GT INTERACTIVE SOFTWARE CORP, S-1, 1996-10-18

GT INTERACTIVE SOFTWARE CORP
S-1, 1996-10-18
PREPACKAGED SOFTWARE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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GT INTERACTIVE SOFTWARE CORP.
(Exact name of registrant as specified in its charter)

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DELAWARE 7372 13-3689915
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

16 EAST 40TH STREET,
NEW YORK, NEW YORK 10016
(212) 726-6500

(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

RONALD CHAIMOWITZ,
16 EAST 40TH STREET,
NEW YORK, NEW YORK 10016
(212) 726-6500

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:

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David P. Levin, Esq. Richard R. Plumridge, Esq.
Kramer, Levin, Naftalis & Frankel Alexander D. Lynch, Esq.
919 Third Avenue Brobeck, Phleger & Harrison LLP
New York, New York 10022 1301 Avenue of the Americas
(212) 715-9100 New York, New York 10019
(212) 581-1600
</TABLE>

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: / /
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CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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Common Stock, par value
$.01 per share................................................ $356,500,000 $108,031
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</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act, based on the average of the high and
low sales prices for the Common Stock reported on the Nasdaq National Market
on October 15, 1996.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act, or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to Section 8(a), may determine.
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<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are identical
in all respects except for the front cover page and the Underwriting pages of
the International Prospectus, which are included herein after the final page of
the U.S. Prospectus and are labeled "Alternate Page for International
Prospectus." Final forms of each of the Prospectuses will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.

SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996
LOGO
15,500,000 SHARES

COMMON STOCK

Of the 15,500,000 shares of Common Stock offered hereby, 12,500,000 shares
are being offered initially in the United States and Canada by the U.S.
Underwriters and 3,000,000 shares are being offered initially outside the United
States and Canada by the International Underwriters. Of the shares of Common
Stock being offered, 4,000,000 shares are being offered for sale by GT
Interactive Software Corp. ("GTIS" or the "Company") and 11,500,000 shares are
being offered for sale by the Selling Stockholders. The Company will not receive
any of the proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders." On October 17, 1996, the last sale price
of the Common Stock, as reported on the Nasdaq National Market, was $20.00 per
share. See "Price Range of Common Stock." The Common Stock is traded on the
Nasdaq National Market under the symbol "GTIS."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS (2)
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Per Share........................ $ $ $ $
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Total (3)........................ $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $1,300,000.

(3) Certain Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to an additional 2,325,000 shares of Common Stock solely to
cover overallotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and the Proceeds to Selling Stockholders will be $ ,
$ and $ , respectively.
---------------------

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.

ROBERTSON, STEPHENS & COMPANY MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
LEHMAN BROTHERS
PIPER JAFFRAY INC.

The date of this Prospectus is , 1996.
<PAGE> 4

[Graphical depiction of software titles and characters with the various logos
of the Company and its subsidiaries.]

Depicts current software releases and titles under development.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

2
<PAGE> 5

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

TABLE OF CONTENTS

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PAGE
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Summary................................................................................ 4
Risk Factors........................................................................... 6
Use of Proceeds........................................................................ 14
Price Range of Common Stock............................................................ 14
Dividend Policy........................................................................ 14
Capitalization......................................................................... 15
Selected Consolidated Financial Information............................................ 16
Pro Forma Consolidated Financial Information........................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 19
Business............................................................................... 25
Management............................................................................. 35
Principal and Selling Stockholders..................................................... 43
Certain Transactions................................................................... 46
Description of Capital Stock........................................................... 49
Shares Eligible for Future Sale........................................................ 52
Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders.................... 54
Underwriting........................................................................... 57
Legal Matters.......................................................................... 59
Experts................................................................................ 59
Additional Information................................................................. 59
Index to Consolidated Financial Statements............................................. F-1
</TABLE>

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The Company was incorporated in Delaware in September 1992 and commenced
operations in February 1993. Unless the context otherwise provides, as used in
this Prospectus "GTIS" or the "Company" refers to GT Interactive Software Corp.
and its wholly owned subsidiaries. The Company's principal executive offices are
located at 16 East 40th Street, New York, New York 10016, and its telephone
number is (212) 726-6500. The Company's home page can be accessed on the World
Wide Web at http://www.gtinteractive.com. Information contained in the Company's
Web site shall not be deemed to be part of this Prospectus.

The mark "GT" in stylized form is a trademark of the Company. This
Prospectus also includes product names, trademarks and trade names of companies
other than GTIS which are the property of their respective companies. Humongous
Entertainment, Inc. products are not in any manner affiliated with Putt-Putt
Golf Courses of America, Inc.

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

For investors outside the United States: no action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.

In this Prospectus, references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.

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

3
<PAGE> 6

SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Consolidated Financial Statements and
notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."

THE COMPANY

GT Interactive Software Corp. creates, publishes and merchandises
interactive entertainment, edutainment and value-priced consumer software for a
variety of platforms on a world-wide basis. Similar to major film studios and
record companies, the Company employs a portfolio approach to achieve a broad
base of products across most major consumer software categories. Recognizing
that software distribution capabilities attract publishing content, the Company
has used its strong distribution to build its current position as a leader in
the consumer software publishing business. According to PC Data, in the first
eight months of 1996 the Company had achieved the industry's highest market
share in number of units sold in the PC software games category (giving effect
to the Company's acquisitions of WizardWorks and FormGen). The Company has
experienced significant growth in its published front-line titles, growing from
5 titles released in 1994 to 24 titles released in 1995 to 57 titles released
during the nine months ended September 30, 1996.

The Company's current strategy is to obtain new software content by
blending its in-house development capabilities with the multi-title publishing
relationships it has established with independent software developers and
content providers. To that end, the Company completed several acquisitions of
leading software companies in 1995 and 1996 which have increased its internal
software development capabilities and publishing base. In July 1996, the Company
acquired Humongous, a premier developer and publisher of award-winning
children's software, which has become the centerpiece of its edutainment
business. In addition, the Company acquired WizardWorks, a developer and
publisher of value-priced software, and FormGen, a publisher of interactive PC
shareware and software. These 1996 acquisitions supplemented the Company's 1995
acquisition of Slash, a publisher, purchaser, repackager and distributor of
value-priced software.

The Company has established multi-title software publishing relationships
with a wide range of leading content providers, including id Software, a
developer of 3-D action games, such as Quake, Doom, Doom II and Hexen; 3D
Realms, the creator of the best-selling Duke Nukem 3D; Williams, an arcade game
developer whose titles include Mortal Kombat 3, NBA Hang Time and War Gods; and
Scavenger, the developer of Scorcher, Amok and Into The Shadows. The Company has
also entered into multi-title relationships with edutainment content providers
such as Mercer Mayer, a leading children's author and the creator of The Little
Critter books, and Stan and Jan Berenstain, the creators of The Berenstain Bears
series.

The Company believes that it is currently the largest distributor of
consumer software to mass merchants in the United States. The Company is the
primary supplier of its own and third party consumer software to approximately
2,290 Wal-Mart stores and approximately 735 Target stores and supplies
value-priced software under specially designed programs to approximately 2,155
Kmart stores. In addition, the Company has established direct selling
relationships for its own published software with a variety of major retailers,
including Sam's Club, Price-Costco, CompUSA, Best Buy, Egghead and Computer
City, at approximately 20,000 locations nationwide.

The Company believes that significant growth opportunities exist in
international markets and across a variety of next generation platforms. In
order to exploit international markets, in January 1995, the Company established
a software publishing operation in London, England, with responsibility for
European markets and is currently publishing, marketing and distributing its
consumer software products in over 35 countries world-wide. The Company believes
that it is well positioned to take advantage of existing and emerging next
generation platforms. Recently, GTIS successfully launched Doom for the Sony
PlayStation in Japan and Europe. In addition, the Company released Quake for PCs
in Europe in August 1996, where it was the number one selling title upon its
release.

