SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

__X__ ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE
      ACT OF 1934 For THE FISCAL YEAR ENDED AUGUST 31, 1997

_____ TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO______

                         Commission file number 0-15811

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

                            BR0DERBUND SOFTWARE, INC.
             (Exact name of registrant as specified in its charter)

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

         Delaware                                                 94-2768218
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

              500 Redwood Boulevard, Novato, California 94948-6121
               (Address of principal executive offices) (Zip Code)

       Registrant's Telephone Number, including area code: (415) 382-4400

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
                                (Title of Class)

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. |_|

The aggregate  market value of the  registrant's  Common Stock,  $.01 par value,
held by non-affiliates  of the registrant,  based upon the closing sale price of
the Common Stock on October 31, 1997 as reported on the NASDAQ  National  Market
system, was $603,552,495.

As of October 31, 1997, there were 20,812,155 shares of the registrant's  Common
Stock Outstanding.

Documents Incorporated by Reference

Portions of registrant's  definitive proxy statement (the "Proxy Statement") for
its  1998  Annual  Meeting  of  Stockholders  to be held  January  22,  1998 are
incorporated by reference into Part III hereof.

This report consists of 50 sequentially numbered pages.
The Exhibit Index is located at pages 44 and 45.              Page 1 of 50 Pages

<PAGE>

                            BR0DERBUND SOFTWARE, INC.
                           FORM 10-K, AUGUST 31, 1997
                                Table of Contents

                                                                            Page
                                                                            ----
                                     PART I

Item 1.  Business.............................................................3
Item 2.  Properties..........................................................14
Item 3.  Legal Proceedings...................................................14
Item 4.  Submission of Matters to a Vote of Security Holders.................14

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related 
           Stockholder Matters...............................................16
Item 6.  Selected Financial Data.............................................17
Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations.........................................18
Item 8.  Financial Statements and Supplementary Data.........................26
Item 9.  Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure............................43

                                    PART III

Item 10. Directors and Executive Officers of the Registrant..................43
Item 11. Executive Compensation..............................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management......43
Item 13. Certain Relationships and Related Transactions......................43

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports 
           on Form 8-K.......................................................44

Signatures...................................................................47

CAUTIONARY  NOTE  REGARDING  FORWARD  LOOKING  STATEMENTS:  This  Form  10-K  of
Broderbund   Software,   Inc.   ("Broderbund"   or   the   "Company")   contains
forward-looking   statements  that  are  subject  to  risks  and  uncertainties.
Statements indicating that the Company "believes,"  "expects,"  "anticipates" or
"estimates" are forward  looking as are all other  statements  regarding  future
financial  results,  market  conditions,  product offerings or other events that
have not yet occurred.  There are many important factors that could cause actual
results or events to differ  materially  and/or adversely from those anticipated
by the forward looking statements contained in this Form 10-K and Annual Report.
Such factors  include but are not limited to, the rate of growth of the consumer
software  market,  market  acceptance of the Company's  products or those of its
competitors,  the timing of new product introductions,  expenses relating to the
development and promotion of new product  introductions and to the marketing and
distribution of existing products, changes in pricing policies by the Company or
its  competitors,  projected and actual  changes in platforms and  technologies,
timely and successful adaptation to such platforms or technologies, the accuracy
of forecasts of consumer demand, product returns, market seasonality, the timing
of orders from major customers and order  cancellations,  changes or disruptions
in the consumer software  distribution  channels and successful  acquisition and
integration  of new  businesses,  as well as those factors  listed under Factors
Affecting  Future  Operating   Results   elsewhere  in  this  Annual  Report  to
Stockholders.  Actual  events or the actual  future  results of the  Company may
differ  materially  from any  forward  looking  statement  due to such risks and
uncertainties.  Other factors,  uncertainties  and assumptions not  specifically
identified or disclosed by the Company were also  involved in the  derivation of
these forward-looking statements and the failure of such other assumptions to be
realized  may  also  cause  actual  results  to  differ  materially  from  those
projected.  The Company  assumes no obligation  to update these  forward-looking
statements  to reflect  actual  results  or  changes  in factors or  assumptions
affecting such forward looking statements.


                                       2
<PAGE>

PART I

Item 1. BUSINESS

Overview

     Broderbund  Software,   Inc.  ("Broderbund"  or  the  "Company")  develops,
publishes  and  markets  a broad  line  of  interactive  personal  productivity,
entertainment  and  education  software  for use in the home,  school  and small
business  markets.  Since the  founding of the Company in 1980,  Broderbund  has
developed  innovative  products  which take  advantage  of  advances in personal
computer  ("PC")  technology and which have won over 400 awards and sold over 40
million  units.  The Company is  committed to creating  imaginative  software to
provide value for consumers of all ages.

     Broderbund's  product  strategy  is to  identify  and  develop  families of
products that will achieve sustained  consumer appeal and brand name recognition
primarily   across   three  major   consumer   software   categories:   personal
productivity, entertainment and education. The Company's best known products are
The  Print  Shop(R)  family  of  personal  productivity   products,  the  Carmen
Sandiego(R)  family of educational  products,  the Family Tree Maker(TM) line of
genealogy  products,  and the entertainment  product Myst(R),  which is the best
selling PC game of all time. Recognizing that new and emerging technologies have
historically played, and will continue to play, an increasingly significant role
in the multimedia  environment  and consumer  preferences,  the Company seeks to
adapt to and incorporate such technologies into its product  offerings.  In this
respect,  the Company believes that the emergence of the Internet  represents an
important trend and opportunity in the consumer software market,  and as part of
its Internet  strategy it is  developing  on-line  capabilities  to its existing
products,  expanding its web-site presence and infrastructure and investing in a
number  of  small  Internet  related  companies  in  order  to keep  abreast  of
developments in this rapidly-evolving  area, and to position itself as a leading
participant in this emerging platform.

     The Company sells its products through distributors,  computer superstores,
electronics  stores,  mass  merchandisers,  discount  warehouse  stores,  office
stores,  software specialty retail chains and educational  dealers. In addition,
Broderbund also sells its products  directly to schools and to consumers through
direct mail,  telemarketing  and via the Internet.  In August 1997,  the Company
acquired Parsons Technology,  a consumer  productivity software company based in
Iowa that  distributes its products  primarily  direct-to-consumer.  The Company
believes that the direct-to-consumer channel will play an increasingly important
role in the  distribution  of its  products.  International  sales are primarily
derived from a subsidiary in the United Kingdom and from licensing  arrangements
with foreign distributors.  The Company also leverages its distribution strength
by  acting  as the  exclusive  distributor  for  other  publishers  through  its
affiliated label program.

     The consumer  software  industry is characterized by rapid change,  intense
competition  and  consolidation.   The  Company  has  engaged  in  acquisitions,
investments and joint ventures of technologies,  content products and businesses
when it believes  that they are  consistent  with and  beneficial to its overall
strategy.  As  described  above,  in August  1997  Broderbund  acquired  Parsons
Technology.  Also in fiscal 1997, the Company  acquired from Random House,  Inc.
the remaining 50% interest in the Living  Books(R) joint venture  created by the
Company  and  Random  House,   Inc.  in  1993,   which  publishes  a  series  of
award-winning,  interactive animated children's  storybooks on CD-ROM. In fiscal
1996, the Company  acquired  T/Maker  Company,  a leading  publisher of clip art
software,  including the popular  ClickArt(R)  product line. During fiscal 1996,
Broderbund also made a minority equity  investment in Live Picture,  Inc., which
publishes photo editing software for businesses and consumers.  In addition, the
Company has invested in certain start-up Internet related companies.


                                       3
<PAGE>

     The  Company was  incorporated  in  California  in  September  1981 and was
reincorporated in Delaware in February 1987. The Company's executive offices are
located at 500 Redwood Boulevard,  Novato, California 94948-6121.  Its telephone
number  is  (415)  382-4400.  The  Company's  Internet  web site is  located  at
http://www.broderbund.com.

Industry Background

     The consumer  world-wide  software  market is  generally  divided into five
primary categories: entertainment, education, personal productivity, finance and
reference.  The Company primarily  develops and publishes products for the first
three of these categories.

     Declining retail software prices and improvements in multimedia  technology
and  performance  have  fundamentally   changed  the  consumers'  experience  by
providing affordable, highly interactive entertainment, educational and creative
environments increasingly rich in content with realistic sounds and music, text,
advanced  graphics  and  animations,  photographs  and even film or video clips.
Accordingly,   both  consumer  demand  and  consumer   expectations  compel  the
publication of increasingly sophisticated,  easy to use, content rich multimedia
products.  The world-wide software industry also periodically undergoes profound
changes with the  introduction of new hardware  platforms and new  technologies,
including most recently  significant changes with the introduction and increased
importance of the Internet.  In addition to these developments,  competition has
continued to increase and intensify  among new and existing  multimedia  content
providers and publishers.

     The growth in the installed  base of multimedia PCs over the last few years
has  resulted in the creation of a mass market for  consumer  software  products
with advanced  multimedia  functionality and engaging  content.  The creation of
this  mass  market  has been  characterized  by the rise in  importance  of mass
merchant software sales as a distribution channel,  increasing price pressure as
well as increasing  competition for limited  consumer  retail shelf space.  This
competitive  environment  has resulted in the  increased  importance of creating
significant brand name recognition,  establishing  strong retail  relationships,
and  offering a diverse  product  line for the  increased  likelihood  of retail
success and  sell-through.  It has also resulted in the increased  importance of
direct-to-consumer  channels  which augment the Company's  efforts in the retail
environment.

Products

     Broderbund's  product strategy is to create,  identify and develop families
of software  products with brand name recognition in order to achieve  sustained
consumer appeal.  During fiscal 1997, the Company released 46 new titles in both
the published and affiliated label areas, as compared to 42 new titles in fiscal
1996. The Company  offers  products  primarily in three major consumer  software
categories:   personal  productivity,   entertainment  and  education.  Personal
productivity products consist of software that provide tools for the consumer to
create and  communicate,  whether via printed output,  on-screen  visualization,
e-mail or Internet  environments.  Entertainment  products  are designed for the
consumer's leisure time enjoyment.  Broderbund designs its education products to
be both  educational  and  engaging,  so that the  products  appeal  both to the
primary user (i.e.,  the child) and to the buyer (i.e.,  the parent or teacher).
The top selling  products  during  fiscal 1997 were from The Print Shop  family,
from the Family Tree Maker line and Myst.

     The Company's  product  strategy for each of its categories is based on the
following:

     Branded  Product  Franchises.  Broderbund  seeks to develop  products  with
significant and broad brand name  recognition that may be expanded into families
of  related  sequel or  complementary  products  in order to  achieve  sustained
consumer appeal. Successful products serving as examples of the


                                       4
<PAGE>

Company's strategy include:  The Print Shop, Carmen Sandiego,  Kid Pix(R), Myst,
Family Tree Maker and Living Books(R) families of products. The Company believes
that  developing  product  families  helps to achieve longer life cycles for the
Company's products.

     Advanced   Technology.   The  Company   seeks  to  create   technologically
sophisticated   multimedia  products  based  on  the  latest  personal  computer
platforms,   including  the  Internet.   Broderbund  incorporates   conventional
programming  disciplines with advanced tools like those used to develop animated
or cinematic films. The advanced  technology  utilized  increases the appeal and
realism of  Broderbund's  products  to  sophisticated  consumers  as well as new
users.

     Creativity. Broderbund seeks to foster creativity in the development of its
products.  The Company's goal is to lead the market in manifesting creativity in
its products and in pioneering new types of interactive experiences.  Broderbund
has a  history  of  establishing  products  with  enduring  consumer  appeal  by
conceiving  imaginative  and  innovative  ideas to  develop  new  niches  in the
consumer market.

     Quality.  The  Company  seeks to  provide a high  level of  quality  in its
products.   The  Company  strives  to  develop  products  that  exceed  customer
expectations  and provide  long-term  lasting value and  enjoyment.  The SPA has
consistently recognized the quality of Broderbund products.  Broderbund has been
awarded more SPA  "Excellence in Software"  Awards than any other company in the
consumer software category.

     Ease-of-Use.  The Company seeks to create  products that allow the consumer
to become  quickly  proficient in the use of the product.  Because  Broderbund's
products  are easy to use,  they are  often  given  as gifts or  recommended  as
purchases for the first-time buyer.

     Third Party  Validation.  The Company seeks to develop products that appeal
both  to the  primary  user  and to  third  parties,  particularly  parents  and
teachers,  who have  significant  influence  over the product  buying  decision.
Broderbund  believes the educational and creative  content in its products makes
them popular with parents and teachers without  diminishing the enjoyment of the
primary users.

     The Company's products in each category are described below:

     Productivity  Products. The Company's productivity products are designed to
provide  consumers and small businesses with high quality,  easy to use software
products that relate to popular lifestyle,  education and productivity interests
and needs. The productivity category includes The Print Shop family of products,
the Family  Tree  Maker  line,  3D Home  Series,  Williams-Sonoma  Guide to Good
Cooking(TM),  Org Plus(R) and the ClickArt  family of products.  Products in The
Print  Shop  family,  first  introduced  in May 1984,  have sold over 12 million
units.  The Print Shop programs enable  consumers to easily create  personalized
greeting cards, signs, banners,  calendars,  post cards, letterhead,  envelopes,
business  cards  and  other  personal  documents  and  are  supplemented  by the
additions  of  several  product  line  extensions  such  as  The  Print  Shop(R)
Presswriter(TM), The Print Shop(R) Signature Greetings(TM) and The Print Shop(R)
Live  Mail(TM).  Family  Tree  Maker is a  leading  genealogy  program  which is
extended by the Family Archives(TM) CD-ROM collections of family historical data
to make searching for one's ancestors  easier.  3D Home Architect(R) and 3D Home
Interiors(R)  are  best-selling,  comprehensive  solutions  to easy home design,
complete  with  realistic 3D views.  Williams-Sonoma  Guide to Good Cooking is a
computerized  cookbook  designed to streamline and organize the cooking process.
Click Art is a popular line of clip art software.


                                       5
<PAGE>

     The  Company's   productivity  products  range  in  price  in  stores  from
approximately $20 to $70. During fiscal 1997,  productivity  products  accounted
for approximately 56% of the Company's net revenues.

     Education Products.  Broderbund's  education strategy is to provide a broad
and diverse  selection  of  high-quality  educational  products for the home and
school which are educationally strong, easy to use and engaging for a wide range
of age groups.  The Company also seeks to leverage  well known  brands,  whether
owned by the Company  (e.g.,  Carmen  Sandiego) or licensed  from third  parties
(e.g.,  Rugrats(TM) and Dr. Seuss) to achieve  recognition and consumer  appeal.
The core of the education category is comprised of the Carmen Sandiego family of
products and the Living Books family of products.

     The  Carmen  Sandiego  family  of  products  is a very  popular  series  of
interactive  games  designed  to  motivate  the  player to learn  more about the
subject  matter  and  which  have sold over six  million  units  since the first
product was released in April 1985.  The central  character is Carmen  Sandiego,
who, due to the popularity of the game and marketing efforts of the Company, has
become a household  name.  Since  September 1991,  Public  Broadcasting  Service
Television  ("PBS") has shown the Emmy award winning,  weekday  children's  quiz
show now called "Where in Time is Carmen  Sandiego?".  Although the Company does
not receive  significant  revenues  from the  television  programs,  the Company
believes the programs have increased the exposure of the Carmen  Sandiego series
and enhanced the recognition of the brand name.

     The Living Books line of products is a series of CD-ROM  based  interactive
storybooks  for  children  which allow  children to learn,  listen and  explore.
Living  Books  feature  well-known  children's  authors and  classic  children's
stories,  including Dr.  Seuss's Green Eggs and Ham, Dr.  Seuss's The Cat in the
Hat,  Just  Grandma and Me(TM),  The  Berenstain  Bears In the Dark and Arthur's
Reading Race. In fiscal 1997, the market for children's  interactive  storybooks
on CD-ROM  continued to be  intensely  competitive,  resulting in lower  average
selling  prices.  In some  cases,  competitors  of the  Company  had  access  to
proprietary intellectual property content, as well as the financial resources to
market products heavily and to leverage brand names through other media, such as
feature films and television.

