all of
our locations have been included in the Year 2000 plan, a failure of either
of these systems could prevent normal work at one or more of our locations.

FINANCIAL AND ACCOUNTING SOFTWARE. We have upgraded our financial and
accounting systems to the most recent available version. We believe our
database and financial applications are Year 2000 compliant. Although all of
these business applications have been (and will continue to be) thoroughly
evaluated for year 2000 compliance, a failure in one or more of these
software packages could delay our ability to process customer orders,
billing, payroll, accounts payable and financial statements. Consequently, we
may not be able to file our financial reports with the Securities and
Exchange Commission on a timely basis, which could negatively affect our
stock price.

PRODUCTION AND FULFILLMENT FACILITY. We use a third party fulfillment center
to assemble and distribute our products. Even though our third party
fulfillment center is in the process of updating its computer systems to be
Year 2000 compliant, we cannot be certain that its computer systems will be
operating properly. In an event that its computer systems are not functioning
properly due to Year 2000 non-compliance and the third party cannot ship
products to our customers, our financial position and earnings will be
severely impacted.

CONTINGENCY PLANS

We expect to develop contingency plans for key internal systems and critical
business partners by the end of the first quarter of fiscal 2000. This
contingency planning includes identifying additional vendors who could
provide similar goods and


                                      28
<PAGE>

services on short notice. We expect these plans to reduce the risk of
interruption, delay or failure of key processes required for business
operations. However, failure of such plans remains a possibility and could
have a materially adverse impact on our results of operations or financial
condition.


The statements regarding year 2000 issues above and in "Risk Factors-The Year
2000 risk may adversely affect us" are "Year 2000 readiness disclosures"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
The protection of this Act does not apply to federal securities fraud actions.

IMPACT OF EUROPEAN MONETARY CONVERSION

We are aware of the issues associated with the changes in Europe resulting
from the formation of a European economic and monetary union (EMU). One
change resulting from this union required EMU member states to irrevocably
fix their respective currencies to a new currency, the euro, as of January 1,
1999, at which date the euro became a functional legal currency of these
countries. During the next three years, business in the EMU member states
will be conducted in both the existing national currency, such as the French
franc or the Deutsche mark, and the euro. As a result, companies operating or
conducting business in EMU member states will need to ensure that their
financial and other software systems are capable of processing transactions
and properly handling these currencies, including the euro.

We are still assessing the impact that the conversion to the euro will have
on our internal systems, the sale of our products, and the European and
global economies. To date, we have conducted limited sales activities in the
European economies. However, we are planning to significantly expand our
operations in Europe in fiscal 2000. We will take appropriate corrective
actions based on the results of such assessment. We have not yet determined
the cost related to addressing this issue.


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 instrments 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 and short-term investments 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,
1999:

<TABLE>
<CAPTION>

                                                      Average
              Short-term investments(1)            Interest Rate            Cost               Fair Value
                                                  ----------------    -----------------     -----------------
              <S>                                 <C>                <C>                   <C>
              Fixed rate                                  6.00%         $    11,538           $    11,573
              Variable rate                               4.18%                  22                    22
</TABLE>
              (1) See definition in Note A to our Consolidated Financial
Statements.

The aggregate fair value of our investment in short-term investments as of
March 31, 1999, by contractual maturity date, consisted of the following:

<TABLE>
<CAPTION>

                                                                                       AGGREGATE FAIR
                                                                                           VALUE
                                                                                           -----
                                                                                        (in thousands)
    <S>                                                                              <C>
      Due in one year or less.........................................................          $9,602
      Due in one to three years.......................................................           1,993
                                                                                       ----------------
                                                                                               $11,595
                                                                                       ================
</TABLE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA


The Independent Auditors' Report, Consolidated Financial Statements and Notes
to Consolidated Financial Statements follow on Pages 30 through 47.


                                      29
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
The 3DO Company:

We have audited the accompanying consolidated balance sheets of The 3DO
Company and subsidiaries as of March 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the years in the three-year period ended March 31, 1999. 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 generally accepted auditing
standards. 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, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles.


                                                        /s/  KPMG LLP


Mountain View, California
May 4, 1999



                                      30
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                    MARCH 31,
                                                                                          ------------------------------
                                                                                               1998            1999
                                                                                          --------------   -------------
                 <S>                                                                       <C>             <C>
                    ASSETS
                    Current assets:
                       Cash and cash equivalents                                               $ 16,209        $  2,256
                       Short-term investments                                                    18,375          11,595
                       Accounts receivable, net                                                     216          20,777
                       Prepaid and other current assets                                             838           1,420
                                                                                          --------------   -------------
                    Total current assets                                                         35,638          36,048

                    Property and equipment, net                                                   3,336           3,320
                    Deposits and other assets                                                     1,473           1,120
                                                                                          --------------   -------------

                    Total assets                                                               $ 40,447        $ 40,488
                                                                                          =============    =============


                    LIABILITIES AND STOCKHOLDERS' EQUITY
                    Current liabilities:
                       Accounts payable                                                          $  495        $  1,859
                       Accrued expenses                                                           2,468           6,526
                       Deferred revenue                                                             352             485
                       Short term debt                                                               --           9,505
                       Other current liabilities                                                  3,554           1,998
                                                                                          --------------   -------------
                    Total current liabilities                                                     6,869          20,373


                    Stockholders' equity:
                       Preferred stock, $0.01 par value; 5,000 shares
                         authorized;  no shares issued                                               --              --
                     Common stock, $0.01 par value; 50,000 shares authorized; 29,018
                       and 29,760 shares issued; 25,570 and 25,540 shares issued and
                       outstanding, respectively                                                    290             297
                       Additional paid-in capital                                               159,938         161,975
                       Accumulated other comprehensive loss                                       (290)           (255)
                       Accumulated deficit                                                    (114,673)       (127,840)
                       Treasury stock, at cost, 3,448 and 4,220 shares, respectively           (11,687)        (14,062)
                                                                                          --------------   -------------
                    Total stockholders' equity                                                   33,578          20,115
                                                                                          --------------   -------------

                    Total liabilities and stockholders' equity                                 $ 40,447        $ 40,488
                                                                                          =============    =============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.



                                      31
<PAGE>

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


<TABLE>
<CAPTION>

       SOFTWARE PUBLISHING                                                     YEARS ENDED MARCH 31,
                                                                       ----------------------------------------
                                                                           1997          1998         1999
                                                                       ------------- ------------ -------------
  <S>                                                                <C>            <C>        <C>
       Revenues                                                         $   9,540      $ 9,429    $  48,019
       Cost of Revenues                                                     5,397        3,916       13,778
                                                                       ------------- ------------ -------------
       Gross profit                                                         4,143        5,513       34,241
                                                                       ------------- ------------ -------------

       Operating expenses:
          Research and development                                         23,717       16,483       25,939
          Sales and marketing                                               5,309        5,612       13,497
          General and administrative                                        6,917        6,399        8,900
          In-process research and development                               7,700           --           --
                                                                       ------------- ------------ -------------
            Total operating expenses                                       43,643       28,494       48,336
                                                                       ------------- ------------ -------------

       Operating loss                                                     (39,500)     (22,981)     (14,095)

       Net interest and other income                                        2,115        1,874        1,119
                                                                       ------------- ------------ -------------

       Loss before taxes                                                  (37,385)     (21,107)     (12,976)
                                                                       ------------- ------------ -------------


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

       Operating income                                                    54,731        25,831            --

       Gain on sale of  hardware systems assets                                --        18,032            --
                                                                       ------------- ------------ -------------

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


       CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS

       Income (loss) before taxes                                       $  17,346      $ 22,756      $(12,976)
       Income and foreign withholding taxes                                 4,075           219           191
                                                                       ------------- ------------ -------------
       Net income (loss)                                                $  13,271      $ 22,537      $(13,167)
                                                                       ============= ============ =============

       Basic net income (loss) per share                                $     0.48     $    0.85     $   (0.51)
                                                                       ------------- ------------ -------------
       Diluted net income (loss) per share                              $     0.46     $    0.83     $   (0.51)
                                                                       ============= ============ =============

       Shares used to compute basic net income (loss) per share             27,662        26,387        25,602
                                                                       ============= ============ =============

       Shares used to compute diluted net income (loss) per share           28,935        27,114        25,602
                                                                       ============= ============ =============
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.