4
<PAGE> 7

THE OFFERING

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Common Stock Offered by the Company.............. 4,000,000 shares
Common Stock Offered by the Selling
Stockholders................................... 11,500,000 shares
U.S. Offering.................................... 12,500,000 shares
International Offering........................... 3,000,000 shares
Common Stock Outstanding after the Offering...... 70,515,767 shares(1)
Use of Proceeds.................................. To be used for working capital, general
corporate purposes and potential
acquisitions and investments. See "Use
of Proceeds."
Nasdaq National Market Symbol.................... GTIS
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
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ACTUAL AS ADJUSTED(10)
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BALANCE SHEET DATA(2):
Cash, cash equivalents and short-term investments...................................... $ 69,743 $ 147,243
Working capital........................................................................ 108,467 185,967
Total assets........................................................................... 277,861 355,361
Stockholders' equity................................................................... 133,871 211,371
</TABLE>

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(1) Excludes (i) an aggregate of 5,443,849 shares of Common Stock reserved for
issuance upon the exercise of options granted as of September 30, 1996,
pursuant to the Company's 1995 Stock Incentive Plan, at a weighted average
exercise price of $11.11 per share and (ii) 1,320,072 shares of Common Stock
reserved for issuance upon exercise of warrants outstanding as of the date
of this Prospectus at a weighted average exercise price of $12.52 per share.
See "Management -- Stock Incentive Plan" and "Shares Eligible for Future
Sale."
(2) The summary consolidated financial information presented, except for the
pro forma information, is based upon the historical consolidated financial
statements, as restated for the acquisitions of WizardWorks and FormGen.
Information for the six months ended June 30, 1995 and 1996 and the pro
forma information are unaudited.
(3) Information represents only a partial year, as the Company did not commence
operations until February 1993.
(4) Reflects the Company's acquisition of Slash and Humongous as if the same
had been consummated on January 1, 1995 and the income tax provision that
would have been provided had both the Company and Slash been C corporations
for the relevant periods. (See Note 2 and Note 7 of the Notes to the
Company's December 31, 1995 Consolidated Financial Statements).
(5) Reflects the Company's acquisition of Humongous as if the same had been
consummated on January 1, 1996.
(6) The benefit from change in tax status occurred as a result of the
transition from an S corporation to a C corporation on March 1, 1995, which
allowed the Company to accrue certain tax benefits which would otherwise
have flowed to the stockholders of the S corporation. This benefit would not
have arisen for the year ended December 31, 1995 had the Company been a C
corporation beginning January 1, 1994.
(7) Reflects additional income tax provision that would have been provided had
both the Company and Slash been C corporations for the relevant periods.
(See Note 2 and Note 7 of the Notes to the Company's December 31, 1995
Consolidated Financial Statements).
(8) Net income for the year ended December 31, 1994 would have been $12,046 had
the Company been a C corporation for the entire year.
(9) Pro forma weighted average number of shares outstanding has been calculated
as if all stock issued in the twelve month period prior to the initial
public offering (including common stock equivalents such as options and
warrants) had been outstanding throughout the periods presented and assuming
the proceeds from such issuances (including the assumed exercise prices of
options and warrants) had been used to reacquire shares at the initial
public offering price at the beginning of the period.
(10) Adjusted to reflect the sale of 4,000,000 shares of Common Stock by the
Company based upon an assumed public offering price of $20.00 per share
(after deducting the underwriting commissions and estimated offering
expenses payable by the Company) and the receipt by the Company of $2
million upon the exercise, immediately prior to the consummation of the
Offering, of certain warrants held by id Software.

Unless otherwise indicated, all information contained in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option and (ii) gives
effect to the acquisitions of WizardWorks and FormGen. All information, other
than historical financial information, gives effect to the acquisition of
Humongous.

5
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RISK FACTORS

In addition to other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below.

CUSTOMER CONCENTRATION AND CREDIT RISK

The Company is the primary supplier of software to Wal-Mart Stores, Inc.
("Wal-Mart"), including titles published by the Company and products from other
publishers. On a pro forma basis, giving effect to the acquisition of Slash
Corporation ("Slash"), sales to Wal-Mart accounted for approximately 42% and 49%
of the Company's net sales for 1994 and 1995, respectively, and 47% and 50% for
the six months ended June 30, 1995 and 1996, respectively. The Company's status
as Wal-Mart's primary supplier is not based upon any written agreement or
understanding. Accordingly, such status could be terminated at any time by
Wal-Mart. In addition, Wal-Mart has dedicated, and the Company currently
anticipates that Wal-Mart will continue to dedicate, the software department in
a limited number of stores to other software distributors on a test basis. There
can be no assurance that Wal-Mart will continue to use the Company as its
primary supplier of consumer software, or at all. The loss of Wal-Mart as a
customer, a significant decrease in product shipments to or an inability to
collect receivables from Wal-Mart or any other adverse change in the Company's
relationship with Wal-Mart would have a material adverse effect on the Company's
business, operating results and financial condition.

RISKS ASSOCIATED WITH ACQUISITIONS AND INVESTMENTS

In June 1995 the Company acquired Slash, in June 1996 the Company acquired
WizardWorks Group, Inc. ("WizardWorks") and Candel Inc., the parent company of
FormGen, Inc. ("FormGen") and in July 1996 the Company acquired Humongous
Entertainment, Inc. ("Humongous"). The Company undertook these acquisitions to
expand its publishing and distribution capabilities with the assumption that the
combined entity would be better able to take advantage of market opportunities
than if each of the companies were operated individually. This synergy will
depend in part on the ability of the Company to retain in-house publishing
staffs and third-party relationships and to utilize distribution, sales and
marketing capabilities. The Company is in the process of integrating the
acquired companies by consolidating certain operations, offices and facilities,
and combining administrative, accounting, sales and marketing and distribution
functions. The integration of these acquired companies will involve, among other
things, the opening of new facilities or the expansion of existing facilities,
the expansion of accounting systems, controls and procedures, the increase in
warehouse and distribution capabilities, the closing of redundant facilities and
the elimination of duplicate personnel. The Company is in the early stages of
integrating certain of the acquired companies and there can be no assurance that
the integration will be completed without disrupting the Company's business.
Should the Company not be able to achieve such integration in a timely manner or
in a coordinated fashion, it could materially and adversely affect the Company's
business, operating results or financial condition.

The Company believes that its future growth will depend, in part, on its
ability to continue to identify, acquire and integrate companies which have
software development and publishing capabilities. While the Company reviews
acquisition opportunities in the ordinary course of its business, some of which
may be material and some of which are currently under investigation or
discussion, the Company presently has no commitments or understandings with
respect to any material acquisitions and there can be no assurance that the
Company will be successful in identifying and acquiring suitable acquisition
candidates. If any such acquisition candidates are identified, there can be no
assurance that the Company will be successful in financing such acquisitions,
negotiating terms favorable to the Company, consummating such acquisitions or
integrating the acquired businesses into the Company's operations. Moreover, in
connection with any such acquisitions, the Company may be required to incur
indebtedness or assume other liabilities which could have a material adverse
effect on the Company's operating results, liquidity and capital resources, or
to issue shares of its capital stock which could result in dilution to
stockholders.

6
<PAGE> 9

In addition, in September 1996 the Company entered into an agreement to
invest in convertible preferred stock of OffWorld Entertainment, Inc. (also
known as "OddWorld Inhabitants" or "OddWorld"), which is convertible into 50% of
the common equity. Such acquisition is subject to the approval of the
shareholders of OddWorld's parent company. This acquisition is currently
scheduled to be presented to such shareholders for their approval in November,
1996. There can be no assurance that such shareholder approval will be obtained.
If such approval is not obtained, there can be no assurance that the Company
will be able to obtain the rights to OddWorld's technology or content.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY

The Company has experienced and may continue to experience significant
quarterly fluctuations in net sales and operating results due to a variety of
factors, including fluctuations in the mix of products with varying profit
margins sold by the Company, the size and timing of acquisitions, the size and
growth rate of the consumer software market, market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products or enhancements of existing
products, projected and actual changes in computing platforms, the timing and
success of product introductions by the Company and its competitors, product
returns, changes in pricing policies by the Company and its competitors, the
accuracy of retailers' forecasts of consumer demand, the timing of orders from
major customers, order cancellations and delays in shipment. In addition, delays
in the introduction of the Company's front-line titles could result in material
fluctuations of the Company's operating results. The Company has experienced,
and expects to experience in the future, significant fluctuations in its
quarterly net sales and operating results as a result of such factors. In
response to competitive pressures, the Company may take certain pricing or
marketing actions that could materially and adversely affect the Company's
business, operating results and financial condition. Products are generally
shipped as orders are received and, accordingly, the Company operates with
little backlog. The Company's expense levels are based, in part, on its
expectations regarding future sales and, as a result, operating results would be
disproportionately adversely affected by a decrease in sales or a failure to
meet the Company's sales expectations. Defective front-line published products
may result in higher customer support costs and product returns. Further, the
consumer software business is seasonal. Net sales are typically significantly
higher during the fourth calendar quarter, due primarily to the increased demand
for consumer software during the year-end holiday buying season. Net sales in
other quarters are generally lower and vary significantly. Accordingly, the
Company believes that period to period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. There can be no assurance that the Company will achieve consistent
profitability on a quarterly or annual basis. Due to all of the foregoing
factors, the Company's operating results in any quarter may be below the
expectations of public market analysts and investors. In such event, the market
price of the Company's Common Stock would likely be materially and adversely
affected. See "-- Possible Volatility of Stock Price" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON NEW PRODUCT AND PRODUCT ENHANCEMENT INTRODUCTIONS; PRODUCT DELAYS

The Company's continued success in the publishing business depends on the
timely introduction of successful new products or enhancements of existing
products 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. If revenues from new products or
enhancements were to fail to replace declining revenues from existing products,
the Company's business, operating results and financial condition could be
adversely affected. The process of developing software products such as those
offered by the Company is extremely complex and is expected to become more
complex and expensive in the future as new platforms and technologies are
addressed. A significant delay in the introduction of one or more new products
or enhancements could have a material adverse effect on the ultimate success of
such products and on the Company's business, operating results and financial
condition, particularly in view of the seasonality of the Company's business.
See "-- Reliance on Third-Party Software Developers; Reliance on Other
Publishers," "-- Fluctuations in Quarterly Operating Results; Seasonality,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business -- GTIS Publishing."