     The  Active  Mind  Series  includes  seven  products  designed  to  develop
curriculum-oriented  skills in reading, writing, math,  communication,  thinking
and reasoning, including recently released Success Starter(TM) products.

     The   Company's   education   products   range  in  price  in  stores  from
approximately $20 to $40. During fiscal 1997,  education  products accounted for
approximately 27% of the Company's net revenues.

     Entertainment Products. In September 1993, the Company released Myst, which
subsequently became the single  best-selling  entertainment title in PC software
history,  and  although it  continues  to remain  popular,  revenue has declined
significantly,  even though unit volume is strong.  Other  entertainment  titles
released in fiscal 1997 included Koala Lumpur Journey to the Edge(TM),  The Last
Express(TM)  and  Warlords(TM)  III: Reign of Heroes(TM).  Part of  Broderbund's
strategy  is to  increase  its  focus  and  commitment  to  the  development  of
entertainment  titles  and to expand its  entertainment  line with  several  new
strategy,   adventure   and  action  games  using  both  internal  and  external
development resources.  However,  because the entertainment market tends to be a
"hit" driven business,  where only a relatively  limited number of popular "hit"
titles achieve  widespread  consumer  acceptance,  the risks associated with the
successful  development  of  costly  entertainment  products  and  their  market
acceptance  increase.  As a result,  there can be no assurance  that the Company
will publish an adequate number of successful  titles. In addition,  the Company
anticipates  that a  significant  number of the  entertainment  products will be
licensed from, or developed by, the Company in  collaboration  with  independent


                                       6
<PAGE>

software developers. Accordingly the risks associated with reliance upon outside
developers will increase, including the risks of delays in product introduction,
increases in royalties paid to outside developers, and uncertainties surrounding
the  Company's  ability to attract and retain  successful  developers  and their
content.

     The  Company's  entertainment  products  range  in  price  in  stores  from
approximately $20 to $50. During fiscal 1997,  entertainment  products accounted
for approximately 13% of the Company's net revenues.

     Affiliated   Label  Products.   Affiliated  label  products  are  designed,
developed and published by third party software  publishers  and  distributed by
Broderbund through its distribution  channels.  In fiscal 1997, affiliated label
products  accounted for  approximately  4% of the  Company's  net revenues.  The
Company's  current  affiliated label partners include  Encyclopedia  Britannica,
Inc.,  Talonsoft Inc.,  Progressive  Network,  Inc.,  Sunset Books,  Tsunami and
Inroads Interactive, Inc.

     Under  affiliated  label  agreements,   Broderbund  performs  a  low-margin
distribution  function and in certain cases,  a  manufacturing  function,  which
causes affiliated label revenues to yield substantially lower gross margins than
sales of  Broderbund's  published  products.  As a  result,  changes  in the mix
between  published  sales and  affiliated  label sales can affect the  Company's
gross margin.  Affiliated  label publishers are often smaller  publishers,  with
limited financial  resources.  The Company's affiliated label agreements require
the affiliate label  publisher to assume the financial risk of product  returns.
There  can be no  assurance  that  there  will  not be  significant  returns  of
affiliated  label products,  or that the affiliated label publisher will be able
to fulfill its financial  obligation created thereby, in which case the Company,
in order to preserve its relationships with its customers,  would have to assume
the obligation for affiliated label product returns.

     Living Books. As of January 1, 1997, the Company acquired from Random House
the remaining 50% interest in the Living Books joint venture. However, since its
inception on January 1, 1994 and prior to the acquisition  date,  Broderbund and
Random House, Inc. were equal partners in a joint venture called Living Books to
publish the Living Books line of products.  Prior to the Company's  acquisition,
the  Company's  50%  share  of the  joint  venture's  profits  and  losses  were
recognized in nonoperating income in the financial statements.

Product Development

     The  Company's  strategy to  successfully  achieve  new product  flow while
managing its research and development  expenses has been to combine its internal
software  development   capabilities  together  with  publishing   relationships
established with various independent  software developers and content providers.
The  Company's  product  development   process  includes  design,   prototyping,
programming,  computer graphic design, animation, sound and video recordings and
quality assurance.  The Company relies on a combination of internally  developed
technology,  as well  as  content  and  technologies  from  third  parties.  The
Company's  development  agreements  with third  parties  generally  provide  the
Company  with  publishing,  marketing  and  distribution  rights  to a  personal
computer  software  product  for  payment  of  royalties  based  on sales of the
product.  Many of these  agreements also call for development fees to be paid as
advances  on such  royalties  over the term of the  product's  development.  The
specific  royalty rates,  development  fees,  payment terms,  geographic  scope,
duration and other terms of the Company's license  agreements vary, based on the
nature of the  product  and the  amount  of  development  contribution  from the
licensor.

     The Company's product development and marketing  activities are coordinated
in integrated business units based on the target customer. Each of the Company's
business units consists of software 

                                       7
<PAGE>

engineers,  graphic  artists,  animators,  and sound and  video  technicians  to
develop products and convert existing programs to various hardware  formats,  as
well as marketing and public relations staff to market the resulting products.

     Most elements of the  development  process are provided by a combination of
third-party  and in-house  resources.  Broderbund  believes that the use of both
in-house and third-party designers,  artists and programmers expands its ability
to introduce creative and innovative products.  Third-party  designers,  content
providers (such as musical composers) and some outside  programming groups often
receive  royalties on the sales of products  with which they were  involved,  in
addition to fees, while most graphic artists and some outside programming groups
operate on a fee-only basis.

     The continued success of the Company depends on the timely  introduction of
successful new products,  including new titles and adaptations to new platforms,
to replace  declining  revenues from older  products.  Consumer  preferences for
software  products are difficult to predict,  and few consumer software products
achieve  sustained  market   acceptance.   During  fiscal  1997,  a  substantial
percentage  of  Broderbund's  net  revenues has been derived from The Print Shop
family,  Myst and Family Tree Maker line. There can be no assurance that current
sales  levels of these  products can be  maintained.  In fact,  the  substantial
decline in Myst  revenues  during  fiscal 1997 as compared to prior fiscal years
was not fully  replaced,  and there can be no assurance  that the shortfall from
the continuing decline in Myst revenues will be replaced in a timely manner. The
Myst sequel product,  Riven(TM): The Sequel to Myst(R), has been released in the
first quarter of fiscal 1998 but there can be no assurance  that it will achieve
widespread market acceptance,  or that revenues generated from Riven: The Sequel
to Myst will replace the revenue shortfall from the decline in Myst revenues. In
general,  entertainment  products have relatively short product lives, and sales
of older  entertainment  products may decline  precipitously.  If for any reason
revenues from new products or upgrades should fail to replace declining revenues
from  existing  products,  the  Company's  business,  operating  results and the
trading  price of  Broderbund's  common stock would be  significantly  adversely
affected.

     The process of  developing  software  products such as those offered by the
Company is extremely  complex and is becoming  more complex and  expensive  over
time. In recent periods, the costs of internal development of new products,  and
advances  to  fund  product   development  by  third  parties,   have  increased
significantly.  As a result, the financial risks borne by the Company associated
with new product development have increased.  In addition,  Broderbund's expense
levels are based on its  expectations  regarding  future sales, and accordingly,
operating results would be  disproportionately  adversely affected by a decrease
in sales or failure to meet the Company's  sales  expectations  due to delays in
new product introductions,  or lower than expected customer acceptance or market
demand.  As a result of the inherent  seasonality of the Company's  business,  a
delay in a new product  introduction  in the first or second quarter of a fiscal
year may have a particularly exaggerated effect on results of operations in that
year. In the past,  Broderbund has experienced delays in the introduction of new
products,  and anticipates  that it will experience  similar delays from time to
time  in  the  future.  If  the  Company  does  not  accurately  anticipate  and
successfully  adapt  its  products  to  emerging  platforms,   environments  and
technologies,  or new products are not introduced when planned or do not achieve
anticipated  revenues,  the  Company's  operating  results  could be  materially
adversely  affected.  In  addition,  the Company  believes  that  electronic  or
Internet  products and services will become an increasingly  important  platform
and distribution  media, the Company's failure to timely and successfully  adapt
to and utilize such  technologies  could  materially  and  adversely  affect its
competitive position and its fiscal results.

Marketing and Distribution

     Broderbund  sells its products  through  distributors,  software  specialty
retail chains,  computer  superstores,  mass  merchandisers,  discount warehouse
stores,   educational   dealers  and   directly  to  

                                       8
<PAGE>

consumers  through mail,  telemarketing  and the Internet.  Broderbund  commonly
participates in and provides financial assistance for its retailers' promotional
efforts, such as in-store displays or newspaper advertisements. The Company also
provides its retailers with demonstration  disks and other collateral  marketing
materials.  Broderbund's  two largest  distributors in fiscal 1997 accounted for
approximately  12% and 5% of the  Company's  net  revenues in the fiscal year as
compared to 11% each for the top two  distributors  in fiscal 1996.  The Company
expects to continue to increase its direct sales to retailers in fiscal 1998.

     Sales to a limited number of  distributors  and retailers have  constituted
and are  anticipated  to  constitute a  substantial  amount of the Company's net
revenues.  Generally,  arrangements with these distributors and retailers may be
terminated by either party at any time. The loss of, or significant reduction in
sales  volume  attributable  to any  of the  Company's  principal  resellers  or
accounts  sold through such  resellers  could  materially  adversely  affect the
Company's results of operations. In addition, certain distributors and retailers
have  experienced  business  difficulties  and  there can be no  assurance  such
difficulties  for  these  or  additional  distributors  and  retailers  will not
continue  which  could  have an  adverse  effect on the  operating  results  and
financial condition of the Company.

     The distribution channels through which consumer software products are sold
are  characterized  by  rapid  change,  including  consolidations  and  business
difficulties  of certain  distributors  and  retailers  and the emergence of new
retailers such as warehouse clubs, mass merchants and computer  superstores.  In
addition,  there is an  increasing  number of companies  competing for access to
these  channels.  As a result of this activity,  the Company has  experienced an
increase in product  returns and credit  risks and has adjusted its reserves for
product returns and doubtful accounts accordingly.

     In addition,  retailers of the Company's  products typically have a limited
amount  of  shelf  space  and  promotional  resources,   and  there  is  intense
competition  for high quality and adequate levels of shelf space and promotional
support from retailers.  To the extent that the number of software  products and
consumer  platforms  increases,  this  competition  for  shelf  space  may  also
increase. As large computer and software manufacturers, entertainment companies,
media  companies  and print  publishers  enter or  increase  their  focus on the
consumer  software  market,  the  competition  for shelf  space will become more
intense. There can be no assurance that distributors and retailers will continue
to  purchase  the  Company's  products or provide the  Company's  products  with
adequate levels of shelf space and promotional support.

     At the time of product shipment the Company  establishes  reserves that are
an estimate of future  returns of products.  The  Company's  estimates of future
returns takes into account the anticipated growth in revenue,  the current level
of  distributor  and  retailer  inventories  of its  products in relation to the
seasonally adjusted rate of sell-through for each product, the impact of planned
product  releases on sales of previously  released  products,  the proportion of
sales  attributable to new outlets of existing  retailers and new channels,  the
effects of shifts in consumer  preferences,  and other factors. The Company from
time to time  lowers the  wholesale  price of  selected  products  to  stimulate
sell-through to consumers.  At such times, the Company has historically  granted
"price  protection"  to its  distributors  and  retailers.  The Company issues a
credit for the difference in wholesale pricing multiplied by the number of units
of the product that the retailer or distributor  has in inventory on the date of
the price  change.  The Company  includes a reserve for  expected  future  price
protection credits as part of its reserve for returns.  Broderbund  monitors the
volume  of  its  sales  to  distributors  and  retailers  to  attempt  to  avoid
over-stocking of its products by such customers.  The Company  maintains a stock
balancing  policy that allows  distributors  and  retailers  to return  products
according to negotiated  terms or pursuant to any promotional  terms that may be
in effect and the Company accepts  returns of defective,  shelf-worn and damaged
products at any time in accordance with negotiated  terms.  Product returns that
differ from the Company's reserves could affect the Company's operating results.
Additionally, the Company believes that higher


                                       9
<PAGE>

than normal returns may be experienced  whenever significant shifts occur within
the distribution  channel and whenever  significant shifts occur with respect to
consumer preferences for new technologies.

     Broderbund  also  promotes its products  directly to  consumers.  Marketing
activities   include   direct   mailings  of   catalogs,   brochures,   in-store
demonstrations  and  presentations  to  computer  user  groups,  advertising  in
computer  publications and the circulation of newsletters to specific audiences,
as well as promotional and marketing efforts conducted via the Internet.  As the
Company  increases  its product  offering  in the  entertainment  category,  the
Company  has  significantly  increased  the  amount  that it spends on  consumer
advertising, thus adversely affecting the Company's profit margin if there is no
corresponding  significant increase in revenues generated by those products. The
entertainment  sector in particular is characterized  by significant  marketing,
promotional and advertising  expenditures,  and there can be no assurance that a
strategy to increase marketing and promotional activities will be successful, or
that the revenues  generated by the affected  products will offset the increased
marketing and promotional expenditures.  Also, particularly in the entertainment
sector,  the  Company has spent and  expects to  continue  spending  significant
amounts on marketing, promotional and advertising well in advance of a product's
commercial  release.  Therefore,  substantial  marketing  expenses have and will
continue to increase the Company's  operating costs well before any revenues are
derived from the product. Further, the Company expects to increase significantly
its direct-to-consumer  marketing, via direct mailings to customers and outbound
calls,  among other things.  Such marketing efforts can be extremely costly, and
there can be no assurance  that these  activities  will be  cost-effective.  The
Company  maintains a substantial  mailing list currently  comprising  over eight
million users of the Company's products.

     As part of its efforts to increase the exposure of the Company's  evergreen
products to the consumer,  the Company purchased Parsons  Technology from Intuit
Inc.  in  August of 1997.  Parsons  Technology  specializes  in  developing  and
marketing  productivity  software and in selling such  software  directly to the
consumer through mail,  telemarketing and the Internet. In addition, the Company
has increased its direct-to-consumer Internet marketing and promotional programs
including  product-dedicated web sites to generate pre-product launch awareness,
on-line promotions, news group seedings and electronic commerce capabilities.

     The  Company's  national  retail sales staff  covers the United  States and
Canada and operates in  California,  Illinois,  Maryland,  Massachusetts,  Ohio,
Pennsylvania,  Texas and Ontario, Canada. The Company's subsidiary in the United
Kingdom markets and distributes  localized versions of the Company's products to
the  major  European  markets.   In  addition,   the  Company  has  distribution
arrangements in Australia, Southeast Asia and Japan. The Company's international
distributor agreements in Asia generally grant the exclusive right to distribute
the Company's products in specific  geographic  territories.  In some cases, the
distributor  purchases  finished  goods from the Company  for  resale.  In other
cases, the distributor  develops a foreign language version and pays the Company
a  royalty  on sales of such  products.  In  fiscal  1997,  international  sales
accounted for approximately 11% of the Company's net revenues.

     The Company has a separate education division to focus on sales to schools.
The Company  believes that sales to this market are an important  element in its
overall  success  because  schools  often  introduce  children  to  Broderbund's
products.

Competition

     The consumer software  industry is intensely and increasingly  competitive.
During  fiscal  year  1997  the  Company  experienced  intense  product-specific
competition  in multiple  product  categories,  including the Company's  largest
revenue-generating  product,  The Print Shop product.  The Company  expects that
existing  consumer  software  companies can be expected to broaden their product
lines and to


                                       10
<PAGE>

increase their focus to compete more directly with its products. Moreover, large
corporations  with  substantial  bases of intellectual  property  content in the
motion picture, toy and media industries and/or substantial  financial resources
without the need for immediate profit or return,  have  increasingly  entered or
announced their intention to enter the market for consumer software and/or their
activities  on the  Internet.  Certain  of the  Company's  existing  and  future
competitors have greater  financial,  technical,  marketing,  sales and customer
support  resources than  Broderbund.  There can be no assurance that the Company
will compete successfully in the future.