                                      32
<PAGE>

                        THE 3DO COMPANY AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    YEARS ENDED MARCH 31, 1997, 1998 AND 1999
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                   ACCUMULATED
                                    COMMON STOCK      ADDITIONAL      OTHER                  TREASURY
                                 ------------------    PAID-IN    COMPREHENSIVE ACCUMULATED   STOCK    STOCKHOLDERS' COMPREHENSIVE
                                   SHARES  AMOUNT      CAPITAL       INCOME      DEFICIT     AT COST      EQUITY     INCOME (LOSS)
                                 --------- --------  ------------ ------------- ----------- ---------- ------------- --------------
<S>                              <C>      <C>      <C>           <C>         <C>              <C>       <C>         <C>
Balances as of March 31, 1996     26,003   $  260     $ 150,541     $   (189)  $(150,481)         --      $    131

Comprehensive Income:
  Net income                                                                       13,271                   13,271     $   13,271

  Other comprehensive income
    (loss)
    Unrealized gain from              --       --            --            36          --         --            36             36
     investments
    Foreign currency translation      --       --            --          (11)          --         --          (11)           (11)
                                                                                                                    --------------
  Comprehensive income                                                                                                 $   13,296
                                                                                                                    ==============

Issuance of common stock for
 acquisition                       1,610       16         5,664            --          --         --         5,680
Sale of common stock through
 employee stock plans and other
 plans                               709        7         1,844            --          --         --         1,851
Common stock issued under stock
 incentive program                    47        1           440            --          --         --           441
                                 -------- --------  ------------ ------------- ----------- ---------- -------------
Balances as of March 31, 1997     28,369   $  284     $ 158,489     $   (164)  $(137,210)         --  $     21,399


 Comprehensive Income:
  Net income                          --       --            --                    22,537         --        22,537     $   22,537

  Other comprehensive loss
    Unrealized loss from              --       --            --         (112)          --         --         (112)          (112)
     investments
    Foreign currency translation      --       --            --          (14)          --         --          (14)           (14)
                                                                                                                    --------------
  Comprehensive income                                                                                                 $   22,411
                                                                                                                    ==============

Sale of common stock through
employee stock plans and other
  plans                              649        6         1,449            --           --        --         1,455
Repurchase of 3DO shares                                     --            --          --   (11,687)      (11,687)
                                 -------- --------  ------------ ------------- ----------- ---------- -------------
Balances as of March 31, 1998     29,018   $  290     $ 159,938    $    (290)  $(114,673)  $(11,687)     $  33,578

Comprehensive Income:
  Net loss                            --       --            --            --    (13,167)         --      (13,167)    $  (13,167)

  Other comprehensive income
    Unrealized gain from              --       --            --            35          --         --            35             35
     investments
                                                                                                                    --------------
  Comprehensive loss                                                                                                 $   (13,132)
                                                                                                                    ==============

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
                                 ======== ========  ============ ============= =========== ========== =============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       33

<PAGE>

                        THE 3DO COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>

                                                                                         YEARS ENDED MARCH 31,
                                                                            ------------------------------------------------
                                                                                1997              1998            1999
                                                                            ------------------------------------------------
            <S>                                                             <C>              <C>             <C>
               Cash flows from operating activities:
                  Net income (loss)                                             $  13,271        $  22,537       $ (13,167)
                    Adjustments to reconcile net income (loss) to net
                    cash used in operating activities:
                       Depreciation and amortization                                7,446            3,744            2,973
                       Deferred revenue                                           (35,870)         (11,640)             133
                       Gain on sale of hardware assets                                 --          (18,032)              --
                       Revenue recognized in exchange for 3DO shares                   --          (10,965)              --
                       In-process research and development                          7,700               --               --
                       Changes in operating assets and liabilities:
                         Accounts receivable, net                                   2,571              213          (20,561)
                         Prepaid and other assets                                     733              803             (678)
                         Accounts payable                                          (2,249)             (74)           1,364
                         Accrued expenses                                          (1,540)            (783)           4,058
                         Hardware incentives                                       (1,236)          (2,944)              --
                         Other liabilities                                          1,095             (162)          (1,255)
                                                                            ------------------------------------------------
               Net cash used in operating activities                               (8,079)         (17,303)         (27,133)
                                                                            ------------------------------------------------
               Cash flows from investing activities:
                  Proceeds from sale of hardware assets                                --           20,000               --

                  Sale of short-term investments, net                              21,500              735            6,814
                  Capital expenditures                                             (4,304)          (1,254)          (2,507)
                  Acquisition of businesses                                        (4,575)              --               --
                                                                            ------------------------------------------------
               Net cash provided by  investing activities                          12,621           19,481            4,307
                                                                            ------------------------------------------------

               Cash flows from financing activities:
                  Proceeds from short-term debt                                        --               --            9,505
                  Repurchase of 3DO shares                                             --             (722)          (2,375)
                  Proceeds from issuance of common stock, net                       1,851            1,455            2,044
                  Payments on capital lease obligations                            (1,446)          (1,083)            (301)
                                                                            ------------------------------------------------
               Net cash provided by (used in) financing activities                    405             (350)           8,873
                                                                            ------------------------------------------------

               Effect of foreign currency translation                                 (11)             (14)              --
                                                                            ------------------------------------------------

               Net increase (decrease) in cash and cash equivalents                 4,936            1,814          (13,953)

               Cash and cash equivalents at beginning of year                       9,459           14,395           16,209
                                                                            ------------------------------------------------

               Cash and cash equivalents at end of year                         $  14,395        $  16,209        $   2,256
                                                                            ================================================

               Supplemental disclosures of cash flow information:
                  Cash paid during the year
                    Interest                                                      $   628          $   135         $     20
                    Income and foreign withholding taxes                          $ 4,075          $    --         $     --
               Noncash investing and financing transactions:
                  Assets acquired under capital lease obligations                 $   152          $    --         $     --

                 Common stock issued in connection with
                   business acquisitions                                          $ 5,680          $    --         $     --
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.

                                       34

<PAGE>

                        THE 3DO COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         MARCH 31, 1997, 1998, AND 1999

A.   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 (Company), 3DO
Europe, Ltd. and Studio 3DO K.K. The 3DO Company develops and publishes
branded interactive entertainment software for multiple platforms.

BASIS OF PRESENTATION

The software publishing statements of operations were primarily derived from
the sales of interactive entertainment software and software publishing
related expenses. The hardware systems statements of operations were
primarily derived from revenue recognized under the M2 Agreement with
Matsushita and expenses associated with the hardware operations. Software
publishing has incurred negative cash flows for all periods presented and the
Company primarily has relied upon cash generated from the sale or license of
hardware systems technology to fund software publishing operations (see notes
G and H.) For presentation purposes all net interest and other income has
been allocated to software publishing.

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 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 or similar investments.
Realized gains and losses are recorded in the accompanying Consolidated
Statements of Operations and were immaterial during the periods presented.
The cost of securities sold is based upon the specific identification method.

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
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. Assets to be disposed of are
reported at the lower of their carrying amount or fair value less cost to
sell.

STOCK-BASED COMPENSATION


                                      35
<PAGE>

The Company uses the intrinsic value-based method of accounting for all of
its employee stock-based compensation plans.

REVENUE RECOGNITION

Revenue from the sale of software titles published and distributed by the
Company is recognized at the time of shipment. Subject to certain
limitations, 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 probable. Per-copy royalties on sales that exceed
the minimum guarantee are recognized as earned. Revenue from the Company's
on-line service is recognized monthly based on usage.

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2 SOFTWARE REVENUE RECOGNITION, which
supersedes SOP 91-1. SOP 97-2 is effective for the Company for transactions
entered into after March 31, 1998. SOP 97-2 generally requires revenue earned
on software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. The fair value of
an element must be based on evidence that is specific to the vendor. If a
vendor does not have evidence of the fair value for all elements in a
multiple-element arrangement, all revenue from the arrangement is deferred
until such evidence exists or until all elements are delivered. The Company
adopted SOP 97-2 in the current fiscal year. However, the effect of adopting
SOP 97-2 did not have a material impact on the Company's consolidated results
of operations or financial position.

In February 1998, the Accounting Standards Executive Committee (AcSEC) of the
AICPA issued SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF SOP 97-2. The SOP
defers the effective date for applying the provisions regarding
vendor-specific objective evidence (VSOE) of fair value until fiscal year
beginning after December 15, 1998.

In December 1998, AcSEC issued SOP 98-9 SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN ARRANGEMENTS, which requires recognition of revenue using
the "residual method" in a multiple element arrangement when fair value does
not exist for one or more of the delivered elements in the arrangement. Under
the "residual method", the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. SOP 98-9 is
effective for the Company for transactions entered into after March 31, 1999.
The effect of adopting SOP-98-9 is not expected to have a material impact on
the Company.

OTHER ASSETS

Intangible assets, primarily goodwill from the acquisition of New World
Computing, 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.