7
<PAGE> 10

RELIANCE ON THIRD-PARTY SOFTWARE DEVELOPERS; RELIANCE ON OTHER PUBLISHERS

Although the Company has substantially increased, primarily through
acquisitions, its internal software development capabilities in 1996, a
significant portion of the Company's published products have been licensed from,
or developed by, the Company in collaboration with independent software
developers. Due primarily to the increased demand for consumer software
programs, the payment of advances and guaranteed royalties to independent
developers has increased and may continue to increase. As of June 30, 1996, the
Company had recorded $48.8 million of royalty advances on its balance sheet.
There can be no assurance that the release of products associated with such
advances will not be delayed, which would delay the Company's ability to receive
revenue to offset such advances or royalties, or that the sales of such products
will be sufficient to cover the amount of such advances or royalty prepayments.
The Company's success depends in part on its continued ability to obtain and
renew product development agreements with independent software developers. As
independent developers are in high demand, there can be no assurance that
independent developers, including those which have developed products for the
Company in the past, will be available to develop products for the Company in
the future. For instance, the Company does not currently have any contractual
agreement with id Software pursuant to which the Company has control over, or
has been promised rights to, future products to be developed by id Software;
such rights are negotiated on a title-by-title basis. Many independent
developers have limited financial resources, which could expose the Company to
the risk that such developers may go out of business prior to completing a
project. In addition, because the Company's published products are often
developed with outside developers, the Company cannot always control the timing
of the introduction of its products. While the Company maintains production
liaisons with independent developers, there can be no assurance that new
products developed by third-party developers whose products are published by the
Company will be introduced on schedule or at all or within acceptable quality
guidelines or that they will achieve market acceptance. The Company's success is
also dependent in part on its ability to obtain content for its products from
external sources. There can be no assurance that the Company will be able to
obtain or renew product development agreements, or to obtain such content, on
favorable terms, or at all. Such agreements are terminable, in some cases
without notice, upon the occurrence of one or more of the following events:
those involving the bankruptcy or insolvency of either party to such agreements,
the cessation of operations by either of such parties or the material breach of
specified provisions of such agreements which breach is not cured within a
designated timeframe. See "Business -- GTIS Publishing."

The Company also distributes products on behalf of other publishers. There
can be no assurance that the Company will obtain or renew any rights to
distribute such products. Failure to retain or obtain such rights could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- The GTIS Merchandising and Distribution
Approach" and "-- GTIS Publishing."

CHANGING PRODUCT PLATFORMS

The consumer software market is characterized by rapidly changing
technology, particularly with respect to product platforms. The Company must
continually anticipate the emergence of, and adapt its products to, popular
platforms for consumer software. When the Company chooses to publish or develop
a product for a new platform, it may be required to make a substantial
development investment one to two years in advance of shipments of products on
that platform. If the Company invests in the development of a product for a
platform that does not achieve significant market penetration, the Company's
planned revenues from that product will be adversely affected and it may not
recover its development investment. If the Company does not choose to publish or
co-develop for a platform that achieves significant market success, the
Company's revenue growth may also be adversely affected. See "Business --
Industry Background" and "-- GTIS Publishing."

INTERNATIONAL SALES

The Company began to broaden its international sales efforts in late 1994
by establishing relationships with software publishers and distributors in
leading international markets. The Company expects that international sales will
account for a significant portion of its net sales in the future. International
sales are subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and other barriers,

8
<PAGE> 11

fluctuating exchange rates, potential political instability, difficulties
installing and managing foreign operations and difficulty in collection of
accounts receivable. In addition, acceptance of the Company's products in
certain markets has required, and may in the future require extensive,
time-consuming and costly modifications to localize the products for use in
particular markets. Software piracy presents a particularly acute problem in
certain international markets such as South America, the Middle East, the
Pacific Rim and the Far East, and the laws of foreign jurisdictions may not
protect the Company's proprietary rights to the same extent as the laws of the
United States. There can be no assurance that these or other factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, operating results and financial
condition. See "Business -- GTIS Publishing" and "-- International."

RELIANCE ON HIT TITLES

A significant percentage of the Company's net sales has been attributable
to a limited number of hit titles. For example, sales of the Company's top five
titles during 1995 and the first six months of 1996 accounted for approximately
10% and 10% of the Company's net sales for such periods, respectively, and
approximately 39% and 38% of the Company's published front-line product sales
for such periods, respectively. The Company's business, operating results and
financial condition could be materially and adversely affected if the Company
does not publish an adequate number of hit titles in each fiscal quarter. See
"Business -- GTIS Publishing."

COMPETITION

The market for consumer software products is highly competitive. Only a
small percentage of products introduced in the consumer software market achieve
any degree of sustained market acceptance. Competition is based primarily upon
price, access to retail shelf space, product enhancements, ability to operate on
popular platforms, availability of titles, new product introductions, marketing
support and distribution systems. Many of the companies with which the Company
currently competes or may compete in the future have comparable or greater
financial, technical, marketing, sales and customer support resources, larger
and more seasoned internal development teams, greater name recognition and a
larger customer base, than the Company. In addition, the Company believes that
large software companies, media companies and film studios are increasing their
focus on the interactive entertainment and edutainment software markets and, as
a result of their financial and other resources, name recognition and customer
base, may become significant competitors of the Company. Moreover, in a number
of geographic markets, certain of the titles offered by the Company, including
various hit titles, are offered on a limited number of platforms and compete
with the same titles offered by the Company's competitors on other platforms.
Current and future competitors with greater financial resources than the Company
may be able to carry larger inventories, undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make higher offers or
guarantees to software developers and licensors than the Company. The market is
also extremely competitive with respect to access to third party developers and
content providers. This competition is based primarily on breadth of
distribution, development funding, reputation and royalty rates. To the extent
that competitors maintain or achieve greater title portfolio breadth, title
rights for popular platforms, or access to third party developers and content
providers, or price, shelf access, marketing support, distribution or other
selling advantages, the Company could be materially and adversely affected. In
addition, several competitors of the Company have recently sought to expand
their distribution capabilities. New hardware platforms and electronic delivery
systems may be introduced into the software market and potential new competitors
may enter the software development and distribution market, resulting in greater
competition for the Company. There can be no assurance that the Company will
have the resources required to respond effectively to market or technological
changes or to compete successfully with current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition. In addition, as
part of its value-added distribution program, the Company seeks to provide its
mass merchant customers with a wide variety of popular titles. Achieving such a
product mix requires the Company to supplement the distribution of its published
products with certain third party software products, including products
published by the Company's competitors. There can be no assurance that such
competitors will continue to provide such products to the Company for
distribution at the Company's mass merchant customers. The failure to obtain

9
<PAGE> 12

software titles developed or published by one or more of the Company's
competitors, and not being able to obtain these products from other distributors
could have a material adverse effect on the Company's relationships with such
mass merchant customers, which in turn would have a material adverse effect on
the Company's business, operating results and financial condition. See "Business
- -- Competition."

DEPENDENCE ON KEY PERSONNEL

The continued success of the Company depends to a significant extent upon
the continued performance and contribution of its senior management and on its
ability to continue to attract, motivate and retain highly qualified employees.
In particular, the Company is highly dependent on the management services of
Joseph J. Cayre, the Chairman of the Board of Directors, Ronald Chaimowitz, the
President and Chief Executive Officer of the Company and Charles F. Bond,
President of the Company's Slash Division. The loss of the services of any of
the Company's senior management could have a material adverse effect on the
Company's business, operating results and financial condition. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Specifically, the Company may experience increased costs in order to
attract and retain skilled employees. In addition, while the Company has entered
into employment agreements with Messrs. Chaimowitz and Bond, there can be no
assurance that such employees will not leave or compete with the Company. The
Company's failure to attract additional qualified employees or to retain the
services of key personnel could materially and adversely affect the Company's
business, operating results and financial condition. See "Management --
Employment Agreements."