     Only a small  percentage of products  introduced  in the consumer  software
market achieve any degree of sustained market  acceptance.  The Company believes
that the principal competitive factors in the consumer software industry include
brand name recognition,  strength in distribution channels, product features and
quality, reliability and ease-of-use, quality of support services and price. The
Company  believes  that its  products  compete  most  favorably  with respect to
product  features  and  quality,   reliability  and   ease-of-use,   brand  name
recognition and strength in distribution  channels and, to a lesser extent, with
quality of support  services  and price.  The  Company  also  believes  that the
increased  technical  sophistication  required in new consumer software products
has caused the availability of significant  financial resources to become a more
important   competitive   factor.   Broderbund  believes  that  the  competitive
environment  has increased  pressure to reduce the prices of its products  which
would reduce profit  margins.  In response to such  competitive  pressures,  the
Company  has  reduced  the  price of some of its  products,  including  its best
selling  series,  The Print Shop,  and there can be no  assurance  that  product
prices will not continue to decline or that the Company will not respond to such
declines with additional  product price reductions.  Prolonged price competition
would have a material adverse effect on the Company's operating results.

International Sales and Expansion

     Over the last year and  one-half  the  Company has taken  several  steps to
enhance  its  presence  in  international   markets,   including  the  Company's
establishment of a wholly-owned  subsidiary in the United Kingdom in 1995 and an
increase in the number of international and localized  products developed by the
Company.  As a result,  international  revenues amounted to approximately 11% of
net revenue for fiscal 1997. There can be no assurance that international  sales
of products  will continue at the rate  experienced  during fiscal 1997, or that
other  difficulties,  including  the  timely  and  successful  launch of foreign
products,  will not be  encountered  in the future.  In addition,  international
sales  are  subject  to  inherent   risks,   including   unexpected   regulatory
requirements,   tariffs  and  other  barriers,   difficulties  managing  foreign
operations,  currency  fluctuations  and  difficulty  in  collection of accounts
receivable.

Proprietary Rights

     Generally, the Company does not have signed license agreements with the end
users of its products and does not copy-protect its software;  rather, it relies
on the copyright laws to prevent unauthorized  distribution of its software. The
Company also relies on a combination of trade secret,  patent and trademark laws
and  nondisclosure  agreements  to  protect  its  proprietary  rights.  Existing
copyright  laws  afford  only  limited  protection.   It  may  be  possible  for
unauthorized third parties to copy the Company's products or to reverse engineer
or otherwise  obtain and use  information  it regards as  proprietary.  Policing
unauthorized use of the Company's  products is difficult,  and while the Company
is unable to  determine  the  extent to which  software  piracy of its  products
exists,  software piracy can be expected to be a persistent problem. The Company
supports industry anti-piracy efforts to police the unauthorized use of software
and obtains limited assistance from U.S. Customs and various foreign customs and
police  authorities.  In addition,  there can be no assurance that the Company's
competitors will not independently  develop  technologies that are substantially
equivalent  or  superior  to its  technologies.  Further,  the  laws of  certain
countries in which the Company's products are or may be


                                       11
<PAGE>



distributed do not protect products and intellectual property rights to the same
extent as the laws of the United States.

Internet Opportunities and Strategies

     The Company  believes that the  proliferation  of on-line  networks and the
Internet  has created new  opportunities  for the  consumer  software  industry,
including  opportunities for the Company to strengthen  customer  relationships,
direct  marketing,  promotion  and  distribution,   broaden  its  reach  to  new
customers,  add value to  existing  products  and to develop  new  products  and
markets.   Broderbund   has   initiated   steps  to  take   advantage  of  these
opportunities,  including  the  expansion  of its  on-line  web  site  presence,
infrastructure and capabilities,  including  electronic  commerce  capablilites,
incorporating  on-line  functionality into existing products,  such as The Print
Shop,  Carmen  Sandiego,  Family  Tree Maker,  3D Home  Architect  products  and
Warlords III: Reign of Heroes, and continued  development of, and investment in,
new Internet centric businesses and products, including multi-user entertainment
products  (Warlords  III:  Reign of Heroes and the Red Orb Zone,  on-line gaming
website).  The Company has incurred, and expects to incur significant additional
costs in connection with its Internet infrastructure, including costs associated
with the  acquisition  of hardware and  software  necessary to allow for on-line
commerce and multi-user games. Although the Company expects that these platforms
and technologies will be an integral element of its overall business,  there can
be no assurance that the Company's  Internet  strategies will be successful,  or
that the costs and investments will provide adequate, or any, returns.

Product Concentration

     During  fiscal 1997,  approximately  56%, 13% and 27% of the  Company's net
revenues were derived from sales of  productivity,  entertainment  and education
products, respectively. Within the productivity category, the Print Shop product
line was  approximately  23% of the  Company's  total net  revenue.  Within  the
entertainment  category,  Myst was  approximately 10% of the Company's total net
revenue.  Within the  education  category,  the Living  Books  product  line was
approximately  8% of the  Company's  total net  revenue.  These were the leading
products from their  respective  categories and, with the exception of Myst, are
expected to continue to account  for a material  percentage  of net  revenues in
fiscal 1998 and  thereafter.  There can be no assurance that sales levels of any
of these  families of products will increase or be sustained,  especially in the
light of increased  competition in the market place. The failure of new products
in these families to achieve market  acceptance,  or an overall decline in sales
of any one or more of the  products  in these  families,  could  have a material
adverse effect on the Company's financial condition and operating results.

Acquisitions, Investments and Joint Ventures

     The Company believes that its future success and growth will depend in part
on its ability to identify, acquire and integrate technologies, content products
and/or  businesses as evidenced by the purchase of Parsons  Technology in fiscal
1997.  The Company  continues  to actively  explore  additional  product-driven,
distribution-driven  and technology-driven  acquisition,  investment,  and joint
venture   opportunities   consistent  with  Broderbund's   overall  product  and
publishing   strategies.   In  the  past  these   opportunities   have  included
acquisitions  of  external   technologies,   content  products  and  businesses,
investments in shared technologies and various start-up Internet businesses, and
joint ventures. There can be no assurance that the Company will be successful in
identifying suitable opportunities,  or if identified, there can be no assurance
that the Company will be successful in completing, or integrating,  the acquired
properties, investments or joint ventures.



                                       12
<PAGE>



Fluctuations in Results and Stock Price

     The  Company  has  experienced,  and  expects to  continue  to  experience,
significant  fluctuations  in  operating  results  due to a variety of  factors,
including  but not limited to, market  acceptance  of the Company's  products or
those of its competitors,  the timing of new product introductions,  the rate of
growth  of the  consumer  software  market,  fluctuations  in  consumer  demand,
expenses relating to the development and promotion of new product introductions,
changes in pricing  policies by the Company or its  competitors,  projected  and
actual changes in platforms and technologies,  timely and successful  adaptation
to such platforms or technologies, the accuracy of forecasts of consumer demand,
product returns,  market seasonality,  the timing of orders from major customers
and order cancellations,  the ability to timely manufacture and ship products in
response to  fluctuating  demand,  and changes or  disruptions  in the  consumer
software distribution channels and the successful acquisition and integration of
new business, products or technologies.  As a result of these and other factors,
the Company's results in any given period are inherently difficult to predict.

     In the event that the Company  should  experience a shortfall in sales in a
given  fiscal  quarter,  the  Company  does not expect  that it would be able to
reduce  its  operating  expenses  quickly  enough to prevent a decline in profit
margins, or, as happened in the fourth quarter of fiscal year 1997, to prevent a
loss.  As a  result,  a  shortfall  in sales  in any  given  period  may have an
exaggerated  effect on the  Company's  earnings  for that  period.  Because  the
Company's stock trades at a relatively high price-earnings multiple, due in part
to analysts'  expectations of continued earnings growth, even a relatively small
shortfall  in  earnings  or a change  in  analysts'  expectations  may  cause an
immediate and substantial  decline in the Company's stock price.  Moreover,  the
Company's  stock  is  subject  to  the  volatility   generally  associated  with
technology  stocks  and may also be  affected  by broader  market  trends or the
results  reported by other market  participants.  There can be no assurance that
the Company's stock price will remain at or near its current level. Investors in
the Company's common stock must be willing to bear the risk of such fluctuations
in earnings and stock price.

Seasonality

     The  Company's  business  has  generally  been  highly  seasonal,  with net
revenues and  operating  income  generally  highest in the first fiscal  quarter
during the calendar year-end holiday selling season,  lower in the second fiscal
quarter, and lowest in the seasonally slow third and fourth fiscal quarters. The
Company believes that the market conditions which resulted in the year-over-year
decline in  profitability  experienced  in fiscal 1997 could  continue.  Without
growth in net  revenues in any  particular  quarter,  the  Company's  increasing
operating  expenses  would cause net income to decline when compared to the same
period in the previous year.

Production

     The Company  prepares  master  software  diskettes and CD-ROM  discs,  user
manuals and  packaging,  and prints labels.  The Company  primarily uses outside
sources to procure and duplicate CD-ROM discs. Diskette duplication is performed
by the Company at its own  facilities.  Printing of the user manuals,  packaging
and   manufacture   of  related   materials   are  performed  to  the  Company's
specifications by outside sources,  and the completed  packages are assembled by
the Company.  To date the Company has not experienced any material  difficulties
or delays in the manufacture  and assembly of its products,  and has experienced
very low returns due to product defects,  however there can be no assurance that
such difficulties will not occur in the future.



                                       13
<PAGE>


Backlog

     The Company typically ships product within one to two days after receipt of
an order,  which is customary in the computer  software  business.  Accordingly,
backlog as of any particular date is not  representative of actual sales for any
succeeding period.

Employees

     As of August 31, 1997,  the Company had 1,129  employees,  including 366 in
product  development,  380 in sales,  marketing  and  customer  service,  200 in
manufacturing and shipping and 183 in administration and finance.  The Company's
future  success  depends  in  large  part on the  continued  service  of its key
technical  and senior  management  personnel  and on its  ability to continue to
attract,  motivate and retain highly qualified  employees.  Competition for such
employees is intense, and the loss of the services of key personnel could have a
material adverse effect upon the Company's current operations and on new product
development  efforts.  None of the Company's employees is represented by a labor
union or is subject to a collective bargaining agreement.  The Company has never
experienced a work stoppage and believes that its employee relations are good.

Broderbund Foundation

     In 1988, the Company created the Broderbund  Foundation (the "Foundation"),
a non-profit  corporation.  Douglas  Carlston and William  McDonagh serve on the
three-member  Board of  Directors  of the  Foundation.  Each year,  the  Company
donates  to the  Foundation  a  percentage  of its  adjusted  pretax  profits as
determined by the Company's  Board of Directors.  For the preceding  three years
Broderbund has donated  approximately  2% of its adjusted  pretax  profits.  The
Foundation makes grants to qualified non-profit  organizations at the discretion
of the Foundation's Board of Directors.


Item 2. PROPERTIES

     The Company owns 15 acres of land and related buildings in Hiawatha,  Iowa.
The buildings total 150,000 square feet.

     The Company  leases  approximately  108,000  square feet of office space in
Marin County, California, approximately 134,000 square feet of manufacturing and
warehouse space in Sonoma County,  California,  approximately 15,000 square feet
of office space in Alameda County, California,  approximately 11,000 square feet
of office  space in Santa  Clara  County,  California  and 1,500  square feet of
office space in Provo, Utah. The Company also leases approximately 59,000 square
feet in Cedar Rapids, Iowa which it subleases.  Broderbund leases  approximately
4,100  square feet of office  space for its  European  subsidiary  in the United
Kingdom, and leases office space for sales representatives in the United States.
The Company expects that its office,  manufacturing  and warehouse space will be
sufficient for its needs through fiscal 1998.


Item 3. LEGAL PROCEEDINGS

     The Company is subject to various pending claims. Management,  after review
and consultation with counsel, considers that any liability from the disposition
of such lawsuits in the aggregate would not have a material  adverse effect upon
the consolidated financial position,  results of operations or cash flows of the
Company.


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 August 31, 1997.


                                       14
<PAGE>

Executive Officers of the Registrant

     The  executive  officers of the Company,  who are appointed by and serve at
the discretion of the Company's Board of Directors, are as follows:

     Name                      Age               Position with Company
     ----                      ---               ---------------------

     Joseph P. Durrett         52       Chief Executive Officer and Director

     William M. McDonagh       41       President, Chief Operating Officer and 
                                          Director

     Thomas L. Marcus          44       Vice President, Business Development,
                                          General Counsel and Secretary

     Daniel J. Steever.        39       General Manager and Group Vice President

     J. Mark Hattendorf        47       Vice President, Finance and Chief
                                          Financial Officer

     There are no family  relationships among directors or executive officers of
the Company.

     Mr. Durrett joined the Company in October 1996 as Chief Executive  Officer.
Prior to  joining  the  Company,  Mr.  Durrett  served  as  president  and chief
operating officer of ADVO, Inc., a direct marketing company, and has held senior
management  positions at Kraft General Foods and brand  management  positions at
Procter and Gamble.  Mr.  Durrett  received a B.A. from Duke  University  and an
M.B.A. from Wharton School, University of Pennsylvania.

     Mr.  McDonagh  joined the Company in October 1982 as  Controller.  In April
1987,  he was  promoted to Vice  President  of Finance.  In February  1992,  Mr.
McDonagh was appointed Senior Vice President and Chief Financial Officer.  Since
April  1994,  he has  served as  President  and  Chief  Operating  Officer.  Mr.
McDonagh, a certified public accountant,  received a B.A. from the University of
Notre Dame and an M.B.A. from Golden Gate University.

     Mr.  Marcus  joined the Company in October 1986 as General  Counsel.  Since
1987,  he has served as Vice  President,  General  Counsel and  Secretary of the
Company.  In June 1994, Mr. Marcus was also appointed Vice  President,  Business
Development.  He had previously served as Vice President of Business Development
from  November  1989 to June  1991.  Mr.  Marcus  received  an  A.B.  from  Yale
University and a J.D. from University of California at Berkeley, Boalt Hall.

     Mr.  Steever  joined the Company in June 1997 as General  Manager and Group
Vice  President.  In his role, Mr. Steever  oversees North American retail sales
and the  Parsons  division.  He had  previously  served as  President  and Chief
Executive  Officer of Marketing Force,  Inc. from 1994 to 1996 and Regional Vice
President/General  Manager at ADVO, Inc. west coast region from 1992 to 1994 and
northeastern region from 1990 to 1992. Mr. Steever received a B.S.M.E.  from the
University of Virginia.

     Mr.  Hattendorf has recently joined the Company as Vice President,  Finance
and Chief Financial Officer. Prior to joining the Company, Mr. Hattendorf served
as Executive Vice President,  Chief Financial Officer of Acclaim  Entertainment,
Inc. from June 1996 to November 1997, as Vice President-Administration and Chief
Financial Officer of Prodigy Services Company from October 1995 to June 1996, as
Senior Vice President and Chief  Financial  Officer of Herbalife  International,
Inc.  from  September  1993 to  October  1995  and as a  financial  and  general
management  consultant  to various  entertainment,  real  estate  and  financial
service  organizations  from May  1991 to  September  1993.  Mr.  Hattendorf,  a
certified  public  accountant,  received  a B.S.  and  M.B.A.  from  the  Loyola
Marymount University of Los Angeles.