ADVERTISING EXPENSES

Advertising costs are expensed as incurred. Cooperative advertising with
distributors and retailers is expensed when spending is committed. For fiscal
1997, 1998, and 1999, advertising expenses totaled approximately $3,682,000,
$3,511,000, and $10,330,000, respectively.

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes. Under the asset and 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 recorded to reduce deferred tax assets to an amount whose realization is
more likely than not.

FOREIGN CURRENCY TRANSLATION


                                      36
<PAGE>

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 are a result of the effect of exchange rate
changes on transactions denominated in currencies other than the functional
currencies. Net gains and losses resulting from foreign exchange transactions
were immaterial during the periods presented.

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 to purchase common stock
using the treasury stock method.

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

<TABLE>
<CAPTION>

                                                                                FOR THE YEARS ENDED MARCH 31,
                                                                       ------------------------------------------------
                                                                           1997             1998             1999
                                                                       --------------   -------------    --------------
     <S>                                                                <C>              <C>            <C>
        Net income (loss)                                                  $  13,271        $ 22,537        $ (13,167)

        Shares  used to compute  basic net income  (loss) per share -
        Weighted-average number of common shares outstanding                  27,662          26,387            25,602
        Effect of common equivalent shares  - stock options
        outstanding using the treasury stock method                            1,273             727                --
                                                                       --------------   -------------    --------------
        Shares used to compute diluted net income (loss) per share            28,935          27,114            25,602
                                                                       ==============   =============    ==============

        Basic net income (loss) per share                                   $   0.48         $  0.85         $  (0.51)
                                                                       ==============   =============    ==============

        Diluted net income (loss) per share                                 $   0.46         $  0.83         $  (0.51)
                                                                       ==============   =============    ==============
</TABLE>

Options to purchase 109,406, 932,823 and 11,421,526 shares of common stock
were excluded from the Company's dilutive net income (loss) per share
calculations in fiscal 1997, 1998 and 1999, respectively because their effect
was anti-dilutive. These anti-dilutive shares had weighted average exercise
prices of $11.49, $4.13 and $3.24 in fiscal 1997, 1998 and 1999, respectively.

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 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 March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1 ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. SOP No. 98-1 requires that certain costs related
to the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. SOP No. 98-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. The Company does not expect the adoption of SOP No. 98-1
to have a material impact on its results of operations or financial condition.

B.   AVAILABLE-FOR-SALE SECURITIES


                                      37
<PAGE>

Available-for-sale securities classified as current assets as of March 31, 1998
and 1999 included the following:

<TABLE>
<CAPTION>

                                                                    AGGREGATE FAIR VALUE
                                                                         MARCH 31,
                                                             -----------------------------------
                                                                  1998               1999
                                                             ----------------   ----------------
                                                                       (IN THOUSANDS)
              <S>                                              <C>                <C>
                 Short-term investments:
                    U. S. Treasury and other government
                       agency obligations                          $  11,553          $  11,595
                    Commercial debt securities                         6,822                 --
                                                             ----------------   ----------------
                 Total short-term investments                         18,375             11,595

                 Cash equivalents:
                    Money market funds                                15,128                 --
                    Asset backed repurchase agreements                    --                 --
                                                             ----------------   ----------------
                 Total cash equivalents                               15,128                 --
                                                             ================   ================
                 Total available-for-sale securities               $  33,503          $  11,595
                                                             ================   ================
</TABLE>

The aggregate fair value of the Company's investment in available-for-sale
securities as of March 31, 1999, by contractual maturity, consisted of the
following:


<TABLE>
<CAPTION>

                                                                     AGGREGATE
                                                                     FAIR VALUE
                                                                  -----------------
                                                                   (IN THOUSANDS)
                                   <S>                           <C>
                                      Due in one year or less             $  9,602
                                      Due in one to three years              1,993
                                                                  -----------------
                                                                         $  11,595
                                                                  =================
</TABLE>


C.   ALLOWANCE FOR DOUBTFUL ACCOUNTS, RETURNS AND PRICE PROTECTION

The following summarizes the activity for the allowance for doubtful
accounts, returns and price protection for the years ended March 31, 1997,
1998 and 1999:

<TABLE>
<CAPTION>

                                                                          YEAR ENDED MARCH 31,
                                                             ------------------------------------------------
                                                                 1997            1998              1999
                                                             -------------   --------------    --------------
                                                                             (IN THOUSANDS)
                  <S>                                         <C>             <C>               <C>
                      Balance at beginning of year               $  2,329         $  3,108          $  1,888
                      Additions                                     4,873            2,113             6,931
                      Deductions                                  (4,094)          (3,333)           (4,802)
                                                             -------------   --------------    --------------
                      Balance at end of year                     $  3,108         $  1,888          $  4,017
                                                             =============   ==============    ==============
</TABLE>

D.   PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 1998 and 1999, consisted of:

<TABLE>
<CAPTION>

                                                                                       MARCH 31,
                                                                             ------------------------------
                                                                                 1998             1999
                                                                             -------------    -------------
                                                                                    (IN THOUSANDS)
                   <S>                                                       <C>               <C>
                      Computer and manufacturing equipment                       $  6,578         $  8,691
                      Furniture, fixtures and leasehold improvements                2,567            2,644
                      Computer software                                             2,563            2,880
                                                                             -------------    -------------
                      Property and equipment, at cost                              11,708           14,215
                      Less accumulated depreciation and amortization              (8,372)         (10,895)
                                                                             -------------    -------------
                      Property and equipment, net                                $  3,336         $  3,320
                                                                             =============    =============
</TABLE>


                                      38
<PAGE>

As of March 31, 1998 and 1999, property and equipment includes approximately
$1.6 and $0.2 million of assets acquired under capital lease obligations,
respectively. Accumulated amortization related to these lease assets was
approximately $1.5 million and $0.1 million as of March 31, 1998 and 1999,
respectively.

E.   ACCRUED EXPENSES

Accrued expenses as of March 31, 1999 and 1998, consisted of the following:

<TABLE>
<CAPTION>

                                                                            MARCH 31,
                                                                  ------------------------------
                                                                      1998             1999
                                                                  -------------    -------------
                                                                         (IN THOUSANDS)
                       <S>                                          <C>              <C>
                          Accrued compensation                         $   614         $  2,112
                          Accrued market development fund                  294            1,146
                          Accrued royalties                                643              214
                          Other                                            917            3,054
                                                                  -------------    -------------
                          Total                                       $  2,468         $  6,526
                                                                  =============    =============
</TABLE>

F.   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 1997, 1998 and 1999, 204,254, 127,596
and 358,297 shares, respectively, were issued by the Company to employees at
a price ranging from $3.98 to $6.80, $2.18 to $2.98 and $2.18 to $2.40 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
$2.93, $1.44 and $1.71 at March 31, 1997, 1998 and 1999, respectively. As of
March 31, 1997, 1998 and 1999, the Company had 550,555, 422,959 and 1,564,662
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 (Plan) authorizes the granting of
incentive and non-qualified stock options and stock purchase rights to
employees. Incentive stock 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
over a 60-month period. Unexercised options generally expire 10 years from
date of grant.

As of March 31, 1997, 1998 and 1999, 13,211,136, 18,229,625 and 20,783,869
shares, respectively, of common stock have been authorized for issuance under
the Plan.

DIRECTOR OPTION PLAN

The Company's 1995 Director Option Plan (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 60-month period. Unexercised options
expire ten years from the date of grant.

As of March 31, 1997, 1998 and 1999, 300,000, 700,000 and 700,000 shares,
respectively, of common stock have been authorized for issuance under the
Director Plan.


                                      39
<PAGE>

Transactions for the years ended March 31, 1997, 1998 and 1999, were as follows:

<TABLE>
<CAPTION>

                                                                                 OPTIONS OUTSTANDING
                                                                           ------------------------------------
                                                            OPTIONS                               WEIGHTED
                                                         AVAILABLE FOR                            AVERAGE
                                                             GRANT             SHARES         EXERCISE PRICES
                                                        ----------------   ---------------    -----------------
            <S>                                        <C>                 <C>               <C>
               Outstanding as of March 31, 1996             3,442,925          5,328,529             9.28

               Authorized                                   3,000,000                 --               --
               Granted                                    (16,005,702)        16,005,702             6.79
               Terminated                                  13,306,657        (13,306,657)            8.82
               Exercised                                           --           (438,085)            1.64

                                                        ----------------   ---------------
               Outstanding as of March 31, 1997             3,743,880          7,589,489             5.27

               Authorized                                   3,992,861                 --               --
               Granted                                    (12,063,610)        12,063,610             3.14
               Terminated                                  10,656,742        (10,656,742)            4.75
               Exercised                                           --           (521,287)            2.20

                                                        ----------------   ---------------
               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
                                                        ================   ===============
</TABLE>

The weighted-average fair values of options granted during 1997, 1998 and
1999 with exercise prices equal to market value were $2.41, $1.07 and $2.13,
respectively.