POSSIBLE VOLATILITY OF STOCK PRICE

The market prices for the Common Stock have been, and may in the future be,
volatile. Market prices for the Company's Common Stock will be influenced by a
number of factors, including quarterly variations in the financial results of
the Company and its competitors, acquisitions, changes in earnings estimates by
analysts and conditions in the computer software industry, the overall economy
and the financial markets. These and other factors may adversely affect the
market price of the Common Stock. See "Price Range of Common Stock."

PRODUCT RETURNS

The Company accepts product returns or provides markdowns or other credits
on varying terms in the event that the customer holds excess inventory of the
Company's products. Software products as complex as those published by the
Company may contain undetected errors when first introduced or when new versions
are released. It is the Company's practice to accept returns of defective or
damaged products at any time. At the time of product shipment, the Company
establishes reserves, including reserves under the Company's policies for stock
balancing, price protection and returns of defective or damaged products, which
estimate the potential for future returns of products based on historical return
rates, seasonality of sales, retailer inventories of the Company's products and
other factors. The Company has historically experienced, and reserved for,
product returns at a rate of approximately 30% of gross sales. Product returns
that exceed the Company's reserves, or loss of or delay in market acceptance of
a new product as a result of software failures or otherwise, could materially
and adversely affect the Company's business, operating results and financial
condition. Although the Company maintains reserves which it believes to be
adequate with respect to product returns and price reductions, there can be no
assurance that actual returns to the Company will not exceed the reserves
established. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

RAPID EXPANSION

The Company has experienced significant and rapid sales growth since it
commenced operations. There can be no assurance that the Company will be able to
maintain its present level of sales or continue to experience sales growth.
There can be no assurance that, if the Company continues to experience sales
growth, it can do so without adversely affecting its profitability.

10
<PAGE> 13

The Company's ability to manage its growth effectively will require it to
continue to attract, train, motivate, manage and retain key employees and to
improve its operational, financial and management information systems. If the
Company's management becomes unable to manage growth effectively, the Company's
business, operating results and financial condition could be adversely affected.
See "Business -- Facilities" and "-- Business Strategy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

RELIANCE ON MERCHANDISING SERVICES

The Company relies upon REPS, a company controlled by certain of the Cayre
Family Stockholders (as defined below), as the primary source of the field sales
representative services provided by the Company to Wal-Mart and to other of its
retail customers. The Company believes that the quality of the field sales
representative services provided by REPS is an important aspect of the Company's
merchandising strength. REPS has agreed to continue to perform such services, at
its cost, pursuant to an agreement expiring in 1997, which agreement may be
terminated only by the Company. The Company believes that the terms of this
agreement are as fair to the Company as the terms obtainable from an
unaffiliated third party. In the event that the Company is unable to extend such
agreement on terms that are favorable to the Company, or REPS ceases to provide
such services for any other reason, and the Company is not able to obtain
comparable services from another source, the Company's business, operating
results and financial condition could be materially and adversely affected.

MANUFACTURING RISKS

The production of the Company's published products involves duplicating
software programs onto CD-ROM disks and floppy diskettes, printing user manuals
and product packaging materials, and packaging finished products. Each of the
foregoing activities is performed for the Company by third parties in accordance
with the Company's specifications, including, in some cases, entities controlled
by the Cayre Family Stockholders. While these services are available from
multiple parties and at multiple sites, there can be no assurance that an
interruption in the manufacture of the Company's products will not occur and, if
it does occur, that it could be remedied without undue delay and without
materially and adversely affecting the Company's business, operating results or
financial condition. In addition, as consumer demand for CD-ROM based software
increases, the Company must compete for CD-ROM duplication services with its
competitors, as well as publishers of music and video CDs. An inability to
secure adequate CD-ROM stamping capacity could have a material adverse effect on
the Company's business, operating results and financial condition. While the
Company engages in ongoing efforts to ensure an adequate and timely supply of
CD-ROMs from a number of suppliers, and to date has incurred no difficulty in
securing its required supply, there can be no assurance that the future supply
of CD-ROMs will be sufficient to meet the Company's requirements.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company sells a significant portion of its published software under
licenses from independent developers and, in such cases, does not acquire the
copyrights for the underlying work. The Company relies primarily on a
combination of patent, trademark, copyright, trade secret and other proprietary
rights laws, license agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights and the rights of
its co-developers. Unauthorized copying occurs within the software industry, and
if a significant amount of unauthorized copying of the Company's published
products or products distributed by it were to occur, the Company's business,
operating results and financial condition could be materially and adversely
affected. Also, as the number of software products in the industry increases and
the functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. There can be
no assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. There has been
substantial litigation in the industry regarding copyright, trademark and other
intellectual property rights. Any such claims or litigation, with or without
merit, could be costly and cause a diversion of management's attention, which
could have a material adverse effect on the Company's business, operating
results and financial

11
<PAGE> 14

condition. See "Business -- Intellectual Property and Proprietary Rights" for
the description of the Company's litigation against Micro Star Software.

RISK OF CUSTOMER BUSINESS FAILURE

Sales are typically made on credit, with terms that vary depending upon the
customer and the nature of the product. The Company does not hold collateral to
secure payment. Retailers and distributors compete in a volatile industry and
are subject to the risk of business failure. For example, the Company currently
has a receivable in the amount of approximately $1.2 million from Neostar Retail
Group, Inc. a retailer currently engaged in Chapter 11 bankruptcy proceedings.
The Company believes its existing reserves are adequate to cover its exposure
with respect to such receivable. Although the Company maintains a reserve for
uncollectible receivables that it believes to be adequate, there can be no
assurance that such reserve is adequate or that additional payment defaults on
significant sales would not materially and adversely affect its business,
operating results and financial condition.

CONCENTRATION OF SHARE OWNERSHIP

The Common Stock entitles its holders to one vote per share on all matters
submitted to a vote of the holders of the Company's Common Stock. Upon the
completion of the Offering, the Cayre Family Stockholders will collectively hold
approximately 42.1% of the combined voting power of the outstanding shares of
Common Stock. As a result, the Cayre Family Stockholders will have a substantial
amount of the voting power required to elect all directors and to approve other
matters required to be voted upon by the stockholders of the Company. See
"Principal and Selling Stockholders" and "Description of Capital Stock." See
also "Certain Transactions -- Transactions with Cayre Family Stockholders" for a
description of certain voting arrangements among the Cayre Family Stockholders.

ANTI-TAKEOVER PROVISIONS

The Company's Board of Directors has the authority to issue shares of
Preferred Stock and to determine the designations, preferences and rights and
the qualifications or restrictions of those shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate actions, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law (the "DGCL").
In general, this statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Furthermore, certain other provisions of the Company's
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws, such as the provision for a staggered Board of Directors, may have the
effect of discouraging, delaying or preventing a merger, tender offer or proxy
contest, which could adversely affect the market price of the Company's Common
Stock. See "Management" and "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have a total of
70,515,767 shares of Common Stock outstanding. Approximately 43,175,000 shares
of Common Stock will be "restricted" securities within the meaning of Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). Generally,
under Rule 144, a person who has held restricted shares for two years may sell
such shares, subject to certain volume limitations and other restrictions,
without registering them under the Securities Act. In addition and subject to
certain limitations, holders of approximately 41,490,000 shares of the Company's
Common Stock (including Common Stock issuable upon the exercise of warrants)
have contractual rights to require the Company to register such shares for
future sale and holders of approximately 2,348,000 additional shares of Common
Stock

12
<PAGE> 15

(including Common Stock issuable upon the exercise of warrants) have contractual
rights to include such shares in future Registration Statements filed by the
Company under the Securities Act. See "Certain Transactions -- Transactions with
GAP Stockholders," "-- Transactions with Cayre Family Stockholders," "--
Transactions with Charles F. Bond" and "Shares Eligible for Future Sale."
Further, the Company has registered on a registration statement on Form S-8
(Registration No. 333-428), the shares of Common Stock subject to outstanding
options or reserved for issuance under the Company's 1995 Stock Incentive Plan.
Notwithstanding the foregoing, the Company and the executive officers, directors
and certain significant stockholders of the Company have entered into "lockup"
agreements providing that they will not offer, sell, contract to sell or grant
any option to purchase or otherwise dispose of the shares of Common Stock owned
by them, subject to certain exceptions, for a period of 90 days after the date
of this Prospectus (the "Lock-Up Period") without the prior written consent of
Robertson, Stephens & Company LLC, on behalf of the Underwriters. As a result of
these contractual restrictions, notwithstanding possible earlier eligibility for
sale under the provisions of Rule 144, shares subject to lock-up agreements may
not be sold until the agreements expire. Robertson, Stephens & Company LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. See "Underwriting." In
connection with licensing and distribution arrangements and acquisitions of
other companies, the Company has issued and may continue to issue Common Stock
or securities convertible into Common Stock. Any such sales, or future sales of
substantial amounts of Common Stock, could adversely affect prevailing market
prices for the Common Stock and could adversely affect the Company's ability to
raise needed capital. See "Shares Eligible for Future Sale."