                                       15
<PAGE>

PART II

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

Common Stock Trading

     The Company's  common stock is traded on the NASDAQ  National Market System
under  the  symbol  BROD.  The  following  table  sets  forth,  for the  periods
indicated,  the high and low closing  prices for the  Company's  common stock as
reported by NASDAQ:

          Fiscal 1997                   High               Low

First Quarter                          $30.63             $22.38
Second Quarter                          35.13              29.00
Third Quarter                           30.88              18.38
Fourth Quarter                          29.50              21.50


          Fiscal 1996                   High               Low

First Quarter                          $76.88             $53.50
Second Quarter                          64.75              43.13
Third Quarter                           48.75              37.00
Fourth Quarter                          44.00              28.50


     The Company has not paid cash  dividends and has no present plans to do so.
There were 432 stockholders of record on August 31, 1997, excluding stockholders
whose stock is held in nominee or street name by brokers.


                                       16
<PAGE>

Item 6.  SELECTED FIVE-YEAR FINANCIAL DATA

<TABLE>
<CAPTION>
                                                          Years ended August 31,
                                          1997         1996        1995        1994        1993
                                       -----------------------------------------------------------
                                                  (In thousands, except per share data)
<S>                                    <C>          <C>         <C>         <C>          <C>      
Statement of Operations Data
Net revenues                           $ 190,787    $ 186,207   $ 171,594   $ 111,774    $  95,583
Cost of revenues                          65,056       58,259      60,997      40,589       39,119
Amortization of purchased technology       5,427          645          95        --           --
                                       -----------------------------------------------------------
     Gross margin                        120,304      127,303     110,502      71,185       56,464
                                       -----------------------------------------------------------
Operating expenses:
   Sales and marketing                    57,311       34,381      25,143      18,621       15,051
   Research and development               43,670       29,244      22,784      16,016       13,671
   General and administrative             13,603       11,256      11,085       7,500        7,112
   Charge for acquired in-process
       technology                         29,297        8,009        --          --           --
 Restructuring charges                     1,986         --          --          --           --
                                       -----------------------------------------------------------
     Total operating expenses            145,867       82,890      59,012      42,137       35,834
                                       -----------------------------------------------------------
Income (loss) from operations            (25,563)      44,413      51,490      29,048       20,630

Interest and dividend income, net          5,556        6,499       6,364       1,791        1,295
Equity in earnings (loss) of joint
  venture                                   (603)         217       3,886        --           --
Terminated merger fees, net                 --         15,464        --       (11,000)        --
                                       -----------------------------------------------------------
Income (loss) before income taxes        (20,610)      66,593      61,740      19,839       21,925
Provision (benefit) for income taxes      (7,128)      29,816      25,553       8,778        8,297
                                       -----------------------------------------------------------
Net income (loss)                      $ (13,482)   $  36,777   $  36,187   $  11,061    $  13,628
                                       ===========================================================
Net income (loss) per share            $   (0.65)   $    1.71   $    1.72   $    0.55    $    0.68
                                       ===========================================================
Shares used in computing per share
  data                                    20,686       21,509      21,037      20,145       20,006
                                       ===========================================================
Balance Sheet Data
  at August 31
Cash and short-term investments        $  94,078      150,893   $ 126,547   $  75,000    $  54,316
Working capital                           98,935      142,493     119,894      73,005       54,770
Total assets                             186,603      200,432     161,551      97,651       77,229
Stockholders' equity                     148,082      165,548     128,882      80,179       62,010
</TABLE>


                                       17
<PAGE>

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

Results of Operations

NET REVENUES

--------------------------------------------------------------------------------
(In thousands)              1997     Change        1996     Change         1995
--------------------------------------------------------------------------------
Net revenues            $190,787         2%    $186,207         9%     $171,594
--------------------------------------------------------------------------------

     The Company derives revenue from products which are published by Broderbund
(published  products)  and products  from other  software  publishers  which are
distributed by Broderbund  (affiliated  label  products).  The Company sells its
products in North America  primarily  through retailers and distributors as well
as directly to consumers.  The Company's international sales,  representing 11%,
11% and less than 10% of revenues in fiscal 1997,  1996 and 1995,  respectively,
are  derived  from a  subsidiary  in the United  Kingdom,  as well as  licensing
arrangements with foreign distributors.

     The top selling products during fiscal 1997 were from products in The Print
Shop family and the Family Tree Maker line and from Myst. Each of these products
are encountering  increased  competition as existing consumer software companies
broaden their product lines and/or increase their focus to compete more directly
with the Company's  products.  During fiscal 1997,  the Company  released 46 new
titles in both the published and affiliated  label areas,  as compared to 42 and
36 new titles in fiscal 1996 and 1995, respectively.

     Revenue growth rates from the Company's  major product  families  fluctuate
from  year  to  year,  depending  on the  timing  of  new  product  releases  or
acquisition  of new products or product  lines,  comparable  growth in the prior
year, and changes in consumer demand.  The productivity  product line showed the
highest growth rate, approximately 26% year over year in fiscal 1997 compared to
30% in  fiscal  1996.  Growth  in this  product  line was  primarily  due to the
purchase of T/Maker Company in the last month of fiscal 1996 (i.e., increases in
sales of products in the Click Art product  line) and  increases in sales in the
Family Tree Maker line. The education line of products  decreased  approximately
8% in fiscal 1997 as compared to a 13% increase in fiscal 1996 due mainly to the
decline in sales for Carmen  Sandiego and Early Learning  titles;  these figures
include Living Books' results for both fiscal years. The entertainment  category
decreased  in fiscal 1997 by 31%  compared to a decrease of 15% in fiscal  1996.
This was primarily  due to a significant  decline in Myst revenue which was only
slightly  offset by the release of The Last Express and Warlords  III:  Reign of
Heroes in fiscal year 1997.  Net revenues  from the  affiliated  label  products
declined 24% and 9% in fiscal 1997 and 1996, respectively,  due to the Company's
decision to reduce the number of affiliated label products offered.

     Overall,  the 2% increase in net revenues in fiscal year 1997 over 1996 was
due to new product  releases,  the  expansion of the Company's  overall  product
offerings  as a result of new  business  acquisitions,  as well as growth in the
Company's  direct-to-consumer  business  of more than 50% over fiscal year 1996.
The 9% increase in net  revenues  during  fiscal 1996 as compared to fiscal 1995
resulted  primarily from the revenue generated by Family Tree Maker products for
a full twelve months in fiscal 1996 versus only five months in fiscal 1995. Also
contributing to the growth in fiscal 1996 was the release of new products.


                                       18
<PAGE>

COST OF REVENUES

--------------------------------------------------------------------------------
(In thousands)                    1997    Change       1996    Change       1995
--------------------------------------------------------------------------------
                                                                       
Cost of revenues               $65,056       12%    $58,259       (4%)   $60,997
Percentage of net revenues         34%                  31%                  36%
                                                                       
Amortization of purchased                                              
  technology                    $5,427      741%       $645      579%        $95
Percentage of net revenues          3%                   0%                   0%
--------------------------------------------------------------------------------
                                                                  
     Cost of revenues includes cost of goods sold,  royalties paid to developers
and accrued technical support costs, which relate primarily to telephone support
provided to consumers  after they  purchase the  software.  The Company does not
capitalize software  development costs as the impact on the financial statements
would be immaterial.  Affiliated label products carry significantly  higher cost
of revenues than published products.

     Cost of revenues increased in fiscal 1997 and decreased in fiscal 1996 as a
percentage of net revenues when compared to the respective previous fiscal year.
The increase in fiscal 1997 was  primarily  due to the increase in business with
mass-merchant  retailers,  and  the  increasingly  competitive  nature  of  that
distribution  channel,  which resulted in increases in returns, as well as costs
incurred for pricing  allowances and price  protection  programs.  Lower average
selling  prices also raised  cost of  revenues  as a  percentage  of revenues in
fiscal 1997. The decrease in fiscal 1996 was primarily due to changes in the mix
between sales of published  products and sales from  affiliated  label companies
and to a  decrease  in  royalties  paid  to  outside  developers.  Lower  margin
affiliated label revenues represented 15% of net revenue in fiscal 1996 compared
to 18% in fiscal 1995.

     Amortization  of  purchased  technology  of $5.4  million  in  fiscal  1997
represents  a portion  of the  excess  purchase  price  related  to the value of
technology purchased which will have a benefit to the Company in future periods,
which  the  Company  has  estimated  to be a  three  year  period  from  time of
acquisition.

OPERATING EXPENSES

--------------------------------------------------------------------------------
(In thousands)                    1997    Change       1996    Change       1995
--------------------------------------------------------------------------------
Sales and marketing            $57,311       67%    $34,381       37%    $25,143
Percentage of net revenues         30%                  18%                  15%

Research and development       $43,670       49%    $29,244       28%    $22,784
Percentage of net revenues         23%                  16%                  13%

General and administrative     $13,603       21%    $11,256        2%    $11,085
Percentage of net revenues          7%                   6%                   6%

Charge for acquired in-
  process technology           $29,297      266%    $ 8,009        --         --

Percentage of net revenues         15%                   4%                   --

Restructuring charges          $ 1,986        --         --        --         --
Percentage of net revenues          1%                   --                   --
--------------------------------------------------------------------------------

     All  operating  expenses  showed  significant  increases  in fiscal 1997 as
compared to fiscal 1996 because of the impact of acquisitions  (T/Maker,  Living
Books and Parsons Technology) on the Company's cost base.



                                       19
<PAGE>

     Sales and  marketing  expenses  increased  in fiscal  1997 from fiscal 1996
primarily due to an increased  emphasis on advertising  and promotions and other
sales and marketing programs, including direct-to-consumer marketing, as well as
a  higher  level  of  staffing  to  support  the  additional  programs,  and  in
particular,  the Company's launch of its new entertainment titles with increased
marketing  efforts.  Sales and  marketing  expenses also included the costs from
Living Books for eight months of fiscal 1997,  subsequent  to the  completion of
the  acquisition  of Random  House's 50% share in the joint  venture.  Sales and
marketing  expenses  increased  in fiscal  1996,  as  compared  to fiscal  1995,
primarily due to promotional  efforts and additional  staffing levels associated
with new product releases,  special marketing  programs for certain products and
costs associated with direct sales to customers.

     Research and development  expenses  increased in fiscal 1997 as compared to
fiscal 1996 primarily as a result of the increased number of new title releases,
expansion of the Company's  development  staff as part of its continued focus on
new product development and the publishing of more technologically sophisticated
multimedia products. In addition,  the Company reserved $5.2 million for royalty
advances  in fiscal  1997.  Also,  subsequent  to  January  1997,  research  and
development  expenses  include  the costs for  Living  Books.  The  increase  in
research and development  expenses in fiscal 1996 as compared to fiscal 1995 was
due  primarily  to the  investment  in  staffing  and  the  publishing  of  more
technologically sophisticated, easy to use and content rich multimedia products.

     General and  administrative  costs increased for fiscal 1997 as compared to
fiscal 1996 as a result of increased  headcount  and office space as a result of
acquisitions.  General  and  administrative  costs for fiscal 1996 and 1995 were
relatively  constant as a  percentage  of net  revenues as an effort was made to
maintain expense levels consistent with the prior years.

     The charge for acquired  in-process  technology of $29.3 million for fiscal
1997  represents a portion of the excess  purchase price related to acquisitions
made by the Company  during the fiscal year  including  Parsons  Technology  and
Living Books. This charge is made at the time of the acquisition.

     Consistent with the Company's test for internally  developed software,  for
each of these  acquisitions  the Company  determined  the amounts  allocated  to
developed and in-process research and development based on whether technological
feasibility had been achieved and whether there was any  alternative  future use
for the technology.  Due to the absence of detailed program designs, evidence of
technological  feasibility was established  through the existence of a completed
working  model at which point  functions,  features  and  technical  performance
requirements   can  be   demonstrated.   As  of  the  respective  dates  of  the
acquisitions, the Company concluded that the in-process research and development
had no alternative  future use after taking into consideration the potential for
usage of the software in different products, resale of the software and internal
usage.

     In accordance  with  Emerging  Issues Task Force  ("EITF")  Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring),"  the
Company recorded a charge to operating expenses of approximately $2.0 million in
fiscal year 1997.  Included in the restructuring  charges is approximately  $1.2
million for employee severance related to certain  restructuring  programs.  The
remaining balance of approximately $0.8 million was due to exit costs related to
these restructuring programs (see Note 11, Restructuring Charges, for additional
details).


                                       20
<PAGE>

NONOPERATING INCOME AND EXPENSES

--------------------------------------------------------------------------------
(In thousands)                    1997    Change       1996    Change       1995
--------------------------------------------------------------------------------
Interest and dividend
  income, net                   $5,556     (15)%    $ 6,499        2%     $6,364
Percentage of net revenues          3%                   3%                   4%

Equity in earnings of joint
  venture                       $ (603)   (378)%    $   217     (94)%     $3,886
Percentage of net revenues          0%                   0%                   2%

Terminated merger fees, net         --    (100)%    $15,464      100%         --
Percentage of net revenues          --                   8%                   --
----------------------------------------------- ------------ -------------------

     Investment  income  decreased in fiscal 1997 as compared to fiscal 1996 due
to a decrease in the Company's cash balances  primarily  related to the purchase
of Random House's 50% interest in the Living Books joint  venture,  the purchase
of Parsons Technology and the purchase of the Company's common stock in the open
market.  Investment  income  increased in fiscal 1996 as compared to fiscal 1995
due to higher average invested cash balances.

     In fiscal 1997, the contribution  from the Company's 50% equity interest in
Living Books,  a joint venture  between the Company and Random House,  decreased
from fiscal 1996 because of declining unit sales and pricing pressure. In fiscal
1996, the  contribution  from the Company's 50% equity  interest in Living Books
decreased  from fiscal  1995 due  primarily  to the  decline in net  revenues of
Living Books products,  as well as an increase in operating expenses  reflecting
higher marketing and development costs.

     In  December  1995,  Broderbund  and The  Learning  Company  terminated  an
agreement to merge and  Broderbund  recognized a gain from the break-up fee paid
by The Learning Company.

PROVISION FOR INCOME TAXES

--------------------------------------------------------------------------------
(In thousands)                    1997    Change       1996    Change       1995
--------------------------------------------------------------------------------
Provision (benefit) for
  income taxes                 $(7,128)   (124)%    $29,816       17%    $25,553
Effective income tax rate      (34.6)%                44.8%                41.4%
--------------------------------------------------------------------------------

     The Company's  effective income tax rate, as a percentage of pre-tax income
(loss),  decreased  in fiscal  1997 due to the  nondeductible  one time  charges
related to acquisitions of in-process  research and development during the year.
The Company's  effective income tax rate increased in fiscal 1996 as compared to
fiscal 1995 as the charge for acquired in-process  technology resulting from the
acquisition of T/Maker  Company did not provide any tax benefit for fiscal 1996.
A more complete  analysis of the differences  between the federal  statutory and
the  Company's  effective  income  tax  rates  is  presented  in  Note  6 to the
consolidated financial statements.

NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE

--------------------------------------------------------------------------------
(In thousands)                    1997    Change       1996    Change       1995
--------------------------------------------------------------------------------
Net income (loss)            $(13,482)    (137)%    $36,777        2%    $36,187
Percentage of net revenues        (7)%                  20%                  21%

Net income (loss) per share  $  (0.65)              $  1.71              $  1.72
--------------------------------------------------------------------------------


                                       21
<PAGE>

     For fiscal 1997,  net loss was $13.5 million or $0.65 per share.  Excluding
the  one-time  charges  resulting  from  the  charge  for  acquired   in-process
technology,  royalty advance charges and  restructuring  costs the Company would
have recognized net income of $9.8 million or $0.46 per share.  For fiscal 1996,
net income  was $36.8  million or $1.71 per  share.  Exclusive  of the  one-time
charge from the  acquisition of T/Maker  Company and of a one-time gain relating
to a terminated merger, net income for fiscal 1996 would have been $35.9 million
or $1.67 per share.