As of March 31, 1997, 1998 and 1999, 1,618,167, 1,564,301 and 2,998,633
options, respectively, were exercisable under the Plan. The weighted-average
exercise price for the shares exercisable at March 31, 1997, 1998 and 1999
were $4.84, $3.12, and $3.10, respectively. Fiscal 1997 and 1998 shares
granted and shares terminated as shown in the table above included options
which were repriced.

The following table summarizes information about fixed stock options
outstanding at March 31, 1999:

<TABLE>
<CAPTION>

                                            OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                             -------------------------------------------------    ----------------------------------
                                                    WEIGHTED-
                                                     AVERAGE         WEIGHTED-                            WEIGHTED-
                                                    REMAINING         AVERAGE                              AVERAGE
                                  NUMBER           CONTRACTUAL       EXERCISE          NUMBER             EXERCISE
    EXERCISE PRICE              OUTSTANDING           LIFE             PRICE         OUTSTANDING            PRICE
    --------------           ---------------    --------------   -------------    ----------------    --------------
      <S>                    <C>                   <C>         <C>                <C>               <C>
        $0.05 to $0.40             39,312             3.36       $     0.18             39,312         $     0.18

        $2.00 to $2.97          1,743,626             8.69       $     2.25            388,459         $     2.16

        $3.03 to $3.94          9,208,888             8.76       $     3.38          2,552,882         $     3.27

        $4.44 to $5.50            427,550             9.94       $     4.49             16,839         $     5.46

             $8.13                  2,150             7.36       $     8.13              1,141         $     8.13

                             ---------------                                      ----------------
        $0.05 to $8.13         11,421,526             8.77       $     3.24          2,998,633         $     3.10
                             ===============                                      ================
</TABLE>



                                      40
<PAGE>

In April 1996, October 1996 and April 1997, the Board of Directors approved
the repricing of options granted at prices in excess of $8.25, $5.50 and
$3.25 per share, respectively, for all employees, including executive
officers.

PRO FORMA NET INCOME (LOSS)

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
1997, 1998 and 1999 would have been as indicated below:

<TABLE>
<CAPTION>

                                                                              YEARS ENDED MARCH 31,
                                                                   ---------------------------------------------
                                                                       1997            1998            1999
                                                                   --------------   ------------   -------------
             <S>                                                     <C>            <C>           <C>
               Net income (loss) as reported                            $ 13,271       $ 22,537      $ (13,167)
               Pro forma                                                $  7,230       $ 16,483      $ (20,130)

               Net income (loss) per basic share as reported            $   0.48       $   0.85      $   (0.51)
               Pro forma                                                $   0.26       $   0.62      $   (0.79)

               Net income (loss) per diluted share as reported          $   0.46       $   0.83      $   (0.51)
               Pro forma                                                $   0.25       $   0.61      $   (0.79)
</TABLE>

The effects of applying SFAS No. 123 may not be representative of the effects
on reported operating results for future years as the pro forma calculations
are based on grants made in fiscal 1996 through 1999. 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 1997, 1998 and 1999:

<TABLE>
<CAPTION>

                                                         OPTION PLAN                        ESPP
                                                ------------------------------ --------------------------------
                                                  1997      1998      1999       1997       1998       1999
                                                ---------  -------- ---------- ---------- ---------- ----------
   <S>                                          <C>       <C>        <C>        <C>        <C>        <C>
     Weighted-average risk free rate               6.01%     6.31%      5.51%      6.04%      5.63%      5.82%
                                                                                       2 years with 6 month
     Expected life of options/rights (in             3.5       3.5        3.5              increments
     years)
     Expected stock price volatility                 68%       78%        84%        68%        78%        84%
     Dividend yield                                   --        --         --         --         --         --
     Forfeiture rate                                 60%       60%        20%        60%        60%        20%
</TABLE>

G.   MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AGREEMENTS

On December 7, 1995, the Company and Matsushita Electronic Industrial Co.,
Ltd. (MEI) entered into a licensing agreement pursuant to which the Company
granted MEI a perpetual, exclusive, worldwide license, with the right to
grant sublicenses, with respect to the M2 Technology, for use in both
hardware and software for games and all other applications (M2 Agreement).
The license was originally granted in exchange for an upfront license payment
of $100.0 million, and for certain royalties that were agreed to be paid to
3DO with respect to certain software products manufactured after January 1,
1998, which are compatible with the M2 Technology.

Under the terms of the M2 Agreement, MEI granted 3DO a non-exclusive license
to use the M2 Technology for the development, manufacture and distribution of
(i) hardware products designed for use in the computer field, (ii) software
and peripherals compatible with hardware products developed by MEI or its
sublicensees that incorporate the M2 Technology, and (iii) development
systems to be used by third parties outside of Japan that are authorized by
MEI to develop and publish software products compatible with hardware
products that incorporate the M2 Technology. All revenue related to the M2
Agreement has been recognized as of the end of fiscal year 1998 under the
percentage-of-completion method of accounting.


                                      41
<PAGE>

On April 24, 1996, the Company agreed to make certain modifications to the M2
system design pursuant to the terms of an addendum (Addendum) to the M2
Agreement with MEI. As consideration for 3DO providing certain engineering
and support services, MEI agreed to pay an additional aggregate fee of
approximately $4.5 million to be received in installments in fiscal 1997 and
1998. On July 23, 1997, the Company and MEI signed a second addendum (Second
Addendum) to the M2 Agreement. Under the Second Addendum, the Company
relinquished its rights to develop and distribute software and peripherals
that are compatible with hardware products developed by MEI or its
sublicensees that incorporate the M2 Technology, and gave up its right to
develop and distribute M2-compatible authoring systems. In addition, the
Company relinquished its right to receive royalties with respect to MEI's
potential use of the M2 Technology, as well as certain other rights. In
exchange, MEI returned to the Company all of the approximately 3.2 million
shares of the Company's common stock that it previously owned. The Company
recognized approximately $11.0 million of non-cash revenue in connection with
this transaction.

H.   SALE OF SYSTEMS GROUP

On June 23, 1997, the Company sold most of the assets of the Company's former
hardware systems group, including certain technologies and related
intellectual property rights and approximately $1.5 million in equipment, to
Samsung Electronics Company, Ltd. (Samsung) for $20.0 million, realizing a
gain of approximately $18.0 million. As part of the sales agreement, CagEnt
Technologies, Inc. (CagEnt), a subsidiary of Samsung, agreed to assist the
Company, as a subcontractor, with respect to the Company's efforts to
complete the remaining deliverables under the M2 Agreement with MEI.

I.   CIRRUS LOGIC, INC.

In February 1996, the Company licensed the 3-D graphics portion of the M2
Technology to Cirrus Logic, Inc. (Cirrus) for the potential development of
high-end 3-D graphics chips for the PC market. Under the terms of the Joint
Development and License Agreement (Cirrus Agreement) the Company agreed to
develop certain modifications to its semiconductor technology familiarly
known to the parties as the "3DEngine." As partial consideration under such
agreement, the Company received the non-refundable sum of $2.5 million. This
payment has been recognized as revenue under the percentage-of-completion
method of accounting.

On October 3, 1996, Cirrus filed a complaint to rescind the Cirrus Agreement
on the grounds of frustration of purpose, mistake, failure of consideration,
concealment, and non-disclosure, and seeking to obtain a repayment of $2.5
million in nonrefundable payments made to the Company. The Company responded
to Cirrus' complaint and filed a cross-complaint regarding Cirrus' breach of
the Cirrus Agreement and seeking to enforce its rights under said agreement,
including procurement of Cirrus' payment of $4.5 million in nonrefundable
license fees, prepaid royalties and termination fees, plus damages, interest,
and attorneys' fees and costs.

On October 15, 1997, 3DO and Cirrus resolved and settled the parties'
respective claims with respect to the above-referenced litigation, including,
inter alia, the dismissal with prejudice of the subject litigation, the
general release of both parties from any and all claims relating to the
Cirrus Agreement, and the payment by Cirrus to 3DO of a mutually acceptable
sum in satisfaction of the license fees, advance royalties, and payments for
engineering services due to 3DO in connection with the Cirrus Agreement. The
Company recognized the payment as revenue in fiscal 1998.