13
<PAGE> 16

USE OF PROCEEDS

The net proceeds from the sale of 4,000,000 shares of Common Stock offered
by the Company hereby are estimated to be approximately $75,500,000 at an
assumed public offering price of $20.00 per share and after deducting estimated
offering expenses and underwriting discounts and commissions. In addition, the
Company will receive $2,000,003 upon the exercise, immediately prior to the
Offering, of certain warrants held by id Software. The Company will not receive
any proceeds from the sale of 11,500,000 shares of Common Stock offered by the
Selling Stockholders. The Company intends to use the net proceeds for working
capital, general corporate purposes and for potential acquisitions and
investments related to its business. The Company has no commitments or
understandings with respect to any acquisition or investment. Pending the use of
the net proceeds for such purposes, the Company will invest such proceeds in
short-term, interest-bearing investments.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market. The
high and low sale prices for the Common Stock as reported by the Nasdaq National
Market for the periods since the Company's initial public offering in December
1995 are summarized below. These over-the-counter market quotations reflect
interdealer prices, without retail mark-ups, mark downs, or commissions and may
not necessarily represent the actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
Fourth Quarter (from December 14, 1995).................................... $16 1/2 $12 1/4
1996
First Quarter.............................................................. $15 $ 8 7/8
Second Quarter............................................................. $25 $10 5/8
Third Quarter.............................................................. $26 3/4 $16 3/4
Fourth Quarter (through October 17, 1996).................................. $26 3/4 $19 1/2
</TABLE>

On October 17, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $20.00. As of October 1, 1996, there were
approximately 87 registered holders of record of the Common Stock.

DIVIDEND POLICY

The Company currently anticipates that it will retain all of its future
earnings for use in the expansion and operation of its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. In addition, the payment of cash dividends may be limited by financing
agreements entered into by the Company in the future. Prior to March 1995, the
Company had elected to be treated as an S corporation for tax purposes. During
the year ended December 31, 1993, the Company paid no distributions to its
stockholders. During the year ended December 31, 1994 and the two months ended
February 28, 1995, the Company paid distributions of $28.4 and $6.0 million,
respectively, to its stockholders, in each case out of funds generated from
operations. The Company has not paid cash dividends on its Common Stock or other
securities since its conversion to a C corporation for Federal and New York
state tax purposes on March 1, 1995.

14
<PAGE> 17

CAPITALIZATION

The following tables set forth the capitalization of the Company as of June
30, 1996 and as adjusted to give effect to the sale of 4,000,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $20.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company, and to the
receipt by the Company of $2,000,003 upon the exercise, immediately prior to the
consummation of the Offering, of certain warrants held by id Software.

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
(IN THOUSANDS)
(UNAUDITED)
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 authorized and none
outstanding, actual and as adjusted............................ $ -- $ --
Common Stock, $.01 par value, 150,000,000 authorized, 62,687,416
outstanding, actual, and 66,898,684 outstanding, as
adjusted(1).................................................... 627 669
Additional paid-in capital........................................ 112,763 190,221
Retained earnings................................................. 20,481 20,481
-------- --------
Total stockholders' equity and capitalization..................... $133,871 $ 211,371
======== ========
</TABLE>

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

15
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)

The following tables set forth selected consolidated financial information
of the Company which, for each of the three years in the period ended December
31, 1995, is derived from the restated audited consolidated financial statements
of the Company. Information for the six-month periods ended June 30, 1995 and
1996 is derived from the unaudited financial statements of the Company, which
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Financial information
for the year ended December 31, 1993 represents only a partial year, since the
Company did not commence operations until February 1993. Pro forma information
is unaudited and reflects the acquisition of Slash and Humongous as if the
acquisitions had occurred as of January 1, 1995 and the income tax provision
that would have been provided had both the Company and Slash been C corporations
for the relevant periods. These tables should be read in conjunction with the
Company's Consolidated Financial Statements, including the notes thereto,
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------------------
PRO PRO PRO
FORMA FORMA FORMA
1993 1994 1995 1995(1) 1995 1995(1) 1996 1996(2)
------- -------- -------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $18,075 $100,029 $225,773 $253,851 $64,420 $86,036 $140,934 $144,283
Cost of goods sold........................ 7,321 53,598 136,325 152,381 36,368 50,458 81,687 82,548
Selling and distribution expenses......... 5,065 14,375 36,076 43,661 10,924 15,026 29,561 33,294
General and administrative expenses....... 4,312 9,896 20,507 24,078 7,347 10,490 12,885 13,658
Merger costs.............................. -- -- -- -- -- -- 1,573 1,573
------- -------- -------- -------- ------- ------- -------- --------
Operating income.......................... 1,377 22,160 32,865 33,731 9,781 10,062 15,228 13,210
Interest and other income, net............ 23 20 772 840 254 298 2,459 2,252
------- -------- -------- -------- ------- ------- -------- --------
Income before income taxes................ 1,400 22,180 33,637 34,571 10,035 10,360 17,687 15,462
Provision for (benefit from) income taxes:
Federal and state (historical).......... 286 2,431 14,037 14,002 3,838 3,783 7,599 7,568
Benefit from change in tax status(3).... -- -- (3,520) (3,520) (3,520) (3,520 ) -- --
Pro forma adjustment to Federal and
state taxes (unaudited)(4)............ -- -- -- 5,461 -- 5,350 -- --
------- -------- -------- -------- ------- ------- -------- --------
Total provision for income taxes...... 286 2,431 10,517 15,943 318 5,613 7,599 7,568
------- -------- -------- -------- ------- ------- -------- --------
Net income(5)............................. $ 1,114 $ 19,749 $ 23,120 $ 18,628 $ 9,717 $4,747 $ 10,088 $ 7,894
======= ======== ======== ======== ======= ======= ======== ========
Net income per share...................... $ 0.16
Weighted average shares outstanding....... 62,687
Pro forma net income per share
(unaudited)(6).......................... $ 0.30 $ 0.12
Pro forma number of weighted average
shares outstanding (unaudited)(6)....... 61,082 66,146
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................................... $ 1,217 $ 92,362 $ 69,743
Working capital (deficit)........................................................... (6,802) 103,617 108,467
Total assets........................................................................ 68,600 297,569 277,861
Stockholders' equity (deficit)...................................................... (6,396) 123,796 133,871
</TABLE>

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

(1) Reflects the Company's acquisition of Slash and Humongous as if the same had
been consummated on January 1, 1995 and the income tax provision that would
have been provided had both the Company and Slash been C corporations for
the relevant periods. (See Note 2 and Note 7 of the Notes to the Company's
Consolidated Financial Statements).

(2) Reflects the Company's acquisition of Humongous as if the same had been
consummated on January 1, 1996.

(3) The benefit from change in tax status occurred as a result of the transition
from an S corporation to a C corporation on March 1, 1995, which allowed the
Company to accrue certain tax benefits which would otherwise have flowed to
the stockholders of the S corporation. This benefit would not have arisen
for the year ended December 31, 1995 had the Company been a C corporation
beginning January 1, 1994.

(4) Reflects additional income tax provision that would have been provided had
both the Company and Slash been C corporations for the relevant periods.
(See Note 2 and Note 7 of the Notes to the Company's Consolidated Financial
Statements).

(5) Net income for the year ended December 31, 1994 would have been $12,046 had
the Company been a C corporation for the entire year.

(6) Pro forma weighted average number of shares outstanding has been calculated
as if all stock issued in the twelve month period prior to the initial
public offering (including common stock equivalents such as options and
warrants) had been outstanding throughout the periods presented and assuming
the proceeds from such issuances (including the assumed exercise prices of
options and warrants) had been used to reacquire shares at the initial
public offering price at the beginning of the period.

16
<PAGE> 19

PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)

The following unaudited pro forma consolidated statements of operations are
based on the historical consolidated statements of operations of the Company and
Humongous for the year ended December 31, 1995 and the six months ended June 30,
1995 and 1996 and the historical statements of operations of Slash for the
period ended June 22, 1995. The pro forma consolidated statements of operations
reflect the acquisitions of Slash and Humongous as if the same had been
consummated on January 1, 1995 and 1996 and the income tax provision that would
have been provided had both the Company and Slash been C corporations for the
relevant periods.