LIQUIDITY AND CAPITAL RESOURCES

--------------------------------------------------------------------------------
(In thousands)                    1997    Change       1996    Change      1995
--------------------------------------------------------------------------------
Cash and short-term
  investments                  $94,078     (38)%   $150,893       19%   $126,547
Working capital                $98,935     (31)%   $142,493       19%   $119,894
Net cash provided by
  operating activities         $ 9,293     (82)%   $ 50,516       24%   $ 40,622
--------------------------------------------------------------------------------

     At August 31,  1997,  cash and  short-term  investments  decreased to $94.1
million  from  $150.9  million  at August 31,  1996.  The  decrease  in cash and
short-term  investments  was due  primarily  to a decline  in cash  provided  by
operating activities from $50.5 million in fiscal 1996 to $9.3 million in fiscal
1997, cash used to purchase  Parsons  Technology and Random House's 50% interest
in the Living Books joint venture,  as well as the purchase of 500,000 shares of
the Company's common stock in the open market during fiscal year 1997. At August
31, 1997,  accounts  receivable,  net of allowances of $27.5 million,  increased
$12.1  million  to $18.0  million.  At  August  31,  1996,  cash and  short-term
investments  increased to $150.9  million from $126.5 million in fiscal 1995. In
fiscal  1996,  cash  and  short-term  investments  were  provided  by  operating
activities and the receipt of a terminated merger break-up fee, partially offset
by the use of cash to purchase T/Maker Company,  acquire a minority  interest in
Live  Picture,  Inc. and  repurchase  shares of the Company's  common stock.  At
August 31,  1996,  accounts  receivable,  net of  allowances  of $27.6  million,
decreased $1.9 million to $6.0 million.

     At this time, the Company is not committed to incur any significant capital
expenditures in fiscal 1998.

     The Company uses its working capital to finance  ongoing  operations and to
fund the  expansion  and  development  of its product  lines.  In addition,  the
Company evaluates from time to time other  acquisitions of products or companies
that complement the Company's business.

     Management  believes the existing cash and short-term  investments and cash
generated  from  operations  will be sufficient  to meet the Company's  expected
liquidity and capital needs for the coming year.

FACTORS AFFECTING FUTURE OPERATING RESULTS

     Broderbund  operates in a rapidly  changing  environment that is subject to
many risks and  uncertainties.  Some of the  important  risks and  uncertainties
which may cause the  Company's  operating  results to differ  materially  and/or
adversely are discussed elsewhere in this Form 10-K.

FLUCTUATIONS IN PERFORMANCE AND OPERATING RESULTS

     The  Company  has  experienced,  and  expects to  continue  to  experience,
significant  fluctuations  in  operating  results  due to a variety of  factors,
including  but not  limited  to,  the rate of  growth of the  consumer  software
market, market acceptance of the Company's products or those of its competitors,
the timing of new product  introductions,  expenses  relating to the development
and promotion of new product  introductions,  changes in pricing policies by the
Company or its  competitors,  projected  and actual  changes  in  platforms  and
technologies,   timely  and   successful   adaptation   to  such   platforms  or


                                       22
<PAGE>

technologies,  the accuracy of forecasts of consumer  demand,  product  returns,
market  seasonality,  the  timing  of  orders  from  major  customers  and order
cancellations,  and changes or disruptions in the consumer software distribution
channels and the  successful  acquisition  and  integration  of new  businesses,
products and technologies.

     The  Company's  business  has  generally  been  highly  seasonal,  with net
revenues and  operating  income  normally  highest in the first  fiscal  quarter
during the calendar year-end holiday selling season,  lower in the second fiscal
quarter, and lowest in the seasonally slow third and fourth fiscal quarters. The
Company  also  believes  that  the  market  conditions  which  resulted  in  the
year-over-year decline in profitability  experienced in fiscal 1997 may continue
in future periods.  The Company has adjusted its sales and marketing strategy in
an effort to increase  prices on several  products,  and  increase  net revenues
while  maintaining unit volume and market share achieved during fiscal 1997 when
prices on such products were lowered.  However,  there can be no assurance  that
the Company  will be  successful  in  implementing  the  strategy,  or that,  if
successfully  implemented,  such  strategy will be effective or will generate or
sustain revenue growth,  unit volume or market share in the future.  In addition
to seasonal  and product  pricing  factors,  the  Company  anticipates  that its
results  for fiscal  1998 will be  affected  by the timing and the number of new
product releases or upgraded versions of existing products, as well as marketing
and promotional  expenditures  in connection  with the product  releases and the
timing of product  announcements or introductions by the Company's  competitors.
Products  are  generally  shipped as orders are  received,  therefore  sales and
operating  results depend on the volume and timing of orders received during the
fiscal  year,  which are  difficult  to predict.  A  significant  portion of the
Company's  operating expenses are relatively fixed and planned  expenditures are
based on sales forecasts.  Thus, if revenue levels are below expectations due to
either the timing of orders  received or delays in product  releases,  operating
results are likely to be  materially  adversely  affected.  Due to the foregoing
factors, the Company believes that quarter to quarter comparisons of its results
of operations  are not  necessarily  meaningful and should not be relied upon as
indications of future performance.

     Any  significant  shortfall in net  revenues  and earnings  from the levels
expected by securities  analysts and stockholders  could result in a substantial
decline in the trading  price of the  Company's  common  stock.  There can be no
assurance  that the  Company's  stock  price will  remain at or near its current
level.  Moreover,  the Company's  stock is subject to the  volatility  generally
associated  with  technology  stocks and may also be affected by broader  market
trends or the results reported by other market participants. For example, during
fiscal  1997,  the price per share of the  Company's  common  stock  ranged from
$18.38 to $35.13 and in fiscal 1996 ranged from $28.50 to $76.88.

INDUSTRY AND COMPETITION

     Data indicates that there has been an overall slowdown in the growth of end
user demand for consumer software for calendar year 1996 and for the majority of
calendar year 1997 when  compared to the same periods in prior years.  There can
be no assurance  that such demand will not continue to slow or decline.  If such
results persist,  the Company's future growth in net revenues could be adversely
affected. In addition, the intense competition in the consumer software business
continues to accelerate as an increasing number of companies, many of which have
financial,  managerial,  technical and intellectual  property  resources greater
than those of the Company, offer products that compete directly with one or more
of the Company's products. As a result, an increasingly large number of products
are competing for limited shelf space.  As discussed above and in prior filings,
the Company  decreased  prices on a number of its  products in order to increase
market share,  including  its  best-selling  series,  The Print Shop, as well as
Myst, which placed negative pressure on net revenues and gross margins. Although
the Company is attempting to increase prices on certain  products,  there can be
no assurance  that its attempts will be  successful or that product  prices will
not  continue  to  decline  as  competition  increases,  and if such  conditions
persist,  the Company's net revenues and  profitability  could be materially and
adversely  affected.  Further,  there  can be no  assurance  that  sales  of the
Company's  existing  products will continue to sustain market  acceptance and to
generate  significant  levels  of  revenue  in  subsequent  quarters  or  that a
shortfall in revenue from any product could be replaced in a timely manner.


                                       23
<PAGE>

     In addition,  sales of products on older  platforms and in certain  product
lines have declined,  and there can be no assurance that sales of these products
will not  decline  further or  experience  lower  than  expected  sales  levels.
Retailers of the Company's  products  typically  have a limited  amount of shelf
space and  promotional  resources  for which there is intense  competition.  For
example,  there are 19 products  available  from Living  Books and it has become
increasingly  difficult to maintain shelf space in the retail channel for all of
these  products.  There can be no  assurance  that  retailers  will  continue to
purchase all of these products or provide these products with adequate levels of
shelf space and  promotional  support.  In  addition,  competition  for creative
talent,  including  independent  developers,  has  also  intensified,   and  the
attraction and retention of key personnel have become increasingly difficult.

PRODUCTS AND PLATFORMS

     The  Company's  future  success will depend in large part on its ability to
develop  and release new  products on a timely  basis and to achieve  widespread
market acceptance for such products. There can be no assurance that expected new
product  introductions  will not experience  material delays,  that new products
introduced  by the  Company  will  achieve  any  significant  degree  of  market
acceptance, or that such acceptance will be sustained for any length of time. In
addition,   because  the  Company  expects  that  the  cost  of  developing  and
introducing  new  products  will  continue  to  increase,  the  financial  risks
associated  with  new  product  development  will  increase  as will  the  risks
associated  with material delays in the  introduction of such new products.  The
Company's   increased   focus  and  commitment   towards  the   development  and
introduction  of  entertainment  titles  increases the risk  associated with the
development  and  marketing of products and their  market  acceptance  since the
entertainment  sector is more  hit-driven,  and with titles  generally  having a
relatively shorter life-cycle.  Further, the substantial  year-over-year decline
in Myst revenues was not fully replaced,  and there can be no assurance that the
shortfall  from the  continuing  decline in Myst  revenues will be replaced in a
timely manner. The Myst sequel product,  Riven: The Sequel to Myst, was released
in the first quarter of fiscal 1998,  but there can be no assurance that it will
achieve widespread market acceptance.

     The Company believes that electronic or Internet products and services will
become an increasingly  important platform and distribution media.  Although the
Company  has  initiated  steps,  at  significant  costs,  to take  advantage  of
opportunities  created by the  Internet  and  on-line  networks  there can be no
assurance that the Company's  Internet strategy will be successful,  or that the
costs and investments  will provide  adequate,  or any,  returns.  The Company's
failure to timely and  successfully  adapt to and utilize such  technologies and
media could  materially and adversely  affect its  competitive  position and its
financial results.  In addition,  the Company believes that potential  customers
for its software are spending  increasing  amounts of time online, and therefore
may be less likely to purchase the  Company's  (and its  competitors)  software.
Just as the Company  competes with other forms of  entertainment  (e.g.,  books,
television), the Company now competes with the Internet.

DISTRIBUTION

     The distribution channels through which consumer software products are sold
have been characterized by intense competition and continuing uncertainties, and
there can be no assurance  that  distributors  and  retailers  will  continue to
purchase the Company's  products or provide the Company's products with adequate
levels of shelf space and promotional support. There is increasing pressure from
distributors  and  retailers  to  obtain  marketing  and  promotional  funds and
discounts in connection with access to shelf space,  in-store promotion and sale
of  products  which has an adverse  impact on the  Company's  net  revenues  and
profitability,  and there can be no  assurance  that  these  pressures  will not
continue or increase.  In addition,  the Company also permits  distributors  and
retailers to return products under certain  circumstances and in recent periods,
the  Company  has  experienced  an  increase  in  the  rate  of  returns  as the
competition in the distribution channel increases and as mass merchants,  office
and warehouse stores become an increasing percentage of the Company's sales. The
Company believes that the rate of product returns may continue at this rate, and
there can be no  assurance  that return  rates will not  increase  further.  The
Company  establishes  allowances  based on estimated  future  returns of product
after  considering  various  factors,  and  accordingly,  if the level of actual
returns exceeds management's


                                       24
<PAGE>

estimates,  it could have a material  adverse impact on the Company's  operating
results.  Further,  certain distributors and retailers have experienced business
difficulties  and  there  can be no  assurance  such  difficulties  for these or
additional  distributors  and  retailers  will not continue  which could have an
adverse effect on the operating results and financial  condition of the Company.
The Company  manufactures  its products based upon estimated  future sales,  and
accordingly,  if  the  level  of  actual  orders  of  products  falls  short  of
management's estimates,  inventory levels could be excessive which could lead to
inventory  write-offs  and have an  adverse  impact on the  Company's  operating
results.

     Sales to a limited number of  distributors  and retailers have  constituted
and are expected to continue to constitute a substantial amount of the Company's
revenues.  Arrangements  with these accounts  generally may be terminated at any
time by the  distributor  or retailer.  The loss of, a significant  reduction in
sales to or inability to collect  receivables  from, or any other adverse change
in the Company's  relationship with, any of the Company's principal resellers or
accounts  sold through such  resellers  could  materially  adversely  affect the
Company's results of operations.  In addition,  sales of the Company's  products
are typically  made on credit,  with terms that vary depending upon the customer
and the nature of the product.  The Company's retailers and distributors compete
in a  volatile  industry  and are  subject  to the risk of  bankruptcy  or other
business  failure,  and certain  distributors  and  retailers  have  experienced
difficulties.  Although  the  Company  maintains  a  reserve  for  uncollectible
receivables  which it believes is adequate,  there can be no assurance  that its
reserve  will  prove to be  sufficient  or that the  difficulties  for  these or
additional  distributors  and retailers  will not continue,  which could have an
adverse effect on the operating results and financial condition of the Company.

     Because of the foregoing  factors,  as well as other factors  affecting the
Company's operating results and financial condition,  past financial performance
should  not be  considered  a  reliable  indicator  of future  performance,  and
investors  should not use historical  trends to anticipate  results or trends in
future periods.


                                       25
<PAGE>

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Broderbund Software, Inc.

We have  audited the  accompanying  consolidated  balance  sheets of  Broderbund
Software,  Inc.  as of August 31, 1997 and 1996,  and the  related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
three years in the period ended August 31,  1997.  Our audits also  included the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule 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  consolidated  financial  position  of
Broderbund  Software,  Inc.  at August 31, 1997 and 1996,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended August 31, 1997, in conformity with generally  accepted  accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.


                                                Ernst & Young LLP

San Francisco, California
October 3, 1997


                                       26
<PAGE>

                            Broderbund Software, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                               August 31,
                                                                            1997       1996
                                                                          -------------------
                                                                             (In thousands
                                                                          except share data),
<S>                                                                       <C>        <C>     
Assets
Current assets:
  Cash and short-term investments                                         $ 94,078   $150,893
  Accounts receivable, net of allowances of $27,452
    in 1997 and $27,611 in 1996                                             18,047      5,956
  Inventories                                                                4,527      3,140
  Deferred income taxes                                                     14,975     15,057
  Other current assets                                                       3,799        869
                                                                          -------------------
Total current assets                                                       135,426    175,915
                                                                          -------------------
Property and equipment, net                                                 18,664      7,014
Purchased technology and other intangibles                                  20,308     13,090
Deferred income taxes                                                       11,002       --
Investments in affiliates                                                     --        4,053
Other assets                                                                 1,203        360
                                                                          -------------------
Total assets                                                              $186,603   $200,432
                                                                          ===================

Liabilities and stockholders' equity
Current liabilities:
  Accounts payable                                                        $  8,928   $  4,442
  Accrued liabilities                                                       24,567     25,149
  Other current liabilities                                                  2,996      3,831
                                                                          -------------------
Total current liabilities                                                   36,491     33,422
                                                                          -------------------
Deferred income taxes                                                         --        1,462
Other liabilities                                                            2,030       --
Commitments

Stockholders' equity:
  Common stock, $.01 par value, authorized 120,000,000 shares;
  issued and outstanding 20,768,132 and 20,670,060 shares, respectively     27,422     31,383
  Retained earnings                                                        120,660    134,165
                                                                          -------------------
Total stockholders' equity                                                 148,082    165,548
                                                                          -------------------
Total liabilities and stockholders' equity                                $186,603   $200,432
                                                                          ===================
</TABLE>

See accompanying notes.


                                       27
<PAGE>

                            Broderbund Software, Inc.

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                      Years ended August 31,
                                               ----------------------------------
                                                  1997         1996        1995
                                               ----------------------------------
                                              (In thousands, except per share data)
<S>                                            <C>          <C>         <C>      
Net revenues                                   $ 190,787    $ 186,207   $ 171,594
Cost of revenues                                  65,056       58,259      60,997
Amortization of purchased technology               5,427          645          95
                                               ----------------------------------
     Gross margin                                120,304      127,303     110,502
                                               ----------------------------------

Operating expenses:
   Sales and marketing                            57,311       34,381      25,143
   Research and development                       43,670       29,244      22,784
   General and administrative                     13,603       11,256      11,085
   Charge for acquired in-process technology      29,297        8,009        --
   Restructuring charges                           1,986         --          --
                                               ----------------------------------
     Total operating expenses                    145,867       82,890      59,012
                                               ----------------------------------

Income (loss) from operations                    (25,563)      44,413      51,490
Interest and dividend income, net                  5,556        6,499       6,364
Equity in earnings (loss) of joint venture          (603)         217       3,886
Terminated merger fees, net                         --         15,464        --
                                               ----------------------------------

Income (loss) before income taxes                (20,610)      66,593      61,740

Provision (benefit) for income taxes              (7,128)      29,816      25,553
                                               ----------------------------------

Net income (loss)                              $ (13,482)   $  36,777   $  36,187
                                               ==================================

Net income (loss) per share                    $   (0.65)   $    1.71   $    1.72
                                               ==================================

Shares used in computing per share data           20,686       21,509      21,037
                                               ==================================
</TABLE>

See accompanying notes.