J.   NET INTEREST AND OTHER INCOME

Net interest and other income for the fiscal years ended March 31, 1997, 1998
and 1999, consisted of the following:

<TABLE>
<CAPTION>

                                                                      YEARS ENDED MARCH 31,
                                                             ----------------------------------------------
                                                                1997             1998             1999
                                                             ------------    -------------    -------------
                                                                            (IN THOUSANDS)
                     <S>                                     <C>              <C>              <C>
                        Interest income                         $  2,720         $  2,108          $ 1,134
                        Interest expense                           (628)            (135)             (20)
                        Other income (expense), net                   23             (99)                5
                                                             ------------    -------------    -------------
                                                                $  2,115         $  1,874          $ 1,119
                                                             ============    =============    =============
</TABLE>




                                      42
<PAGE>

K.   INCOME TAXES

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>

                                                                     YEARS ENDED MARCH 31,
                                                        ------------------------------------------------
                                                            1997             1998             1999
                                                        --------------   -------------   ---------------
                                                                        (IN THOUSANDS)
                            <S>                           <C>             <C>                <C>
                               Current:
                                  Federal                      $   75         $   120           $    --
                                  State and local                   1               1                 1
                                  Foreign                       3,999              98               190
                                                        --------------   -------------   ---------------
                               Total current                    4,075             219               191

                               Total deferred                      --              --                --
                                                        --------------   -------------   ---------------

                               Total income taxes            $  4,075         $   219           $   191
                                                        ==============   =============   ===============
</TABLE>

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, 1997, 1998 and 1999 were as
follows:

<TABLE>
<CAPTION>

                                                                           YEAR ENDED MARCH 31,
                                                                   --------------------------------------
                                                                      1997          1998         1999
                                                                   -----------    ---------    ----------
                       <S>                                            <C>         <C>           <C>
                         Statutary federal tax rate                      34.0%       34.0%         34.0%
                         Valuation allowance                             (33.6)     (36.1)        (35.8)
                         Foreign tax withholding and other                23.1         3.1           0.3
                                                                   -----------    ---------    ----------
                                                                          23.5%       1.0%        (1.5%)
                                                                   ===========    =========    ==========
</TABLE>

The tax effect of temporary differences that give rise to significant portions
of deferred tax assets as of March 31, 1998 and 1999, are presented as follows:

<TABLE>
<CAPTION>

                                                                               YEAR ENDED MARCH 31,
                                                                         ---------------------------------
                                                                              1998              1999
                                                                         ---------------    --------------
                                                                                  (IN THOUSANDS)
                      <S>                                                  <C>               <C>
                         Deferred tax asset:
                           Depreciation and amortization                      $   2,479         $   3,251
                           Deferred revenue                                         151               208
                           Deferred research and development costs                7,819             7,861
                           Net operating loss carryforwards                      30,554            34,813
                           Tax credit carryforwards                              22,257            24,807
                           Other                                                (2,260)           (2,009)
                                                                         ---------------    --------------
                         Total gross deferred tax assets                         61,000            68,931
                         Less valuation allowance                              (61,000)          (68,931)
                                                                         ---------------    --------------
                         Net deferred tax assets                               $     --          $     --
                                                                         ===============    ==============
</TABLE>

The valuation allowance increased $7.9 million in fiscal 1999. Approximately
$0.5 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, 1999, the Company had cumulative federal net operating loss
carryforwards of approximately $100.6 million for federal income tax
purposes, which if not offset against future taxable income, will expire in
fiscal 2009 through 2019. As of March 31, 1999, the Company has cumulative
California net operating loss carryforwards of approximately $6.8 million,
which if not offset against future taxable income, will expire in the fiscal
2002 through 2004.

As of March 31, 1999, the Company had unused research and development tax
credits of approximately $6.8 million and $5.3 million available to reduce
future federal and California income taxes, respectively. The federal
research and development tax credit expires in various years through 2019.
The California research and development tax credit can be carried forward
indefinitely. The Company also had foreign tax credits of approximately $11.5
million available to reduce


                                      43
<PAGE>

future federal income taxes, expiring through fiscal 2004. There are also
minimum tax credits of approximately $0.5 million available to reduce future
federal income taxes, which will carry forward indefinitely.

L.   LEASE COMMITMENTS

The Company leases its facilities under several operating lease agreements.
The Company also leases certain office equipment under non-cancelable
operating leases. Lease payments for the periods ended March 31, 1997, 1998,
and 1999, were $2.0 million, $1.2 million and $1.5 million, respectively.

Future minimum lease payments are as follows:

<TABLE>
<CAPTION>

                                                                                   OPERATING
                                                  MARCH 31,                          LEASES
                                   ----------------------------------------    ------------------
                                                                                (IN THOUSANDS)
                                 <S>                                               <C>
                                   2000                                                $   2,930
                                   2001                                                    2,943
                                   2002                                                    1,787
                                   2003                                                      842
                                   2004                                                      652
                                                                               ------------------
                                   Total minimum lease payments                        $   9,154
                                                                               ==================
</TABLE>

M.   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.

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.

N.   ACQUISITIONS

NEW WORLD COMPUTING, INC.

In June 1996, the Company purchased certain assets and assumed certain
liabilities of New World Computing, Inc. (NWC), a PC platform game developer
located in Agoura Hills, California. Subsequent to the asset purchase, the
Company created a production unit using the New World Computing brand name.
As consideration for the purchase, the Company issued approximately 1 million
shares of its common stock to the parent of NWC, NTN Communications, Inc.
(NTN). In addition, under the terms of the agreement, the Company was
obligated to make a cash payment to NTN because the value of the Company's
stock issued in the transaction fell below an amount equal to approximately
$10 per share during a period following the closing date (Purchase Price
Guarantee); in fiscal year 1997, the Company paid approximately $5.0 million
to NTN. This payment represents the total amount due to NTN under the terms
of the asset purchase agreement and, as such, the Company has no further
obligations to NTN under the Purchase Price Guarantee. The Company recorded
the purchase in June 1996 using the purchase method of accounting. A charge
was recorded in the first quarter of fiscal year 1997 for $7.7 million
representing the amount of the purchase price assigned to in-process research
and development because the acquired technology had not yet reached
technological feasibility and had no other future alternative uses. At the
time of the acquisition, a total of 12 products were in development. The
Company estimated that the average aggregate percentage of completion for
those products was approximately 47%. Of the 12 products in development, four
were subsequently cancelled and four were completed and released, but
generated minimal revenues. The remaining four products were completed and
released with modest market success. However, the average percentage of
completion for those products was only approximately 33% at the time of
acquisition. The Company used an income approach in valuing the acquired
in-process research and development. The income approach reflects the present
value of the operating cash flows generated


                                      44
<PAGE>

by the in-process research and development after taking into account the cost
to complete the projects, the relative risk of the projects and an
appropriate discount rate to reflect the time value of investment capital.

At the time, the entire purchase was booked at the guaranteed purchase price.
As a result, the payment of approximately $5.0 million has no impact on the
Company's income statement for fiscal 1997. Also included as part of the
purchase price were intangibles valued at $3.1 million, to be amortized on a
straight line basis over a period of one to five years. As of March 31, 1998
and 1999, intangible assets, net of amortization, were $1.5 million and $1.0
million, respectively.

The results of operations of NWC have been included in the Company's results
of operations since the date of acquisition. The following unaudited pro
forma information presents the results of operations of the Company and New
World Computing for fiscal 1997, with pro forma adjustments as if the
acquisition had been consummated as of the beginning of the periods presented.

Pro forma financial information:

<TABLE>
<CAPTION>

                                                                     FOR YEAR ENDED
                                                                     MARCH 31, 1997
                                                                  ---------------------
                      <S>                                                    <C>
                        Revenue                                                $93,191
                        Net income (loss)                                      $11,678
                        Net income (loss) per basic share                        $0.42
                        Net income (loss) per diluted share                      $0.40
</TABLE>

ARCHETYPE INTERACTIVE CORPORATION

In May 1996, the Company acquired all the outstanding stock of Archetype
Interactive Corporation, a software developer of a multi-user role playing
game designed to be played over the Internet, from its shareholders in a
tax-free reorganization which has been accounted for using the
"pooling-of-interests" method of accounting. The Company issued 592,000
shares of its common stock in connection with this transaction.

The results of operations of Archetype Interactive Corporation prior to the
acquisition date are not considered material to the consolidated results of
operations of the Company and, accordingly, the Company's consolidated
financial statements have not been restated for all periods.

O.   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 operates in a single operating segment: interactive entertainment
software products.