The unaudited pro forma consolidated statements of operations are presented
for informational purposes only and are not necessarily indicative of what the
results of operations would have been had the events referred to above been
consummated as of January 1, 1995, nor are they necessarily indicative of the
Company's future results of operations.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
COMPANY ACQUISITIONS(1) ADJUSTMENTS PRO FORMA
-------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................................... $225,773 $29,040 $ (962)(2) $253,851
Cost of goods sold.......................................................... 136,325 16,864 (808)(2) 152,381
Selling and distribution expenses........................................... 36,076 7,585 -- 43,661
General and administrative expenses......................................... 20,507 3,046 525(3) 24,078
-------- ------- -------- --------
Operating income............................................................ 32,865 1,545 (679) 33,731
Interest and other income, net.............................................. 772 68 -- 840
-------- ------- -------- --------
Income before income taxes.................................................. 33,637 1,613 (679) 34,571
Provision for (benefit from) income taxes:
Federal and state (historical).............................................. 14,037 -- (35) 14,002
Benefit from change in tax status........................................... (3,520 ) -- -- (3,520 )
Pro forma adjustment to Federal and state taxes (unaudited)(5).............. -- -- 5,461 5,461
-------- ------- -------- --------
Total provision for income taxes............................................ 10,517 -- 5,426 15,943
-------- ------- -------- --------
Net income.................................................................. $23,120 $ 1,613 $(6,105) $ 18,628
======== ======= ======== ========
Pro forma net income per share (unaudited)(6)............................... $ 0.30
Pro forma number of weighted average shares outstanding (unaudited)(6)...... 61,082
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995 SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------------------- --------------------------------------------------
COMPANY ACQUISITIONS(1) ADJUSTMENTS PRO FORMA COMPANY ACQUISITION ADJUSTMENTS PRO FORMA(2)
------- -------------- ----------- --------- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales............ $64,420 $ 22,578 $ (962)(3) $86,036 $140,934 $ 3,349 -$- $144,283
Cost of goods sold... 36,368 14,898 (808)(3) 50,458 81,687 861 -- 82,548
Selling and
distribution
expenses........... 10,924 4,102 -- 15,026 29,561 3,733 -- 33,294
General and
administrative
expenses........... 7,347 2,618 525(4) 10,490 12,885 773 -- 13,658
Merger costs......... 1,573 1,573
------- ------- ------- ------- -------- ------- ---- --------
Operating income..... 9,781 960 (679) 10,062 15,228 (2,018) -- 13,210
Interest and other
income, net........ 254 44 -- 298 2,459 (207) -- 2,252
------- ------- ------- ------- -------- ------- ---- --------
Income before income
taxes.............. 10,035 1,004 (679) 10,360 17,687 (2,225) -- 15,462
Provision for
(benefit from)
income taxes:
Federal and state
(historical)....... 3,838 -- (55) 3,783 7,599 -- (31) 7,568
Benefit from change
in tax status...... (3,520 ) -- -- (3,520) -- -- -- --
Pro forma adjustment
to Federal and
state taxes
(unaudited)(5)..... -- -- 5,350 5,350 -- -- -- --
------- ------- ------- ------- -------- ------- ---- --------
Total provision for
income taxes....... 318 -- 5,295 5,613 7,599 -- (31) 7,568
------- ------- ------- ------- -------- ------- ---- --------
Net income........... $9,717 $ 1,004 $(5,974) $ 4,747 $10,088 $(2,225) $ 31 $ 7,894
======= ======= ======= ======= ======== ======= ==== ========
Pro forma net income
per share
(unaudited)........ $ 0.12
Pro forma number of
weighted average
shares outstanding
(unaudited)........ 66,146
</TABLE>

17
<PAGE> 20

- ---------------
(1) Reflects the results of operations of Slash for the period to June 22, 1995
and for Humongous for the entire period presented. The results of Slash
subsequent to June 22, 1995 are included in the Company's results of
operations.

(2) Reflects the Company's acquisition of Humongous as if the same had been
consummated on January 1, 1996.

(3) Reflects the elimination of intercompany sales between the Company and
Slash.

(4) Reflects amortization of goodwill, which has an estimated useful life of 20
years, arising from the acquisition of Slash to the extent not already
reflected in the Company's historical statements of operations.

(5) Reflects the additional income tax provision that would have been provided
had both the Company and Slash been C corporations for the relevant periods
(See Note 2 and Note 7 of the Notes to the Company's Consolidated Financial
Statements) resulting in an effective rate of 46.1% for the year ended
December 31, 1995 and 54.2% for the six months ended June 30, 1995 due to
some of the acquired companies not being able to utilize net operating
losses.

18
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.

OVERVIEW

The Company creates, publishes and merchandises interactive entertainment,
edutainment and value-priced consumer software for a variety of platforms on a
world-wide basis. Since it commenced operations in February 1993, the Company
has experienced rapid revenue growth and its product and customer mix have
changed substantially.

An important element of the Company's financial performance is its product
mix which has varied over time as the Company has built its business. The
Company's product mix has been composed of two broad product categories:
published software and third-party software. Because each of these product
categories has different associated costs, the Company's margins have depended
and will depend, in part, on the percentage of net sales attributable to each
category. In addition, the Company's margins may vary significantly from quarter
to quarter depending on the timing of its new published product releases. To the
extent that mass merchants require greater proportions of third party software
products, some of which may yield lower margins, the Company's operating results
may be impacted accordingly.

Through February 28, 1995, the Company was an S corporation for Federal and
New York state income tax purposes. The income tax provision for the six months
ended June 30, 1995 and for the year ended December 31, 1995 includes a deferred
tax benefit of approximately $3.5 million due to the Company's change in tax
status.

On June 23, 1995, the Company acquired all of the outstanding stock of
Slash, a leading publisher, purchaser, repackager and distributor of
value-priced software in exchange for 2,793,600 newly issued shares of the
Company's Common Stock and a nominal amount of cash. Historically, Slash
purchased excess inventory from major publishers and sublicensed catalog titles.
It sold these products at lower price points or repackaged these and other
products into compilation boxes, such as five-packs and ten-packs, for volume
sales primarily to mass merchants. Slash's sales of purchased excess inventory
have traditionally occurred at lower margins than its sales of sublicensed
catalog products. The Company's value-priced software business primarily
consists of sublicensed catalog titles which are sold largely to mass merchant
customers. Slash's financial results have been included in the Company's
Consolidated Financial Statements on a purchase basis for the period since the
acquisition.

On June 24, 1996, the Company acquired all of the outstanding stock of
WizardWorks, a leading developer and publisher of value-priced interactive
entertainment, edutainment and productivity software, in exchange for 2,350,000
newly issued shares of the Company's Common Stock. WizardWorks develops,
publishes and distributes consumer software for Windows, DOS and Macintosh
formats.

On June 28, 1996, the Company acquired all of the outstanding stock of
Candel Inc., the parent company of FormGen, a leading publisher of interactive
personal computer ("PC") shareware and software in exchange for 1,032,777 newly
issued shares of the Company's Common Stock.

WizardWorks and FormGen (collectively, the "Acquired Companies"), have each
been accounted for as a pooling of interests. Accordingly, the Company's
Financial Statements for the three years ended December 31, 1995 and six months
ended June 30, 1995 and 1996 have been restated to include the results of the
Acquired Companies.

On July 9, 1996, the Company acquired all of the outstanding common stock
of Humongous, a premier developer and publisher of quality children's software,
in exchange for 3,458,375 newly issued shares of the Company's Common Stock. The
Company's financial statements appearing throughout this Prospectus have

19
<PAGE> 22

not been restated to include the results of Humongous. See Pro Forma
Consolidated Financial Information and Note 5 to the Company's Consolidated
Financial Statements for the Six Months Ended June 30, 1996.

Sales are recorded net of expected future returns which historically have
been experienced and reserved for at approximately 30% of gross sales.

The consumer software industry is seasonal. Net sales are typically highest
during the fourth calendar quarter. This seasonality is primarily a result of
the increased demand for consumer software during the year-end holiday buying
season.

RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of operations
data as a percentage of net sales for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................... 40.5 53.6 60.4 56.5 58.0
Selling and distribution expenses................ 28.0 14.4 16.0 17.0 21.0
General and administrative expenses.............. 23.9 9.9 9.1 11.4 9.1
Merger costs..................................... -- -- -- -- 1.1
------ ------ ------ ------ ------
- - - - -
Operating income................................. 7.6 22.1 14.5 15.1 10.8
Interest and other income, net................... 0.1 -- 0.3 0.4 1.8
------ ------ ------ ------ ------
- - - - -
Income before income taxes....................... 7.7 22.1 14.8 15.5 12.6
Provision for income taxes....................... 1.6 2.4 4.7 0.5 5.4
------ ------ ------ ------ ------
- - - - -
Net income....................................... 6.1% 19.7% 10.1% 15.0% 7.2%
======= ======= ======= ======= =======
</TABLE>

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

Net sales for the six months ended June 30, 1996 increased approximately
$76.5 million or 119% as compared to the six months ended June 30, 1995. This
growth in net sales for the six months ended June 30, 1996 was primarily
attributable to the introduction of newly published front-line titles, such as
Just Me & My Dad, Vikings: Strategy of the Ultimate Conquest, Heretic: Shadow of
the Serpent Rider, Gender Wars, Kingdom O'Magic and Duke Nukem 3D, the
continuing strong sales of Doom and Doom-related products and the expansion of
the Company's value-priced line of software. In addition, an increase in the
number of mass merchant stores supplied and serviced by the Company, an increase
in the shelf space available to the Company from its existing mass merchant
customers and an increase in sales from its existing mass merchant shelf space
contributed to the growth in net sales. The purchase of Slash by the Company
effective June 23, 1995 and the increase in the distribution of third party
software also contributed to the growth in net sales.