                                       28
<PAGE>

                                         Broderbund Software, Inc.

                              Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                             Common Stock                          Total
                                                        ---------------------      Retained     Stockholders'
                                                        Shares       Amount        Earnings        Equity
                                                        ---------------------------------------------------
                                                                          (In thousands)
<S>                                                     <C>         <C>            <C>            <C>      
Balances at August 31, 1994                             19,624      $  20,321      $  59,858      $  80,179
   Exercise of stock options                               388          4,069           --            4,069
   Tax benefits relating to stock options                 --            6,213           --            6,213
   Adjustment for effect of pooling-of-interests
     on prior periods                                      607            537          1,688          2,225
   Foreign currency translation adjustment                --             --              (20)           (20)
   Unrealized gain on short-term investments              --             --               29             29
   Net income                                             --             --           36,187         36,187
                                                        ---------------------------------------------------
Balances at August 31, 1995                             20,619         31,140         97,742        128,882
   Exercise of stock options                               151          2,128           --            2,128
   Tax benefits relating to stock options                 --            1,548           --            1,548
   Repurchase of common stock                             (100)        (3,433)          --           (3,433)
   Foreign currency translation adjustment                --             --              (78)           (78)
   Unrealized loss on short-term investments              --             --             (276)          (276)
   Net income                                             --             --           36,777         36,777
                                                        ---------------------------------------------------
Balances at August 31, 1996                             20,670         31,383        134,165        165,548
   Exercise of stock options                               135          1,833           --            1,833
   Tax benefits relating to stock options                 --              568           --              568
   Repurchase of common stock                             (500)       (14,574)          --          (14,574)
   Purchase of Living Books                                419          7,321           --            7,321
   Shares issued under employee stock purchase
     plan                                                   44            891           --              891
   Foreign currency translation adjustment                --             --             (588)          (588)
   Unrealized gain on short-term investments              --             --              565            565
   Net loss                                               --             --          (13,482)       (13,482)
                                                        ---------------------------------------------------
Balances at August 31, 1997                             20,768      $  27,422      $ 120,660      $ 148,082
                                                        ===================================================
</TABLE>

See accompanying notes


                                       29
<PAGE>

                                  Broderbund Software, Inc.

                            Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                Years ended August 31,
                                                            1997         1996        1995
                                                         -----------------------------------
                                                                   (In thousands)
<S>                                                      <C>          <C>          <C>      
Operating activities
Net income (loss)                                        $ (13,482)   $  36,777    $  36,187
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
    Equity in (earnings) loss of joint venture                 603         (217)      (3,886)
    Depreciation and amortization                           11,151        3,164        2,258
    Deferred income taxes                                  (10,874)        (120)      (5,394)
    Charge for acquired in-process technology               29,297        8,009         --
    Write-off of purchased technology                         --           --          1,678
    Royalty advance reserve                                  5,192         --           --
    Changes in current assets and liabilities:
      Accounts receivable                                   (6,050)       1,924       (5,582)
      Inventories                                              111         (578)        (201)
      Other current assets                                  (1,957)         317         (429)
      Income taxes                                          (4,345)       9,453          669
      Accounts payable                                       2,874       (1,652)         438
      Accrued compensation                                  (2,361)      (2,268)       5,709
      Other accrued liabilities                               (866)      (4,293)       9,175
                                                         -----------------------------------
Net cash provided by operating activities                    9,293       50,516       40,622
                                                         -----------------------------------
Investing activities
Net additions to equipment and improvements                 (4,445)      (3,963)      (3,383)
Dividends received from joint venture                         --          1,000        2,500
Short-term investments                                     (42,096)     (17,702)      33,842
Business combinations, net of cash acquired                (44,414)     (21,020)        --
Investments in affiliates                                   (4,848)      (3,450)        --
Adjustment for effect of pooling-of-interests on prior
  periods                                                     --           --          2,225
Other                                                         (531)       1,374         (708)
                                                         -----------------------------------
Net cash provided (used) for investing activities          (96,334)     (43,761)      34,476
                                                         -----------------------------------
Financing activities
Exercise of stock options                                    1,833        2,128        4,069
Tax benefit from exercise of stock options                     568        1,548        6,213
Employee stock purchase plan                                   891         --           --
Repurchase of common stock                                 (14,574)      (3,433)        --
                                                         -----------------------------------
Net cash provided by (used) financing activities           (11,282)         243       10,282
                                                         -----------------------------------
Translation adjustment                                        (588)         (78)         (20)
                                                         -----------------------------------
Increase (decrease) in cash                                (98,911)       6,920       85,360
Cash and equivalents, beginning of year                    108,999      102,079       16,719
                                                         -----------------------------------
Cash and equivalents, end of year                           10,088      108,999      102,079
Short-term investments                                      83,990       41,894       24,468
                                                         -----------------------------------
Cash and short-term investments, end of year             $  94,078    $ 150,893    $ 126,547
                                                         ===================================
Supplemental disclosure of cash flow information
  Income tax payments, net                               $   7,617    $  18,857    $  24,168
                                                         ===================================
Interest payments                                        $      40    $      81    $      39
                                                         ===================================
Supplemental disclosure of non-cash investing and
  financing activities
Issuance of restricted stock for purchase of Living
Books                                                    $   7,321         --           --
                                                         ===================================
</TABLE>

See accompanying notes.


                                       30
<PAGE>

                            Broderbund Software, Inc.

                   Notes to Consolidated Financial Statements

                         August 31, 1997, 1996, and 1995


1.   Accounting Policies

     Operations

     The Company currently operates in one business segment, the development and
     publishing of consumer software for personal computers.

     Basis of Consolidation

     The consolidated  financial  statements include the accounts of the Company
     and its  subsidiaries.  The Company has export sales from the United States
     and has  operations in the United  Kingdom.  All  significant  intercompany
     accounts and transactions have been eliminated.

     Investments in Affiliates

     Prior to January 1997,  the Company and Random House,  Inc.  (collectively,
     the  "Partners")  participated  in a joint  venture to publish  story-based
     multimedia software for children. The joint venture, Living Books, combined
     resources of these two  publishers and was 50% owned by each. The Company's
     contribution  to the joint venture  consisted of the existing  Living Books
     product line and the  technology  and people to produce more Living  Books.
     Random House, Inc. contributed cash and access to its library of children's
     books and authors.  The joint venture was  responsible for all research and
     development,  manufacturing  and marketing costs associated with the Living
     Books products.  The Partners were each distributing  Living Books products
     through their  respective  distribution  channels under an affiliated label
     arrangement.  The  Company  had  revenues of  $8,817,000,  $18,041,000  and
     $22,393,000  during  fiscal  1997,  1996,  and  1995,  respectively,   from
     distribution of Living Books products as an affiliated label product.

     Prior to January 1, 1997 the Company  reported  its share in  earnings  and
     losses of Living Books under the equity method of accounting. The Company's
     share was based on the partnership's most recent quarter end results, which
     were reported on a calendar year basis.  The Company's equity (loss) in the
     earnings of the joint  venture for the six months  ended  December 31, 1996
     and the years ended June 30, 1996 and 1995 amounted to $(603,000), $217,000
     and $3,886,000,  respectively.  The Company received distributions from the
     joint  venture   during  fiscal  1997  and  1996  of  $0  and   $1,000,000,
     respectively, which reduced the Company's investment in the joint venture.

     As of January 1, 1997,  the Company  purchased  Random House's 50% share in
     this joint venture (see Note 2, Business  Combinations).  Results of Living
     Books  after  this  date  are  reflected  in  the  accompanying   financial
     statements.

     The Company has minority interests in Live Picture, Inc., Babycenter, Inc.,
     Classifieds 2000, Inc., Classified Project,  Inc., Cyberian Outpost,  Inc.,
     E-Ticket,  Inc.,  Index Stock  Photography,  Inc.,  Netcentives,  Inc., Net
     Contents,  Inc.,  Netplay,  Inc. and N/Volve,  Inc. These  investments  are
     recorded  at cost  and were  fully  reserved  for on the  August  31,  1997
     Consolidated  Balance Sheet in connection with the Company's  restructuring
     (see Note 11, Restructuring Charges).


                                       31
<PAGE>

1.   Accounting Policies (continued)

     Cash and Short-Term Investments

     Cash and cash  equivalents  consist  of cash in banks  and  investments  in
     highly liquid short-term instruments with original maturities of 90 days or
     less.  Short-term  investments  consist  principally of municipal bonds and
     U.S. government agency notes.

     The  Company   accounts  for  investments   under  Statement  of  Financial
     Accounting  Standards No. 115,  Accounting for Certain  Investments in Debt
     and Equity Securities ("SFAS No. 115"). Under SFAS No. 115,  investments in
     equity and debt securities are classified in three categories and accounted
     for  based  upon  the   classification.   The  Company  has  accounted  for
     investments in debt securities as "available-for sale" pursuant to SFAS No.
     115 and has recorded such  investments at fair value with unrealized  gains
     and losses reported as a component of stockholders' equity.

     Concentration of Credit Risk

     Financial   instruments   which   potentially   subject   the   Company  to
     concentrations  of  credit  risk  consist  primarily  of  cash,  short-term
     investments and accounts  receivable.  The Company's  investment  portfolio
     consists  of  investment   grade   securities.   Accounts   receivable  are
     principally from distributors and retailers of the Company's products.  The
     Company  performs  ongoing credit  evaluations of its customers'  financial
     condition and maintains allowances for potential credit losses.

     Inventories

     Inventories, which consist primarily of software media, manuals and related
     packaging materials,  are recorded at standard cost, which approximates the
     lower of cost,  determined on the  first-in,  first-out  basis,  or market.
     Provisions   are  made  in  each   period  for  the  effect  of   inventory
     obsolescence.

     Property and Equipment

     Property and equipment are recorded at cost.  Depreciation and amortization
     are provided using the  straight-line  method over  estimated  useful lives
     ranging from three to seven years for equipment and improvements and thirty
     years for buildings.

     Purchased Technology and Other Intangibles

     Purchased  technology,  net of  amortization,  at August 31, 1997, 1996 and
     1995 of $20,308,000, $11,570,000 and $761,000, respectively, includes costs
     of obtaining product technology which are amortized using the straight line
     method over periods not  exceeding  three years.  Management  evaluates the
     future  realization of purchased  technology  quarterly and writes down any
     amounts  that  management  deems  unlikely to be recovered  through  future
     products sales.  Amortization  expense for fiscal 1997,  1996, and 1995 was
     $5,427,000, $645,000 and $95,000, respectively. Certain amounts reported in
     prior  years  have been  reclassified  to  conform  with  fiscal  year 1997
     presentation.

     Advances  at  August  31,  1996  of  $1,520,000  represent  prepayments  of
     royalties  made  to  independent   software  developers  under  development
     agreements.  These  advances  were  charged  to  cost  of  revenues  at the
     contractual  royalty rate based on actual net product sales.  In the fourth
     quarter of fiscal year 1997 the Company has  reserved  for 100% of advances
     on the balance sheet, which resulted in a pretax charge of $5.2 million.

     Software Development Costs

     Financial  accounting  standards provide for the  capitalization of certain
     software development costs after technological  feasibility of the software
     is attained.  No such costs were  capitalized in fiscal 1997, 1996, or 1995
     because the impact on the financial statements would not be material.


                                       32
<PAGE>

1.   Accounting Policies (continued)

     Net Revenues

     Revenue from product sales is recognized  upon shipment of product,  net of
     allowances for returns,  in accordance  with the provisions of the American
     Institute  of Certified  Public  Accountants'  Statement of Position  91-1,
     "Software  Revenue  Recognition."  Net revenues  from sales to one customer
     were 12%, 11% and 22% of total net revenues in fiscal 1997,  1996 and 1995,
     respectively.  Net revenues from sales to a different customer were 11% and
     13% of total net revenues in fiscal 1996 and 1995, respectively.

     Royalties

     Royalties  are  accrued  based on net  revenues,  pursuant  to  contractual
     agreements with developers of software  products  published by the Company.
     Royalty costs,  which are included in cost of revenues,  were  $10,933,000,
     $11,999,000 and $13,424,000 in fiscal 1997, 1996 and 1995, respectively.

     Advertising Costs

     The Company  charges  advertising  costs to sales and marketing  expense as
     incurred. Advertising costs were $16,139,000,  $6,383,000 and $3,025,000 in
     fiscal 1997, 1996 and 1995,  respectively.  Printing and postage related to
     direct mail offers are expensed over the life of the mailing, not to exceed
     90 days and are included in Other  current  assets on the balance  sheet at
     August 31, 1997.

     Foreign Currency Translation

     The functional  currency of the Company's  foreign  subsidiary is its local
     currency. Assets and liabilities of this operation are translated into U.S.
     dollars  using  current  exchange  rates,  and  revenues  and  expenses are
     translated in U.S.  dollars using average  exchange  rates.  The effects of
     foreign  currency  translation  adjustments  are deferred and included as a
     component of stockholders' equity.

     Foreign currency transaction gains and losses are a result of the effect of
     exchange rate changes on transactions  denominated in currencies other than
     the  functional  currency.  Such  amounts were not material in fiscal 1997,
     1996 or 1995.

     Recently Issued Accounting Standards

     The Company adopted Statement of Financial  Accounting  Standards  ("SFAS")
     No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
     Long-Lived  Assets to Be Disposed Of" ("SFAS 121") effective for the fiscal
     year ended August 31, 1997.  SFAS 121 requires  that  impairment  losses be
     recorded on long-lived  assets and certain  identifiable  intangibles  when
     indicators  of  impairment  are  present  and the  undiscounted  cash flows
     estimated  by those  assets  are less than the  assets'  carrying  amounts.
     Adoption of this  standard did not have a material  impact on the Company's
     consolidated financial statements.

     SFAS No.  123,  "Accounting  for  Stock-Based  Compensation"  ("SFAS  123")
     establishes  a fair value method of  accounting  for  stock-based  employee
     compensation plans. As permitted under SFAS 123, the Company has elected to
     follow Accounting  Principles Board Opinion No. 25 ("APB 25"),  "Accounting
     for Stock Issued to  Employees"  in accounting  for  stock-based  awards to
     employees.  As such,  the Company  has  continued  to measure  compensation
     expense using the  intrinsic  value based method for  stock-based  employee
     compensation plans and has provided pro forma disclosures of net income and
     earnings  per share as if the  accounting  provisions  of SFAS 123 had been
     adopted (see Note 7, Stockholders' Equity).

     In February 1997, the Financial  Accounting Standards Board ("FASB") issued
     SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation
     of basic and diluted  earnings per share for periods  ending after December
     15, 1997, for all entities with complex capital  structures.  At that time,
     the Company will be required to change the method currently used to compute
     earnings  per  share  and to  restate  all  prior  periods.  Under  the new
     requirements  for  calculating  primary  earnings  per share,  the dilutive
     effect of stock options will be excluded. There will be no impact


                                       33
<PAGE>

1.   Accounting Policies (continued)

     on the Company's primary or fully diluted earnings (loss) per share for the
     year ended  August 31, 1997  because  the  Company  incurred a loss for the
     period. The impact is expected to result in an increase in primary earnings
     per  share for the year  ended  August  31,  1996 of $0.07 per share and no
     change to fully diluted earnings per share.

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
     Income." SFAS No. 130 establishes standards for reporting and displaying of
     comprehensive  income and its  components.  The Company will adopt SFAS No.
     130 effective September 1, 1998.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
     an  Enterprise  and  Related  Information."  SFAS No. 131  establishes  new
     requirements for the reporting of information regarding operating segments,
     products, services,  geographic areas and major customers. The Company will
     adopt SFAS No. 131 effective September 1, 1998.

     Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosures  of  contingent  assets and  liabilities  as of the date of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during the reporting period. Such estimates include allowances for doubtful
     accounts, product returns and price protection, and estimates regarding the
     recoverability  of  inventories.  Actual  results  could  differ from those
     estimates.

     Net Income (Loss) Per Share

     Net income (loss) per share data is based on the weighted average number of
     common shares and dilutive  common stock  equivalents  outstanding  for the
     period.  There are no  significant  differences  between  primary and fully
     diluted earnings per share

     Reclassifications

     Certain amounts  reported in prior years have been  reclassified to conform
     to the fiscal 1997 presentation.


2.   Business Combinations

     Parsons Technology

     On August 6, 1997, the Company acquired Parsons Technology from Intuit Inc.
     Parsons Technology is a leading direct-to-consumer  marketing  organization
     and has an experienced  product development group. The acquisition has been
     accounted  for under the purchase  method,  and had an  aggregate  purchase
     price of approximately  $31,000,000 in cash,  including  acquisition costs.
     Approximately $10,000,000 of the excess of the purchase price over the fair
     value of the net  tangible  assets  acquired was  allocated  to  in-process
     research  and  development  and   approximately   $9,311,000  to  purchased
     technology and other intangible  assets. The amount allocated to in-process
     research  and  development  was  charged  to  operations  at  the  time  of
     acquisition. The purchased technology and other intangible assets are being
     amortized  over three  years from the date of  acquisition.  The  operating
     results of Parsons Technology, which were not material in relation to those
     of the Company, have been included in the consolidated financial statements
     for the period subsequent to the date of acquisition.

     Living Books

     As of January 1, 1997,  the Company  acquired the remaining 50% interest in
     the Living Books joint venture. The acquisition was accounted for under the
     purchase method of accounting and was accomplished by a combination of cash
     and restricted  stock,  with an aggregate  purchase price of  approximately
     $18,370,000,   including   acquisition   costs.   In  connection  with  the
     acquisition,   a  portion  of  the  excess  purchase  price,  approximately
     $9,250,000 was allocated to in-process technology and charged to operations
     at the time of acquisition. Approximately $4,853,000


                                       34
<PAGE>

2.   Business Combinations (continued)

     was allocated to purchased  technology  and is being  amortized  over three
     years from the date of acquisition.  The operating results of Living Books,
     which are not  material  in  relation  to those of the  Company,  have been
     included in the consolidated financial statements for the period subsequent
     to the date of  acquisition.  Prior to this date,  the  Company  and Random
     House,  Inc.  were equal  partners in the joint  venture to publish  Living
     Books products.

     T/Maker Company

     On August 6, 1996, the Company completed its acquisition of T/Maker Company
     ("T/Maker"),  a leading developer of clip art software. The acquisition has
     been accounted for under the purchase method, and had an aggregate purchase
     price  of   approximately   $19,900,000,   including   acquisition   costs.
     Approximately  $8,000,000 of the excess of the purchase price over the fair
     value of the net  tangible  assets  acquired was  allocated  to  in-process
     research  and  development  and  approximately   $11,500,000  to  purchased
     technology. The amount allocated to in-process research and development was
     charged to operations at the time of acquisition.  The purchased technology
     is being  amortized  over  three  years from the date of  acquisition.  The
     operating results of T/Maker,  which were not material in relation to those
     of the Company, have been included in the consolidated financial statements
     for the periods subsequent to the date of acquisition.

     Banner Blue Software, Inc.

     On April 28, 1995, the Company  acquired Banner Blue Software  Incorporated
     ("Banner  Blue"),  a  leading  developer  of  genealogy   software,   in  a
     transaction  accounted  for  under  the  pooling-of-interests  method.  The
     Company  issued  607,000  shares of common  stock in  exchange  for all the
     outstanding  stock of Banner Blue.  The  operating  results for Banner Blue
     were not  material to the  combined  results of the two  companies  for all
     periods prior to the  acquisition  and therefore  results for those periods
     have not been  restated.  The  operating  results of Banner  Blue have been
     included  in  the  consolidated   financial   statements  for  all  periods
     subsequent to the date of acquisition.


3.   Fair Value of Financial Instruments

     The  carrying  amount  approximates  fair value for each class of financial
     instruments  which  include  cash  and  equivalents,  accounts  receivable,
     accounts payable and accrued  liabilities  because of the short maturity of
     these instruments.  The carrying values of short-term investments are based
     upon quoted market prices.

     Cash and short-term investments, at fair value, consist of the following:

                                                       August 31,
                                                 1997             1996
                                               -------------------------
                                                     (In thousands)
     Cash and equivalents:
       Cash and money market funds             $  4,848         $  1,149
       Municipal securities                        --             53,812
       Commercial paper                           2,240            1,500
       Money market preferreds                    3,000           49,200
       Corporate notes                             --              3,338
                                               -------------------------
                                                 10,088          108,999
                                               -------------------------
     Short-term investments:
       Money market preferreds                    3,024            2,675
       Municipal securities                      65,947           22,831
       Commercial paper                           1,000             --
       U.S. government agencies                  11,530           15,884
       Corporate equity fund                        473              504
       Corporate notes                            2,016             --
                                               -------------------------
                                                 83,990           41,894
                                               -------------------------
     Cash and short-term investments           $ 94,078         $150,893
                                               =========================


                                       35
<PAGE>

3.   Fair Value of Financial Instruments (continued)

     Cash and short-term  investments  had an aggregate cost of $93,754,000  and
     $151,140,000 at August 31, 1997 and 1996, respectively.  At August 31, 1997
     cash and short-term investments included gross unrealized gains of $388,000
     and losses of $70,000.  At August 31, 1996 cash and short-term  investments
     included gross unrealized gains of $139,000 and gross unrealized  losses of
     $386,000.  At August 31, 1997  short-term  investments of $13,305,000  were
     contractually  due within one year with the  balance due after one year but
     before two years.


4.   Property and Equipment

     Property and equipment consist of the following:

                                                          August 31,
                                                     1997            1996
                                                   ------------------------
                                                        (In thousands)
     Computer equipment                            $ 14,702        $ 10,169
     Furniture                                        8,960           6,134
     Leasehold improvements                           3,717           1,947
     Buildings                                        6,194            --
     Land                                             1,048            --
                                                   ------------------------
                                                     34,621          18,250
     Accumulated depreciation and amortization      (15,957)        (11,236)
                                                   ------------------------
                                                   $ 18,664        $  7,014
                                                   ========================


5.   Other Accrued Liabilities

     Other accrued liabilities consist of the following:

                                                          August 31,
                                                     1996            1996
                                                   ------------------------
                                                        (In thousands)
     Accrued compensation                          $  8,545        $  8,794
     Accrued royalties                                5,701           4,101
     Accrued income taxes                             4,621           8,966
     Accrued sales and marketing costs                3,714           3,288
     Accrued restructuring                            1,986            --
                                                   ------------------------
                                                   $ 24,567        $ 25,149
                                                   ========================


6.   Income Taxes

     The Company's  pretax income from foreign  operations for fiscal 1997, 1996
     and 1995 was $901,000, $1,648,000 and $88,000, respectively.


                                       36
<PAGE>

6.   Income Taxes (continued)

     Significant components of the provision for income taxes are as follows:

                                                    Years ended August 31,
                                             ---------------------------------
                                                1997       1996         1995
                                             ---------------------------------
                                                      (In thousands)
     Current:
       Federal                               $  2,767    $ 22,392     $ 23,920
       State                                      642       7,002        6,789
       Foreign                                    337         542          238
                                             ---------------------------------
     Total current                              3,746      29,936       30,947
                                        
     Deferred:                          
       Federal                                 (8,677)        (93)      (4,299)
       State                                   (2,197)        (27)      (1,095)
                                             ---------------------------------
     Total deferred                           (10,874)       (120)      (5,394)
                                             ---------------------------------
                                             $ (7,128)   $ 29,816     $ 25,553
                                             =================================
                                    
     The principal  reasons that the aggregate income tax provisions differ from
     taxes  computed at the  applicable  federal  statutory  rate are  reflected
     below:

                                                    Years ended August 31,
                                             ---------------------------------
                                                1997       1996         1995
                                             ---------------------------------
                                                      (In thousands)
     Income tax provision at federal
       statutory rate                        $ (7,214)   $ 23,308     $ 21,609
     State income taxes, net of federal
       tax benefit                             (1,010)      4,533        3,701
     Charge for acquired in-process
       technology                                 907       2,803         --
     Other                                        189        (828)         243
                                             ---------------------------------
                                             $ (7,128)   $ 29,816     $ 25,553
                                             =================================

     Deferred income taxes reflect the net tax effects of temporary  differences
     between  the  carrying  amounts of assets  and  liabilities  for  financial
     reporting   purposes  and  the  amounts  used  for  income  tax   purposes.
     Significant components of the Company's deferred tax assets and liabilities
     are as follows:

                                                                 August 31,
                                                            --------------------
                                                              1997        1996
                                                            --------------------
                                                               (In thousands)
     Deferred tax assets:
       Accruals and reserves not currently deductible       $15,554      $14,900
       Purchased technology                                  10,674          581
       Other, net                                             2,758        2,142
                                                            --------------------
                                                             28,986       17,623
                                                            --------------------
     Deferred tax liabilities:
       Purchased technology                                   2,104        3,855
       Other, net                                               905          173
                                                            --------------------
                                                              3,009        4,028
                                                            --------------------
     Net deferred tax assets                                $25,977      $13,595
                                                            ====================

     Income tax  benefits  which  accrue to the  Company  from the  exercise  of
     nonqualified  stock  options and  disqualifying  dispositions  of incentive
     stock options have been recorded as increases to common stock.

     The Company does not provide for U.S.  taxes on  undistributed  earnings of
     its foreign  subsidiary.  If these earnings were  distributed to the parent
     company,   foreign  tax   credits   available   under   current  law  would
     substantially eliminate the resulting Federal tax liability.


                                       37
<PAGE>

7.   Stockholders' Equity

     Preferred Stock

     The Company's  Certificate of Incorporation  authorizes 1,000,000 shares of
     preferred stock,  none of which is issued or outstanding at August 31, 1997
     and 1996.  The Board of Directors  has the authority to issue the preferred
     stock in one or more series and to fix the rights,  voting rights, terms of
     redemption,  redemption prices,  liquidation  preferences and the number of
     shares  constituting any series or the designation of such series,  without
     further vote or action by the stockholders.

     Employee Stock Purchase Plan

     In April 1996,  the Company  established  an Employee  Stock  Purchase Plan
     whereby eligible employees may authorize payroll deductions of up to 10% of
     their  compensation  to  purchase  shares  at 85% of the  lower of the fair
     market  value  of the  Common  Stock  on the  first or the last day of each
     six-month  purchase period.  In fiscal year 1997, 44,000 shares were issued
     under the plan at an  average  price of $20.25 per  share.  In fiscal  year
     1996,  there were no shares issued under the Plan. At August 31, 1997,  the
     Company had 206,000 shares of its Common Stock reserved for future issuance
     under the Plan.

     Stock Option Plans

     Under the Company's  Employee and Consultant Stock Option Plans,  incentive
     and nonqualified  stock options may be granted to employees,  directors and
     consultants to purchase a maximum of 6,250,000  common shares.  All options
     are granted at an amount  equal to or greater than the fair market value of
     the common stock at the date of grant.  In connection  with the acquisition
     of Banner Blue Software,  the Company  assumed the  outstanding  options of
     Banner Blue  Software and  converted  such  options into options  under the
     Plans  based upon the merger  exchange  ratio.  Options  vest in annual 20%
     increments from the date of grant, according to the vesting schedule at the
     date of grant.  The  options  generally  expire  ten years from the date of
     grant.

     In fiscal  year 1997,  the Company  offered to cancel and  reissue  certain
     stock  options  granted in fiscal years 1996 and 1995.  The Company  issued
     970,000 stock options in fiscal year 1997 related to this reissuance.  This
     reissuance  is  included  in the  table  below  under  shares  granted  and
     forfeited for fiscal year 1997.  Changes in options  outstanding during the
     three years ending August 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                                                                               Weighted
                                                                                                Average
                                                                                               Exercise
                                                            Number of     Exercise Price       Price Per
                                                              Shares         Per Share           Share
                                                           ---------------------------------------------
     <S>                                                    <C>          <C>                    <C>   
     Options outstanding at August 31, 1994                 1,792,000    $ 1.00  -  $28.32      $14.59
       Granted                                                660,000    $32.25  -  $72.00      $48.18
       Assumed in the acquisition                                                           
         of Banner Blue Software                               42,000    $ 3.97  -  $27.54      $13.02
       Exercised                                             (388,000)   $ 1.50  -  $28.32      $10.51
       Forfeited                                             (150,000)   $10.62  -  $32.25      $18.50
                                                           ----------
     Options outstanding at August 31, 1995                 1,956,000    $ 1.00  -  $72.00      $26.44
       Granted                                              1,042,000    $33.13  -  $76.73      $53.85
       Exercised                                             (151,000)   $ 1.00  -  $32.25      $14.08
       Forfeited                                             (138,000)   $10.63  -  $72.00      $40.66
                                                           ----------
     Options outstanding at August 31, 1996                 2,709,000    $ 1.00  -  $76.73      $36.98
       Granted                                              2,067,000    $18.50  -  $31.00      $27.43
       Exercised                                             (135,000)   $ 1.00  -  $28.32      $13.58
       Forfeited                                           (1,272,000)   $10.63  -  $72.00      $52.72
                                                           ----------
     Options outstanding at August 31, 1997                 3,369,000    $ 1.00  -  $76.73      $26.11
                                                           ==========
     Outstanding options exercisable at August 31, 1997       870,000
                                                           ==========
     Options available for grant at August 31, 1997         1,613,000
                                                           ==========
</TABLE>


                                       38
<PAGE>

7.   Stockholders' Equity (continued)

     At August 31, 1997,  a total of 4,982,000  shares of common stock have been
     reserved  for  issuance  upon  exercise of  outstanding  stock  options and
     options available for issuance under the Company's plans.

     The following table summarizes  information  regarding options  outstanding
     and options exercisable as of August 31, 1997:

<TABLE>
<CAPTION>
                                                   Outstanding options                     Exercisable options
                                      -------------------------------------------------------------------------------
                                                              Weighted average
                                                         ------------------------
                                                         Contractual                                     Weighted
      Range of per share              Number of             life         Exercise        Number of        average
        exercise prices                 shares           (in years)       price            shares      exercise price
                                     --------------------------------------------------------------------------------
<S>                                     <C>                 <C>          <C>              <C>             <C>    
     $  1.00 - $ 18.50                  725,000             5.62         $ 12.28          533,000         $ 10.22
     $ 18.66 - $ 27.50                  790,000             8.42         $ 25.09          148,000         $ 22.29
     $ 27.54 - $ 28.38                  388,000             8.45         $ 28.34           53,000         $ 28.18
     $ 28.75 - $ 28.75                  896,000             9.22         $ 28.75             --           $  --
     $ 31.00 - $ 76.73                  570,000             7.88         $ 39.50          136,000         $ 39.76
                                     --------------------------------------------------------------------------------
     $  1.00 - $ 76.73                3,369,000             7.94         $ 26.11          870,000         $ 17.96
                                     ================================================================================
</TABLE>

     Pro Forma Information

     Under  APB 25,  the  intrinsic  value  method,  the  exercise  price of the
     Company's  employee stock options equals the market price of the underlying
     stock on the date of grant,  thus no compensation  expense is recognized in
     the Company's  financial  statements.  Pro forma information  regarding net
     income  (loss) and net income (loss) per share is required by SFAS 123, and
     has been  determined as if the Company had accounted for its employee stock
     options  (including  shares issued under the Employee  Stock Purchase Plan,
     collectively  called  "options")  under  the  fair  value  method  of  that
     Statement.