                                      45
<PAGE>

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

<TABLE>
<CAPTION>

                                                                YEAR ENDED MARCH 31,
                                                  --------------------------------------------------
                                                       1997              1998             1999
                                                  ---------------- ----------------- ---------------
    <S>                                                <C>              <C>             <C>
       Software publishing revenues:
         PC                                               $ 9,540          $  8,346        $ 26,799
         Console                                               --                --          20,029
         Other                                                 --             1,083           1,191
                                                  ---------------- ----------------- ---------------
       Total Software publishing revenues                   9,540             9,429          48,019

       Royalty and other  revenues                         82,810            29,461              --

                                                  ---------------- ----------------- ---------------
       Total revenues                                    $ 92,350          $ 38,890        $ 48,019
                                                  ================ ================= ===============
</TABLE>

In fiscal 1999, the Company's two top customers each accounted for
approximately 13% of the Company's total revenues. All revenues in fiscal
1999 were derived from the Company's software publishing operations. In
fiscal 1997 and 1998, one customer from the Company's former hardware systems
business accounted for 85% and 67% of the Company's total revenue,
respectively.

The Company's software publishing export sales are principally in Europe and
Asia/Pacific. In each of fiscal 1997, 1998 and 1999, less than 10% of the
Company's total net revenues were derived from international software
publishing sales. The Company had software publishing export sales, primarily
to Japan and the United Kingdom, of approximately $0.6 million, $2.1 million,
and $4.2 million for the fiscal 1997, 1998, and 1999, respectively. In fiscal
1997 and 1998, the Company's export sales to Japan from its hardware systems
operations were derived primarily from the M2 agreement with MEI. The
Company's assets are primarily located in its corporate office in the United
States.

P.   LINES OF CREDIT

In fiscal 1999, the Company entered into two revolving credit agreements with
Coast Business Credit and Merrill Lynch & Co.

The Merrill Lynch credit facility allows the Company to borrow up to $20.0
million or 90% of the cash balances in the pledged collateral bank account at
Merrill Lynch. The amount outstanding under this credit facility bears a
variable per annum rate of interest equal to the sum of the 30-day commercial
paper rate plus 2.10% (6.94% as of March 31, 1999). Interest expense is due
monthly and the loan balance is due at the expiration date of the credit
agreement. This credit agreement will expire on November 30, 2000. As of
March 31, 1999, the Company's outstanding loan balance was approximately $9.5
million.

The Coast Business Credit revolving credit agreement permits the Company to
obtain a loan amount of up to $20.0 million, or 60% of qualified accounts
receivables, bearing an interest rate equal to Prime Rate plus 2.0% per annum
(9.75% as of March 31, 1999) 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 the Company:

         -       must achieve 80% of the projected quarterly tangible net worth
                 upon projections acceptable to Coast;

         -       must maintain $2,000,000 on deposit at all times in restricted
                 accounts which shall be assigned to and accessible only to
                 Coast; and

         -       must not pay dividends.



                                      46
<PAGE>

As of March 31, 1999, no borrowings were outstanding under this facility.
However, on April 1, 1999, the Company repaid the outstanding borrowings to
Merrill Lynch and borrowed $9.5 million from Coast Business Credit.

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

Not Applicable.



                                      47
<PAGE>

                                    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, 1999.

<TABLE>
<CAPTION>

NAME                                AGE                              POSITION
----                                ---                              --------
<S>                               <C>   <C>
Trip Hawkins......................  45    Chairman of the Board and Chief Executive Officer
James A. Cook.....................  50    Executive Vice President, General Counsel and Secretary
Stephen E. Fowler.................  40    Senior Vice President, Sales and Operations
Richard J. Hicks, III.............  38    Senior Vice President, Product Development
John W. Adams.....................  37    Chief Financial Officer
Robert Gayman.....................  38    Vice President, Sales
Jeffrey A. Cleary.................  41    Vice President, Marketing
Dominic Wheatley..................  39    Chairman of 3DO Europe
William A. Hall...................  67    Director
H. William Jesse, Jr..............  47    Director
Hugh C. Martin....................  45    Director
</TABLE>

TRIP HAWKINS, the founder of 3DO, has been Chairman of the Board and Chief
Executive Officer of 3DO since September 1991. He also served as President
from September 1991 until October 1995, and he served as Secretary from
September 1991 through February 1993. From August 1982 to December 1990, Mr.
Hawkins served as President of Electronic Arts. He served as the Chief
Executive Officer of Electronic Arts from August 1982 until May 1991, and was
Chairman of its board of directors from August 1982 until July 1994. Prior to
founding Electronic Arts, Mr. Hawkins was a director of marketing at Apple
Computer, Inc.

JAMES A. 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. From January 1990 until
January 1993, he was a partner in the law firm of Cook and Lefevre. From June
1985 to December 1989, he was a sole practitioner operating as the Law
Offices of James Alan Cook.

STEPHEN E. FOWLER was appointed as 3DO's Senior Vice President, Sales and
Operations in April 1998. Previously, he served as Senior Vice President,
Operations from May 1997; Vice President, Operations from October 1995; Vice
President, Developer and Customer Services from June 1994; and Senior
Director, Developer Services from January 1993. From September 1990 to
January 1993, he served as Vice President, Technical Services at Gupta
Corporation (now called Centura Software Corporation), a software tools
company. From April 1984 to August 1990, he served in various senior
management positions including Director, Worldwide Services at Application
Development Systems.

RICHARD J. HICKS, III joined 3DO as Vice President, Product Development in
October 1997 and was promoted to Senior Vice President, Product Development
in 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. He was Vice President,
Software of ShaBLAMM Computer, Inc., a computer hardware company, from
February 1994 to July 1995. From May 1988 to January 1994, he held several
software development positions at Electronic Arts.

JOHN W. ADAMS became 3DO's Chief Financial Officer in March 1998. He served
as Vice President, Planning and Analysis and Director of Operations at
International Thomson Publishing, from April 1996 to March 1998. Mr. Adams
served as Senior Manager, Financial Planning from February 1993 to April 1996
at The Walt Disney Company and was a Manager, Business Planning at The Gap
Incorporated from March 1992 to February 1993. Mr. Adams has also held
various planning positions at the Pepsi-Cola Company from February 1986 to
March 1992.

ROBERT GAYMAN joined 3DO as Vice President, Sales in March 1999. From October
1996 to March 1999, he was Western Regional Sales Manager for Sony Computer
Entertainment America, and from January 1993 to October 1996, he was

                                      48
<PAGE>

National Sales Manager for Sun Gro Consumer Products. He has also held sales
positions at Mediagenic, Spalding Sports Worldwide, and RJR Nabisco Brands.

JEFFREY A. CLEARY joined 3DO as Vice President, Marketing in May 1999. From
June 1998 to May 1999, he was the Vice President, Marketing and Sales at
Stagecast Software. From August 1993 to September 1995, he was Director,
Marketing and Product Development for the Boys Toys division at Galoob Toys
and from September 1995 to June 1998, he was Vice President, Marketing and
Product Development for Boys Toys at Galoob Toys. From June 1987 to August
1993, he held several marketing positions at RJRNabisco/Del Monte. He has
also worked in advertising and retail sales.

DOMINIC WHEATLEY became Chairman of 3DO Europe in May 1999. From 1996 to
1998, he was semi-retired and pursued various entrepreneurial activities. He
founded Domark Software in 1984 and served as its Chief Executive Officer
through a series of several acquisitions whereby Domark became Eidos plc in
1996. Mr. Wheatley also serves as a non-executive director of Statpro, a
financial software company.

WILLIAM A. HALL has been a director since June 1997. He founded Sight & Sound
Distributing Company, in December 1984 and has been its President and Chief
Executive Officer since that time. Since 1988 he has also been owner of
W.A.A. Management/Consulting, and since 1993 he has been Vice Chairman and
majority stockholder of U.S. Animation, Inc. He has been a partner in
Lincolnshire Management, Inc., a management consultant company, since June
1994. Mr. Hall is also a director of Chromium Graphics, Inc.; Credentials
(TRW Credit); Northword Press; and Lincolnshire Management, Inc. Mr. Hall is
a member of the Audit Committee and Compensation Committee.

H. WILLIAM JESSE, JR. has been a director since September 1997. He joined
cybermeals, Inc. (now called Food.com), an Internet company, in 1997 and was
elected its Chairman and Chief Executive Officer in March 1998. From 1986
through March 1998, he was Chairman, President and Chief Executive Officer of
Jesse Hansen & Co., a consulting company, and remains as Chairman. He also
serves as Chairman and Chief Executive Officer of Vineyard Properties of
California, Inc. Mr. Jesse has previously served as Chief Executive Officer
of American Hawaii Cruises; Vice President of The Getz Corporation; Chief
Executive Officer of the Delta Queen Steamboat Co. and Vice President of its
parent, The Coca Cola Bottling Company of New York; and Vice President of
Prudential Lines, Inc. and General Manager of its Mediterranean/Mideast
Division. Mr. Jesse serves on the board of directors of The Wine Group, Inc.,
Stanislaus Food Products Company, Wired Ventures, Inc., ExTerra Credit
Recovery, and Online Partners, Inc. Mr. Jesse is a member of the Audit
Committee.