Cost of goods sold primarily includes costs of purchased products and
royalties paid to software developers. Cost of goods sold for the six months
ended June 30, 1996 increased approximately $45.3 million or 125%, as compared
to the six months ended June 30, 1995. Cost of goods sold as a percentage of net
sales for the six months ended June 30, 1996 increased to 58.0% from 56.5% for
six months ended June 30, 1995. This increase was primarily due to a change in
product mix driven by increased demand by mass merchants for third party
software products which yielded the Company lower margins. The percentage
increase was partially offset by a shift in the overall Company mix toward the
Company's higher margin published products, which increased to approximately 52%
of net sales during the six months ended June 30, 1996 compared to approximately
44% during the six months ended June 30, 1995.

Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. These expenses increased

20
<PAGE> 23

approximately $18.6 million or 171% during the six months ended June 30, 1996
compared to the six months ended June 30, 1995. The increase was due to
additional advertising costs of approximately $5.1 million to support the growth
of the Company's published products and an increase in shipping costs of
approximately $2.7 million attributable to the overall increase in sales volume.
In addition, costs associated with the expansion of the Company's sales and
distribution staff and distribution center increased approximately $6.2 million
to support its growth. Selling and distribution expenses as a percentage of net
sales for the six months ended June 30, 1996 increased to 21.0% compared to
17.0% for the six months ended June 30, 1995.

General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses for the six months ended June 30, 1996 increased approximately $5.5
million or 75% as compared to the six months ended June 30, 1995. The increase
was due primarily to the expansion of the Company's operations. General and
administrative expenses as a percentage of net sales for the six months ended
June 30, 1996 decreased to 9.1% from 11.4% for the six months ended June 30,
1995 due to certain economies of scale.

Merger costs consist of legal, accounting and other professional fees
incurred by the Company to complete the acquisition of WizardWorks and FormGen.

Interest and other income, net increased approximately $2.2 million for the
six months ended June 30, 1996 as compared to the six months ended June 30,
1995. This is primarily attributable to greater short-term investments and cash
balances.

1995 COMPARED TO 1994

Net sales for the year ended December 31, 1995 ("1995") increased
approximately $125.7 million or 126% as compared to the year ended December 31,
1994 ("1994"). This growth in net sales was primarily attributable to an
increase in the number of mass merchant stores supplied and serviced by the
Company, an increase in the shelf space available to the Company from its
existing mass merchant customers, an increase in sales from its existing mass
merchant shelf space, the purchase of Slash by the Company effective June 23,
1995, which accounted for approximately $30.4 million of net sales, and the
Company's sales of Microsoft(R) Windows(R) 95, which accounted for approximately
$15.2 million in net sales. In addition, the introduction of newly published
front-line titles, such as Hexen, Mortal Kombat 3 and Ultimate Doom, the
continuing strong sales of other Doom products and the expansion of its
value-priced line of software contributed to the growth in net sales.

Cost of goods sold for 1995 increased approximately $82.7 million or 154%
as compared to 1994. Costs of goods sold as a percentage of net sales for 1995
increased to 60.4% from 53.6% for 1994. The percentage increase in cost of goods
sold was primarily due to a change in product mix driven by increased demand
from mass merchants for third-party software products which yielded the Company
lower margins. Additionally, the Company's sales of Microsoft(R) Windows(R) 95
during the last half of 1995 and, less significantly, certain product lines of
Slash contributed to the increase in cost of goods sold. Excluding Microsoft(R)
Windows(R) 95 and the acquisition of Slash, cost of goods sold as a percentage
of net sales would have been approximately 55.1%. The percentage increase was
partially offset by increased sales of the Company's higher margin published
front-line and value-priced products.

Selling and distribution expenses increased approximately $21.7 million or
151% during 1995 as compared to 1994. The increase was due to the Company's
increased sales volume, additional advertising costs of approximately $10.9
million to support the Company's published products and costs associated with
the expansion of sales and distribution staff and distribution center of
approximately $4.7 million, to support the Company's growth. Selling and
distribution expenses as a percentage of net sales increased to 16.0% for 1995
as compared to 14.4% for 1994.

General and administrative expenses increased approximately $10.6 million
or 107% as compared to 1994. The increase was due primarily to costs of
approximately $6.0 million associated with additional personnel required to
support the expansion of the Company's operations, costs of approximately $.9
million associated with new facilities (including depreciation) to accommodate
the increase in personnel, approxi-

21
<PAGE> 24

mately $1.5 million in professional fees, and other expenses related to the
expansion of the Company's operations. General and administrative expenses as a
percentage of net sales for 1995 decreased to 9.1% from 9.9% for 1994.

1994 COMPARED TO 1993

Net sales for the year ended December 31, 1994 ("1994") increased
approximately $82.0 million as compared to the more than 10 months of operations
by the Company in 1993 ("1993"), the Company's first year of operation. The
growth in net sales was primarily attributable to the introduction of front-line
published and third-party software products to Wal-Mart, as well as an increase
in the number of mass merchant outlets supplied by the Company. In addition, net
sales grew due to an increase in the shelf space available to the Company from
its existing mass merchant customers and an increase in sales from its existing
mass merchant shelf space. Finally, the release of Doom II and other Doom titles
late in the third quarter of 1994 contributed to the growth in net sales. Due to
the Company's emphasis on publishing front-line products as well as on selling
third-party products to its mass merchants, sales of sublicensed value-priced
software products declined in 1994 compared to 1993.

Cost of goods sold for 1994 increased approximately $46.3 million as
compared to 1993. Cost of goods sold as a percentage of net sales for 1994
increased to 53.6% from 40.5% in 1993. The percentage increase was primarily
attributable to a shift in the Company's product mix from sublicensed
value-priced software to a mix including the Company's own published product
together with third-party software. This third-party software yielded lower
margins for the Company, which were partially offset by the higher margins
associated with the Company's published product.

Selling and distribution expenses for 1994 increased approximately $9.3
million as compared to 1993. This increase was primarily attributable to the
increase in the distribution costs related to the Company's increasing sales
volume, advertising and promotion expenses related to the introduction of Doom
II and other Doom titles, and the expansion of the sales staff to support the
Company's growth. Selling and distribution expenses as a percentage of net
sales, however, decreased to 14.4% for 1994 from 28.0% for 1993, as the fixed
component of sales and distribution expenses did not increase proportionately
with the increase in growth. In addition, in 1993, the Company expensed
approximately $2.8 million in connection with a promotional obligation.

General and administrative expenses for 1994 increased approximately $5.6
million as compared to 1993. The increase was primarily attributable to costs
associated with the growth of the Company and the development of operational and
administrative staff, new office facilities leased to accommodate the increase
in personnel and other variable expenses related to the expansion of the
Company's operations. General and administrative expenses as a percentage of net
sales decreased to 9.9% for 1994 from 23.9% for 1993. The decrease as a
percentage of net sales was primarily due to increased economies of scale.