     The fair value for these options was estimated at the date of grant using a
     Black-Scholes  option pricing model.  The  Black-Scholes  option  valuation
     model was developed for use in estimating  the fair value of traded options
     that have no vesting restrictions and are fully transferable.  In addition,
     option valuation models require the input of highly subjective  assumptions
     including  the  expected  stock price  volatility.  Because  the  Company's
     options have characteristics  significantly  different from those of traded
     options,  and  because  changes in the  subjective  input  assumptions  can
     materially  affect the fair value estimate,  in management's  opinion,  the
     existing models do not necessarily provide a reliable single measure of the
     fair value of its options.  The following weighted average assumptions were
     used in determining the fair value of the Company's  stock-based  awards to
     employees:

                                                Options                ESPP
                                      Fiscal Year    Fiscal Year    Fiscal Year
                                         1997           1996           1997
                                      -----------------------------------------
     Expected life (in years)             3.5            3.5            0.5
     Expected volatility                   51%            49%            51%
     Risk-free interest rate              5.9%           5.9%           5.5%
     Expected dividend yield              0.0%           0.0%           0.0%

     The  Company's  calculations  are  based  on a  multiple  option  valuation
     approach  and  forfeitures  are  recognized  when they occur.  The weighted
     average  estimated  fair value of employee  stock  options  granted  during
     fiscal  years 1997 and 1996 was $7.98 and $19.09 per option,  respectively.
     The  weighted  average  estimated  fair value of shares  granted  under the
     Employee Stock Purchase Plan during fiscal year 1997 was $7.00 per share,


                                       39
<PAGE>

7.   Stockholders' Equity (continued)

     respectively.  For purposes of pro forma  disclosures,  the estimated  fair
     value of the options is  amortized  to expense  over the  options'  vesting
     period. The Company's pro forma information is as follows:

                                              Fiscal Year          Fiscal Year
                                                  1997                1996
                                               ---------            --------
                                            (in thousands, except for net income
                                               (loss) per share information)
     Pro forma net income (loss)               $ (22,882)           $ 33,506
     Pro forma net income (loss) per share     $   (1.11)           $   1.56


     The effects on pro forma disclosures of applying SFAS 123 are not likely to
     be  representative of the effects on pro forma disclosures of future years.
     Because SFAS 123 is applicable only to options granted subsequent to August
     31,  1995,  the pro forma effect will not be fully  reflected  until fiscal
     year 1999.


8.   Profit Sharing and Retirement Plan

     The Company has a 401(k)  Profit  Sharing Plan covering  substantially  all
     employees.  The Company  contributes  $0.25 for every $1.00  contributed by
     Plan   participants   subject  to   certain   limitations   on   individual
     contributions.  The Company also funds annually its profit sharing  expense
     which is at the discretion of the Board of Directors. The Company's cost of
     the Plan was $945,000,  $2,508,000 and $2,547,000 in fiscal 1997,  1996 and
     1995 respectively.


9.   Lease Commitments

     The Company leases office and warehouse space under operating leases.  Rent
     expense under operating leases was $5,181,000, $3,628,000 and $2,808,000 in
     fiscal 1997,  1996 and 1995,  respectively.  Future  minimum lease payments
     under operating leases are as follows:

                                                             Year ended
                                                           August 31,1997
                                                           --------------
                                                           (In thousands)

     1998                                                    $  5,898
     1999                                                       5,584
     2000                                                       4,747
     2001                                                       4,215
     2002                                                       1,192
     2003 and thereafter                                          744
                                                           --------------
                                                             $ 22,380
                                                           ==============


10.  Litigation

     The Company is subject to pending claims and litigation.  Management, after
     review and consultation with counsel, considers that any liability from the
     disposition of such lawsuits would not have a material  adverse effect upon
     the consolidated financial condition of the Company.


11.  Restructuring Charges

     In accordance  with  Emerging  Issues Task Force  ("EITF")  Issue No. 94-3,
     "Liability  Recognition for Certain Employee Termination Benefits and Other
     Costs  to  Exit  an  Activiy   (Including   Certain  Costs  Incurred  in  a
     Restructuring),"  the Company  recorded a charge to  operating  expenses of
     $1,986,000  in the fourth  quarter of fiscal  1997.  Restructuring  charges
     included  costs  pertaining  to  certain  restructuring   programs.   These
     restructuring  programs  pertained to the  consolidation  of facilities and
     discontinuation of certain projects which resulted in a


                                       40
<PAGE>

11.  Restructuring Charges (continued)

     reduction  of the  workforce  of  approximately  50 people.  Following is a
     summary of significant components of the charge:

                                                            Year ended
                                                         August 31, 1997
                                                         --------------
                                                         (In thousands)

     Restructuring Costs
       Employee severance                                  $  1,194
       Exit costs, principally costs of 
         vacating certain facilities                            792
                                                         --------------
                                                           $  1,986
                                                         ==============


12.  Terminated Merger Costs

     In December  1995,  the  Company and The  Learning  Company  terminated  an
     agreement to merge.  The Company  recognized  pre-tax income of $15,464,000
     which consisted of an $18,000,000  payment received to terminate the merger
     and $2,536,000 of associated expenses.


13.  Operations by Geographic Area

     Information  regarding  the  Company's  operations in the United States and
     foreign areas is presented below:

                                                             August 31,       
                                                        1997           1996   
                                                     ------------------------ 
                                                          (In thousands)      
     Net Revenue                                                              
     North America                                                            
       Customers in the United States                $ 170,273      $ 166,426 
       Customers in Canada                               5,793          5,664 
       Customers in Asia/Pacific                         4,208          3,312 
       Other exports                                      --              157 
       Intercompany revenues                             2,640          2,055 
                                                     ------------------------ 
                                                       182,914        177,614 
     Europe                                             10,513         10,648 
     Consolidating eliminations                         (2,640)        (2,055)
                                                     ------------------------ 
                                                     $ 190,787      $ 186,207 
                                                     ======================== 
     Income from Operations                                                   
     North America                                   $ (26,349)     $  42,823 
     Europe                                                786          1,590 
                                                     ------------------------ 
                                                     $ (25,563)     $  44,413 
                                                     ======================== 
     Identifiable Assets                                                      
     North America                                   $ 181,475      $ 195,347 
     Europe                                              5,128          5,085 
                                                     ------------------------ 
                                                     $ 186,603      $ 200,432 
                                                     ======================== 
                                                     
     For  fiscal  1995  revenues  from  foreign  sources  were  less than 10% of
     consolidated net revenues.


                                       41
<PAGE>

14.  Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                                       Quarter ended
                                    --------------------------------------------------
                                    November      February         May          August        Fiscal
                                       30           28/29           31            31           Year
                                    -----------------------------------------------------------------
                                                 In thousands, except for per share data
<S>                                 <C>           <C>            <C>           <C>           <C>     
Fiscal year 1997:
  Net revenues                      $61,491       $44,316        $39,294       $45,686       $190,787
  Gross margin                       38,292        27,766         24,999        29,247        120,304
  Net income (loss)                   8,895        (3,462)            11       (18,926)       (13,482)
  Net income (loss) per share          0.42         (0.16)          --           (0.91)         (0.65)
Fiscal year 1996:
  Net revenues                      $70,961       $48,044        $34,993       $32,209       $186,207
  Gross margin                       46,041        33,009         24,706        23,547        127,303
  Net income (loss)                  15,936        18,839          6,180        (4,178)        36,777
  Net income (loss) per share          0.73          0.87           0.29         (0.20)          1.71
</TABLE>


                                       42
<PAGE>

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURES

          Not applicable.


PART III

Item 10 to Item 13 inclusive.

     These items have been omitted in accordance with  instructions to Form 10-K
Annual  Report.  The  registrant  will file  with the  Securities  and  Exchange
Commission  not later than 120 days after the end of the fiscal year  covered by
this Report,  a  definitive  proxy  statement  pursuant to  Regulation  14A with
respect to the 1998 Annual Meeting of Stockholders.


                                       43
<PAGE>

PART IV

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

(a)  Financial Statements and Financial Statement Schedules

     The following documents are filed as a part of this Report:

                                                                           Page
     1.   Index to Financial Statements.

          Report of Independent Auditors                                    26
          Consolidated Balance Sheets - August 31, 1997 and 1996            27
          Consolidated Statements of Operations - Years Ended
            August 31, 1997, 1996 and 1995                                  28
          Consolidated Statements of Stockholders' Equity -- 
            Years Ended August 31, 1997, 1996 and 1995                      29
          Consolidated Statements of Cash Flows -- Years Ended 
            August 31, 1997, 1996 and 1995                                  30
          Notes to Consolidated Financial Statements                        31

     2.   Financial Statement Schedules.

          The following  financial  statement  schedule of Broderbund  Software,
          Inc.  for the fiscal  years ended  August 31,  1997,  1996 and 1995 is
          filed as part of this  Report and should be read in  conjunction  with
          the Consolidated Financial Statements of Broderbund Software, Inc.

                           Schedule                                        Page

          Schedule II - Valuation and Qualifying Accounts                   48

          Schedules  not listed  above have been  omitted  because  they are not
          applicable or are not required or the  information  required to be set
          forth therein is included in the Consolidated  Financial Statements or
          Notes thereto.

     3.   Exhibits

           3.1 (1)  Restated Certificate of Incorporation.
           3.2      Amended and Restated Bylaws.
           3.3 (6)  Amended and Restated Bylaws
           4.1 (1)  Second  Amended and Restated  1986  Employee and  Consultant
                    Stock Option Plan, as amended.
           4.2 (2)  Form of Incentive Stock Option Agreement.
           4.3 (2)  Form of Non-qualified Stock Option Agreement.
           4.4 (5)  Broderbund Software, Inc. 1996 Employee Stock Purchase Plan.
           4.5 (5)  Broderbund  Software, Inc. 1996 Employee Stock Purchase Plan
                    Subscription Agreement.
           4.6 (5)  Broderbund  Software, Inc. 1996 Employee Stock Purchase Plan
                    Notice of Withdrawal.
           4.7 (5)  1996 Employee and Consultant Stock Option Plan of Broderbund
                    Software, Inc.
          10.1 (3)  Broderbund  Software, Inc.  401(k)  Profit  Sharing Plan, as
                    amended.
          10.3 (4)  Trade  Finance   Credit   Agreement   made  by  and  between
                    registrant and Union Bank, as amended.


                                       44
<PAGE>

          10.5 (4)  Form of Indemnification Agreement.
          10.10(3)  Living Books  Partnership  Agreement dated September 9, 1993
                    between  registrant,  Random House,  Inc.,  Random House New
                    Media Inc. and Broderbund Living Books, Inc.
          10.11 (7) Stock Purchase  Agreement among Broderbund  Software,  Inc.,
                    Intuit Inc. and Parsons Technology, Inc.
          11.1      Computation of net income per share (see page 43).
          21.1      List of subsidiaries.
          23.1      Consent of Ernst & Young LLP, Independent Auditors (see page
                    44).
          24.1      Power of Attorney (included on page 41).

----------
(1)  Incorporated by reference to the exhibit filed with the registrant's Annual
     Report on Form 10-K for the year ended August 31, 1994.
(2)  Incorporated  by  reference  to the  exhibit  filed  with the  registrant's
     Registration Statement on Form S-8 (File No. 33-45928),  effective February
     24, 1992.
(3)  Incorporated by reference to the exhibit filed with the registrant's Annual
     Report on Form 10-K for the year ended August 31, 1993.
(4)  Incorporated  by  reference  to the  exhibit  filed  with the  registrant's
     Registration Statement on Form S-1 (File No. 33-43232),  effective November
     25, 1991.
(5)  Incorporated   by  reference  to  exhibits  filed  with  the   registrant's
     Registration Statement on Form S-8 (File No. 333-13803), effective October,
     9, 1996.
(6)  Incorporated  by  reference  to the  exhibit  filed  with the  registrant's
     Quarterly Report on Form 10-Q for the quarter ended February 28, 1997.
(7)  Incorporated by reference to the exhibit filed with the  registrant's  Form
     8-K dated November 10, 1997.


                                       45
<PAGE>

(b)  Reports on Form 8-K

          No  reports  on Form 8-K have  been  filed  with  the  Securities  and
     Exchange Commission during the fourth quarter of the period covered by this
     Report.

(c)  Exhibits

     See item 14 (a) 3 above.

(d)  Financial Statement Schedules

     See item 14 (a) 2 above.


                                       46
<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,  in the City of Novato,
State of California, on this 26th day of November, 1997.

                                        Broderbund SOFTWARE, INC.

                                        By:  /s/  Joseph P. Durrett
                                             ----------------------------------
                                             Joseph P. Durrett,
                                             Chief Executive Officer


                                POWER OF ATTORNEY

     KNOW ALL THESE PERSONS BY THESE PRESENTS,  that each person whose signature
appears below  constitutes and appoints Thomas L. Marcus and William M. McDonagh
and  each  of them  acting  individually,  as  such  person's  true  and  lawful
attorneys-in-fact  and agents,  each with full power of  substitution,  for such
person,  in any and all  capacities,  to sign any and all amendments  (including
post-effective  amendments)  to this report on Form 10-K, and to file with same,
with all exhibits thereto and other documents in connection therewith,  with the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  and each of them,  full power and  authority to do and perform each and
every act and thing requisite and necessary to be done in connection  therewith,
as fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said  attorneys-in-fact  and agents, or
any of them, or their or his or her  substitutes,  may do or cause to be done by
virtue hereof.

     Pursuant to the  requirements  of the  Securities and Exchange Act of 1934,
this  Report on Form 10-K has been  signed  below by the  following  persons  on
behalf of the Registrant and in the capacities and on the dates indicated:

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


/s/ Joseph P. Durrett        Chief Executive Officer           November 26, 1997
-------------------------    (Principal Executive
Joseph P. Durrett            Officer) and Director


/s/ William M. McDonagh      President, Chief Operating        November 26, 1997
-------------------------    Officer and Director 
William M. McDonagh          (Principal Financial 
                             Accounting Officer)


/s/ Douglas G. Carlston      Chairman, Board of Directors      November 26, 1997
-------------------------
Douglas G. Carlston      


/s/ Edmund R. Auer           Director                          November 26, 1997
-------------------------
Edmund R. Auer


/s/ Gary L. Buckmiller       Director                          November 26, 1997
-------------------------
Gary L. Buckmiller


/s/ Scott D. Cook            Director                          November 26, 1997
-------------------------
Scott D. Cook


/s/ William P. Egan          Director                          November 26, 1997
-------------------------
William P. Egan


/s/ Lawrence H. Wilkinson    Director                          November 26, 1997
-------------------------
Lawrence H. Wilkinson


                                       47
<PAGE>

                                                  Schedule II

                                           BRODERBUND SOFTWARE, INC.

                                       Valuation and Qualifying Accounts
                                                (In thousands)

<TABLE>
<CAPTION>
                                        Balance at                      Deductions,                Balance
                                        Beginning       Additions-      Returns and                at End
Description                              of Year        Provisions       Write-offs    Other (1)   of Year
-----------                              -------        ----------       ----------    ---------   -------
<S>                                      <C>             <C>              <C>           <C>        <C>    
Allowance for returns:
  Year ended August 31, 1997             $21,368         $26,788          $29,926       $4,505     $22,735
  Year ended August 31, 1996              19,130          24,970           24,541        1,809      21,368
  Year ended August 31, 1995              10,336          25,744           17,875          925      19,130

Allowance for doubtful accounts:
  Year ended August 31, 1997             $ 6,243         $   694          $ 2,802       $  582     $ 4,717
  Year ended August 31, 1996               4,563           1,111              281          850       6,243
  Year ended August 31, 1995               3,029           1,900              481          115       4,563
</TABLE>

(1)  Represents  balances assumed from Parsons Technology  acquisition in fiscal
     1997, Random House's 50% interest in Living Books joint venture acquisition
     in fiscal 1997,  T/Maker Company  acquisition in fiscal 1996 and the Banner
     Blue Software acquisition in fiscal 1995


                                       48