HUGH C. MARTIN has been a director since April 1996. Since January 1998, he
has been Chief Executive Officer of Optical Networks, Incorporated, a
telecommunications network equipment company. Until his resignation from 3DO
in June 1997, he served as our President from October 1995; Chief Operating
Officer from January 1993 until October 1995; and Senior Vice President,
Engineering and Operations from May 1992 until January 1993. From March 1988
to April 1992, he served as a director and then a senior director of Apple
Computer, Inc. Previously, Mr. Martin co-founded and served as the Vice
President and Chief Development Officer of Ridge Computers, where he
co-designed one of the industry's first commercial RISC processors. Mr.
Martin is a member of the Compensation Committee.

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. Hall will stand for
re-election at the 1999 annual meeting of stockholders. Mr. Jesse will stand
for re-election at the 2000 annual meeting of stockholders. Mr. Hawkins and
Mr. Martin will stand for re-election at the 2001 annual meeting of
stockholders. Each officer serves at the discretion of the Board of Directors.

                                      49
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION TABLES

Summary Compensation Table. The following table sets forth the compensation
paid by the Company to the Chief Executive Officer and the four most highly
compensated executive officers of the Company other than the Chief Executive
Officer (collectively the "Named Officers") during the last fiscal year.

<TABLE>
<CAPTION>

                                                                                        LONG-TERM
                                                                                      COMPENSATION         ALL OTHER
                                    FISCAL             ANNUAL COMPENSATION            OPTIONS/SARS       COMPENSATION
   NAME AND PRINCIPAL POSITION       YEAR          SALARY              BONUS                #                 (1)
   ---------------------------     --------  -----------------  -----------------  -----------------  -----------------
 <S>                              <C>         <C>                <C>                  <C>               <C>
   Trip Hawkins                      1999        $ 295,792                -0-              440,000         $    840
     Chairman and Chief              1998        $ 295,792                -0-            1,760,000 (2)     $    660
     Executive Officer               1997        $ 295,000           $35,128             2,620,000 (3)     $    660

   James Alan Cook                   1999        $ 289,954                -0-               40,000         $    840
     Executive Vice President,       1998        $ 275,504          $100,000               704,000 (4)     $    660
     General Counsel, and            1997        $ 243,552           $20,408               738,000 (5)     $    660
     Secretary

   Stephen E. Fowler                 1999        $ 212,023                -0-               60,000         $  9,085 (6)
     Senior Vice President,          1998        $ 199,473                -0-              307,000 (7)     $  3,265 (8)
     Sales & Operations

   Richard J. Hicks III              1999        $ 180,262                -0-              120,000         $ 10,498 (9)
     Senior Vice President,          1998        $  75,810                -0-              185,000         $     -0-
     Product Development

   John Adams                        1999        $ 154,929                -0-               30,000         $    538
     Chief Financial Officer         1998        $   8,654                -0-              150,000         $     -0-
     (from March 1998)
</TABLE>

(1) The amounts include premiums paid by the Company for group term life
    insurance.

(2) Includes 1,560,000 options granted in previous fiscal years that in fiscal
    1998 were exchanged for new options at $3.25 per share after Mr. Hawkins
    agreed to certain adjustments to the option vesting schedules.

(3) Includes 500,000 options that were originally granted in fiscal 1994,
    10,000 options that were originally granted in fiscal 1995 at $11.00 per
    share, and 50,000 options that were originally granted in fiscal 1996 at
    $11.875 per share that in fiscal 1997 were twice exchanged for new
    options, first at $8.25 per share and later at $5.50 per share, after Mr.
    Hawkins agreed to certain adjustments to the option vesting schedules.

(4) Includes 594,000 options granted in previous fiscal years that in fiscal
    1998 were exchanged for new options at $3.25 per share after Mr. Cook agreed
    to certain adjustments to the option vesting schedules.

(5) Includes 4,000 options granted in fiscal 1995 at $9.875 per share, 12,000
    options granted in fiscal 1995 at $10.75 per share, 10,000 options granted
    in fiscal 1995 at $11.00 per share, 28,000 options granted in fiscal 1996
    at $11.875 per share, and 40,000 options granted in fiscal 1996 at $11.50
    per share that in fiscal 1997 were twice exchanged for new options, first
    at $8.25 per share and later at $5.50 per share, after Mr. Cook agreed to
    certain adjustments to the option vesting schedules. Also includes 150,000
    options granted in fiscal 1997 at $8.25 per share that were exchanged for
    new options at $5.50 per share, after Mr. Cook agreed to certain
    adjustments to the option vesting schedule.

(6) Includes a gain of $8,245 realized upon the sale of shares acquired through
    the Employee Stock Purchase Plan.

(7) Includes 150,000 options granted in previous fiscal years that in fiscal
    1998 were exchanged for new options at $3.25 per share after Mr. Fowler
    agreed to certain adjustments to the option vesting schedules.

(8) Includes a gain of $2,739 realized upon the sale of shares acquired through
    the Employee Stock Purchase Plan.


                                      50
<PAGE>

(9) Includes a gain of $9,893 realized upon the sale of shares acquired through
    the Employee Stock Purchase Plan.


Option Grants in Last Fiscal Year. 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, 1999. The table also sets forth
hypothetical gains or "opinion 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 the Company's Common Stock and overall
market conditions.

<TABLE>
<CAPTION>

                        OPTION GRANTS IN LAST FISCAL YEAR

                                                                                                POTENTIAL REALIZABLE
                                                      % OF TOTAL                                  VALUE AT ASSUMED
                                                        OPTIONS                                    ANNUAL RATE OF
                                                      GRANTED TO                                     STOCK PRICE
                                                       EMPLOYEES    EXERCISE                        APPRECIATION
                                DATE       OPTIONS     IN FISCAL      PRICE    EXPIRATION        FOR OPTIONS TERM(2)
                NAME           GRANTED   GRANTED(1)      YEAR       PER SHARE     DATE           5%              10%
         -----------------    --------- ------------  ----------  ------------ ----------  --------------  --------------
      <S>                   <C>          <C>           <C>       <C>            <C>      <C>            <C>
         John Adams            7/28/98      10,000        0.2030   $   3.3750     7/28/08  $    21,225.19  $    53,788.81
                               2/18/99      20,000        0.4060   $   3.8437     2/18/09  $    48,345.65  $   122,517.36
                                            ------        ------                                ---------      ----------
                Total                       30,000        0.6090                           $    69,570.84  $   176,306.17

         James Alan Cook       7/28/98      20,000        0.4060   $   3.3750     7/28/08  $    42,450.39  $   107,577.62
                               2/18/99      20,000        0.4060   $   3.8437     2/18/09  $    48,345.65  $   122,517.36
                                            ------        ------                                ---------      ----------
                Total                       40,000        0.8120                           $    90,796.04  $   230,094.98

         Stephen E. Fowler     7/28/98      10,000        0.2030   $   3.3750     7/28/08  $    21,225.19  $    53,788.81
                               2/18/99      50,000        1.0150   $   3.8437     2/18/09  $   120,864.11  $   306,293.39
                                            ------        ------                               ----------      ----------
                Total                       60,000        1.2180                           $   142,089.30  $   360,082.20

         Trip Hawkins          7/28/98     240,000        4.8719   $   3.3750     7/28/08  $   509,404.65  $ 1,290,931.39
                               2/18/99     200,000        4.0599   $   3.8437     2/18/09  $   483,456.45  $ 1,225,173.58
                                            ------        ------                               ----------    ------------
                Total                      440,000        8.9317                           $   992,861.10  $ 2,516,104.97

         Richard J. Hicks III  7/28/98      20,000        0.4060   $   3.3750     7/28/08  $    42,450.39  $   107,577.62
                               11/5/98     100,000        2.0299   $   3.0312    11/05/08  $   190,630.54  $   483,095.21
                                            ------        ------                               ----------      ----------
                Total                      120,000        2.4359                           $   233,080.93  $   590,672.83
</TABLE>

(1) The options referenced in the foregoing table are intended to be incentive
    stock options to the extent permitted by applicable law. The Company's 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 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 20% of the shares subject to the option one year
    after commencement of employment, and as to the remainder in equal monthly
    installments (accrued on a monthly basis) over the succeeding 48 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) 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 the Company's estimate or a projection by the Company of future
    Common Stock prices.


                                      51
<PAGE>

            AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
                             YEAR-END OPTION VALUES

<TABLE>
<CAPTION>

                                                                    NUMBER OF               VALUE OF UNEXERCISED
                                                               UNEXERCISED OPTIONS          IN-THE-MONEY OPTIONS
                                 ACQUIRED        VALUE          AT MARCH 31, 1998             AT MARCH 31, 1998
                                                          ----------------------------  -----------------------
           NAME                 ON EXERCISE    REALIZED     EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
 -------------------------    ---------------------------  ----------------------------------------------------------
<S>                                 <C>    <C>           <C>             <C>          <C>             <C>
Adams, John                             0    $       0.00     30,000         150,000     $   96,561.00  $  435,931.00

Cook, James Alan                        0    $       0.00    426,835         417,165     $1,031,789.81  $  902,168.97

Fowler, Stephen E                       0    $       0.00    145,166         236,834     $  357,183.67  $  499,424.71

Hawkins, Trip                           0    $       0.00  1,062,166       1,137,834     $2,276,356.19  $2,406,043.79

Richard J. Hicks, III                   0    $       0.00     51,167         253,833     $   98,109.17  $  532,982.32

             GRAND TOTAL                0    $       0.00  2,603,137       4,867,963     $3,859,999.84  $4,776,550.79
</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, 1999 by:


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

         -       each director;

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

         -       all directors and executive officers as a group.

As of March 31, 1999 there were 25,540,242 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>

                                                                     NUMBER        PERCENT
                                                                     ------        -------

                                                                   SHARES BENEFICIALLY OWNED
                                                                      --------------------
<S>                                                                 <C>           <C>
Trip Hawkins (2)..............................................         6,239,736    23.4%
J&W Seligman & Co., Incorporated
   100 Park Avenue
   New York, New York 10017...................................         3,232,200     12.7
William A. Hall (3)...........................................            45,383      *
H. William Jesse, Jr. (4).....................................            38,333      *
Hugh C. Martin (5)............................................            36,667      *
James A. Cook (6).............................................           461,085     1.8
Stephen E. Fowler (7).........................................           159,116      *
Richard J. Hicks, III (8).....................................            62,133      *
John W. Adams (9).............................................            35,818      *
All executive officers and directors as a group                        7,140,230    26.0%
(11 persons) (10).............................................

</TABLE>



                                      52
<PAGE>

*        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, 1999 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
         600 Galveston Drive, Redwood City, California 94063.

(2)      Includes 1,102,833 shares subject to an option exercisable within 60
         days of March 31, 1999. We have reserved shares for sale to Mr.
         Hawkins, who has expressed an interest in purchasing shares in the
         offering. See "Underwriting."

(3)      Includes 38,333 shares subject to an option exercisable within 60 days
         of March 31, 1999.

(4)      Includes 33,333 shares subject to an option exercisable within 60 days
         of March 31, 1999.

(5)      Includes 36,667 shares subject to an option exercisable within 60 days
         of March 31, 1999.

(6)      Includes 451,167 shares subject to an option exercisable within 60 days
         of March 31, 1999.

(7)      Includes 155,665 shares subject to an option exercisable within 60 days
         of March 31, 1999.

(8)      Includes 57,333 shares subject to an option exercisable within 60 days
         of March 31, 1999.

(9)      Includes 35,000 shares subject to an option exercisable within 60 days
         of March 31, 1999.

(10)     Includes shares held  beneficially  by executive  officers and
         directors as shown in the foregoing table and 1,962,326 shares subject
         to options exercisable within 60 days of March 31, 1999.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is incorporated herein by reference to the
Company's Proxy Statement for the 1999 annual meeting of stockholders.

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

(a) Documents filed as part of this report:

<TABLE>
<CAPTION>

                                                                                             PAGE(S) IN
                                                                                              FORM 10-K
<S>                                                                                          <C>
1.  Index to Consolidated Financial Statements
    Independent Auditors' Report                                                                  30
    Consolidated Balance Sheets as of March 31, 1999 and 1998                                     31
    Consolidated Statements of Operations for the years ended
         March 31, 1999, 1998 and 1997.                                                           32
    Consolidated Statements of Stockholders' Equity
         for the years ended March 31, 1999, 1998 and 1997.                                       33
    Consolidated Statements of Cash Flows for the years ended
         March 31, 1999, 1998 and 1997.                                                           34
    Notes to Consolidated Financial Statements                                                 35-47

2.  Financial Statement Schedules
    Information required by this Item is included in the Notes to


                                      53
<PAGE>

<CAPTION>
<S>                                                                                          <C>
         Consolidated Financial Statements

3.  Exhibits

</TABLE>



                                      54
<PAGE>

The following exhibits are filed as part of, or incorporated by reference into,
this report:


<TABLE>
<CAPTION>

     NUMBER                                                       EXHIBIT TITLE
   <C>           <S>
       3.01   --    Registrant's Restated Certificate of Incorporation.
       3.05   --    Registrant's Delaware Bylaws, as amended.
       4.01   --    Form of Specimen Certificate for Registrant's Common
                    Stock.(2)
      10.01   --    1991 Incentive Stock Plan of the Registrant.(2)
      10.02   --    1993 Incentive Stock Plan of the Registrant.(2)
      10.03   --    Form of Restricted Stock Purchase Agreement of the
                    Registrant.(2)
      10.04   --    Form of Incentive Stock Option Agreement of the
                    Registrant.(2)
      10.05   --    Form of Nonstatutory Stock Option Agreement of the
                    Registrant.(2)
      10.06   --    401(k) Plan of the Registrant.(2)
      10.07   --    Employment Agreement between the Registrant and William M.
                    Hawkins III dated as of February 1993.(2)
      10.07A  --    Amendment to Employment Agreement between the Registrant and
                    William M. Hawkins III, dated as of March 22, 1994.(3)
      10.08   --    Form of Indemnity Agreement.(2)
      10.09   --    Lease between Seaport Centre Venture Phase I and the
                    Registrant for office space at 600 Galveston  Drive,
                    Building 5, Redwood City, California.(4)
      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.(3)
      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.(5)
      10.10   --    1994 Employee Stock Purchase Plan of the Registrant (6)
      10.11   --    1995 Director Option Plan of the Registrant (6)
      10.12   --    Asset Purchase Agreement between the Registrant and Samsung
                    Electronics Co., Ltd. (1)(6)
      10.13   --    Second Addendum dated July 23, 1997, to Technology Licensing
                    Agreement between the Registrant and Matsushita Electronic
                    Industrial Co., Ltd., dated December 7, 1995 (1) (6)
      10.14   --    WCWA Loan Agreement between the Registrant and
                    Merrill Lynch & Co. dated November 3, 1998.
      10.15   --    Loan and Security Agreement between the Registrant and
                    Coast Business Credit dated March 18, 1999.
      21.01   --    List of Subsidiaries of the Registrant.
      23.01   --    Consent of Independent Auditors.
      24.01   --    Power of Attorney.
</TABLE>



(1) Confidential treatment has been granted with respect to certain portions
    of this document.
(2) Incorporated by reference to the same-numbered exhibit filed with the
    Registrant's Registration Statement on Form S-1 No. 33-59166
(3) Incorporated by reference to  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.
(4) Incorporated by reference to 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
(5) Incorporated by reference to exhibit 10.34B filed with the Registrant's
    Annual Report on Form 10-K for the year ended March 31, 1995
(6) Incorporated by reference to 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.



                                      55
<PAGE>

(b) Reports on Form 8-K:
    No Reports on Form 8-K were filed during the quarter ended March 31, 1999.
(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.
(d) Financial Statement Schedules:
    Information required by this Item is included in Notes to Consolidated
    Financial Statements.


                                      56
<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:  /s/  JOHN ADAMS
                                              ----------------------------------
                                               John Adams
                                               Chief Financial Officer
                                               (Principal Financial Officer and
                                               Principal Accounting Officer)
                                               (Duly Authorized Officer)


                                          Date:  June 17, 1999






                                      57

<PAGE>


                                THE 3DO COMPANY
                             Report on form 10-K for
                          the year ended March 31, 1999

                               INDEX TO EXHIBITS*


<TABLE>
<CAPTION>

  EXHIBIT                                                                                                      SEQUENTIALLY
  NUMBER                                        EXHIBIT NAME                                                   NUMBERED PAGE
<C>                                <S>                                                                          <C>
  10.14                               WCWA Loan Agreement between the Registrant and
                                      Merrill Lynch & Co. dated November 3, 1998.
  10.15                               Loan and Security Agreement between the Registrant
                                      and Coast Business Credit dated March 18, 1999.
  21.01                               List of Subsidiaries of the Registrant.
  23.01                               Consent of Independent Auditors.
  24.01                               Power of Attorney.
  27.01                               Financial Data Schedule.
</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.


                                      58