22
<PAGE> 25

SELECTED QUARTERLY OPERATING RESULTS

The following tables set forth unaudited consolidated statements of
operations data for each of the eight calendar quarters in the period ended June
30, 1996, as well as the percentage of the Company's net sales represented by
each item. This information has been derived from the Company's unaudited
Consolidated Financial Statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited Consolidated
Financial Statements contained herein and include all adjustments, consisting
only of normal recurring adjustments, that the Company considers necessary for a
fair presentation of such information. The following table should be read in
conjunction with the Company's audited Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
------------- ------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales.................. $16,240 $ 57,308 $34,122 $30,298 $61,270 $100,083 $68,902 $72,032
Cost of goods sold......... 8,892 32,074 18,928 17,440 40,505 59,452 40,543 41,144
Selling and distribution
expenses................. 2,501 7,782 5,566 5,358 8,890 16,262 13,370 16,191
General and administrative
expenses................. 1,945 4,746 3,319 4,028 5,423 7,737 7,012 5,873
Merger costs............... -- -- -- -- -- -- -- 1,573
------- ------- ------- ------- ------- -------- ------- -------
Operating income........... 2,902 12,706 6,309 3,472 6,452 16,632 7,977 7,251
Interest and other income,
net...................... (3) 20 129 125 206 312 1,541 918
------- ------- ------- ------- ------- -------- ------- -------
Income before income
taxes.................... 2,899 12,726 6,438 3,597 6,658 16,944 9,518 8,169
Provision for (benefit
from) income taxes....... 459 1,184 (1,139) 1,457 2,999 7,200 4,218 3,381
------- ------- ------- ------- ------- -------- ------- -------
Net income................. $ 2,440 $ 11,542 $ 7,577 $ 2,140 $ 3,659 $ 9,744 $ 5,300 $ 4,788
======= ======= ======= ======= ======= ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED (AS A PERCENTAGE OF NET SALES)
--------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
------------- ------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......... 54.7 56.0 55.5 57.6 66.1 59.4 58.8 57.1
Selling and distribution
expenses................. 15.4 13.5 16.3 17.7 14.5 16.3 19.4 22.5
General and administrative
expenses................. 12.0 8.3 9.7 13.3 8.9 7.7 10.2 8.1
Merger costs............... -- -- -- -- -- -- -- 2.2
------ ------ ------ ------ ------ ------ ------ ------
Operating income........... 17.9 22.2 18.5 11.4 10.5 16.6 11.6 10.1
Interest and other income,
net...................... -- -- 0.4 0.4 0.3 0.3 2.2 1.3
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................... 17.9 22.2 18.9 11.8 10.8 16.9 13.8 11.4
Provision for (benefit
from) income taxes....... 2.8 2.1 (3.3) 4.8 4.8 7.2 6.1 4.7
------ ------ ------ ------ ------ ------ ------ ------
Net income................. 15.0% 20.1% 22.2% 7.0% 6.0% 9.7% 7.7% 6.7%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

The Company's business is seasonal. Net sales are typically highest during
the fourth quarter. This seasonality is primarily a result of the increased
demand for consumer software during the year-end holiday buying season. There
can be no assurance that the Company will maintain profitability on a quarterly
or annual basis. Operating results for any quarter are not necessarily
indicative of results for any future period. See "Risk Factors -- Fluctuations
in Quarterly Operating Results; Seasonality.

23
<PAGE> 26

Quarterly fluctuations also result from a variety of other factors,
including the mix of products with varying profit margins and the timing of new
product introductions. Net sales for the three months ended September 30, 1995
reflect sales of Microsoft(R) Windows(R) 95, which accounted for approximately
$13.2 million, the purchase of Slash by the Company, which accounted for
approximately $12.1 million, an increase in the number of mass merchant outlets
supplied and serviced by the Company, an increase in the shelf space available
to the Company from its existing mass merchant customers, an increase in sales
from its existing mass merchant shelf space, the introduction of newly published
front-line titles such as Heretic (Shareware) and Ultimate Doom, the continuing
strong sales of other Doom products, and the expansion of its value-priced line
of software.

Cost of goods sold as a percentage of net sales increased to 66.1% for the
quarter ended September 30, 1995 due primarily to the introduction of
Microsoft(R) Windows(R) 95 and, less significantly, to the acquisition of Slash.
Without giving effect to sales of Microsoft(R) Windows(R) 95 and the acquisition
of Slash, cost of goods sold as a percentage of net sales would have been
approximately 55.6%.

Selling and distribution expenses as a percentage of net sales increased to
22.5% during the quarter ended June 30, 1996 primarily due to additional
advertising costs to support the growth of the Company's published products, an
increase in shipping costs attributable to the overall increase in sales volume,
as well as increased costs associated with the expansion of the Company's sales
and distribution staff and distribution center to support the Company's growth.

General and administrative expenses as a percentage of net sales decreased
to 8.2% during the quarter ended June 30, 1996 as compared to the first quarter
of 1996. Although general and administrative expenses increased due primarily to
additional personnel required to support the expansion of the Company's
operations and other variable expenses related to the expansion of the Company's
operations, these expenses decreased as a percentage of net sales due to the
Company realizing greater economies of scale.

During the quarter ended June 30, 1996, the Company incurred approximately
$1.6 million, or 2.2% of net sales, in merger costs, consisting of legal,
accounting and other professional fees relating to the acquisitions of
WizardWorks and FormGen.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1996, the Company's principal source of liquidity included
cash and short-term investments of approximately $69.7 million, primarily
derived from the Company's initial public offering in December 1995. Cash used
in operating activities for the six months ended June 30, 1996 amounted to
approximately $18.2 million as compared to cash provided by operating activities
of $1.4 million for the six months ended June 30, 1995. This increase in cash
used is attributable to the internally generated funds used to support the
Company's growth and fluctuations in relative levels of receivables, inventory,
royalty advances, accounts payable, income taxes payable and merger-related
costs. The relative level of inventory to accounts payable as of June 30, 1996
increased compared to June 30, 1995 primarily as a result of the timing of sales
and the scheduled payment of the accounts payable.

The Company believes that existing cash, cash equivalents and short-term
investments together with the net proceeds from the Offering and cash expected
to be generated from operations will be sufficient to fund the Company's
anticipated operations for the next twelve months.

24
<PAGE> 27

BUSINESS

The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

GENERAL

GT Interactive Software Corp. creates, publishes and merchandises
interactive entertainment, edutainment and value-priced consumer software for a
variety of platforms on a world-wide basis. Similar to major film studios and
record companies, the Company employs a portfolio approach to achieve a broad
base of products across most major consumer software categories. The Company
obtains new software content by blending its internal software development
capabilities with the multi-title publishing relationships it has established
with a variety of independent software design groups and content providers.
Recognizing that software distribution capabilities attract software publishing
content, the Company has used its strong distribution foundation to build its
current position as a leader in the consumer software publishing business.
According to PC Data, in the first eight months of 1996 the Company had achieved
the industry's highest market share in number of units sold in the PC software
game category. The Company has experienced significant growth in its published
front-line titles, growing from 5 titles released in 1994 to 24 titles released
in 1995 to 57 titles released during the nine months ended September 30, 1996.

INDUSTRY BACKGROUND

The world-wide consumer software market has grown dramatically in recent
years, driven by the increasing installed base of multimedia PCs in the home,
the introduction of new dedicated game systems from Sony, Sega, Nintendo and
others, the proliferation of software titles, and the development of new and
expanding distribution channels. Recent improvements in computer technology have
presented an opportunity to fundamentally change the user's PC experience by
introducing an interactive element to audio and visual entertainment. Multimedia
PCs, generally configured with enhanced memory, high-resolution color monitors,
sound boards, stereo speakers and high-capacity CD-ROM drives, provide
interactive entertainment and learning environments that combine text, realistic
sound, advanced graphics and animation. Rapidly declining prices of
microprocessors and CD-ROM drives have made these computers more affordable.

The world-wide consumer software industry has also recently undergone a
number of profound changes with the introduction of new hardware platforms and
new technologies, such as on-line networks and the Internet. The "next
generation" of game systems are based on 32- and 64-bit microprocessors that
incorporate dedicated graphics chipsets. The Sony PlayStation ("PlayStation")
and Sega Saturn ("Saturn") hardware systems began shipping in Japan in the last
quarter of 1994 and in North America in 1995. The Nintendo 64 ("N64") system
began shipping in Japan in June 1996 and recently began shipping in North
America. Historically, sales of console software titles have exceeded sales of
PC titles in both units and dollars. In addition, the proliferation of on-line
networks and the Internet has created new opportunities for the consumer
software industry, including on-line game playing by users in various locations,
additional promotional techniques including on-line distribution of shareware,
and direct on-line marketing, sales and distribution to end users.

Growth in the installed base of multimedia PCs and in other powerful and
functional platforms has created a mass market for consumer software products.
The development of a mass market for software products has been characterized by
the rise in importance of mass merchant software sales as a distribution
channel, increasing price pressure as well as competition for limited retail
shelf space to accommodate the abundance of new titles. This abundance has
resulted in the increased importance of brand name recognition in a hit driven
market. Faced with the challenges of marketing and distribution, many
independent software developers and content providers are pursuing relationships
with publishing companies with broader distribution capabilities, including
enhanced access to mass market retailers and greater merchandising, marketing
and promotional support. At the same time, retailers are faced with the
challenge of managing the increasing

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number of new titles with limited shelf space. Another result of these market
pressures is the trend in the industry toward the consolidation of software
companies and the diversification of products offered by such companies.

The Company believes that success in the industry will be achieved by those
companies that are able to create significant brand name recognition or "hits,"
establish strong retail relationships and consistently offer a diversified
high-quality software portfolio providing significant sell-through opportunities
for retailers of all kinds.

BUSINESS STRATEGY

The Company's objective is to become one of the world's leading consumer
software companies. GTIS' initial business strategy was to establish a strong
distribution capability as a foundation to build its current position as a
leader in the consumer software publishing business.

The Company believes that significant growth opportunities exist in
international markets and across a variety of next generation hardware
platforms, including PlayStation, Saturn and N64, for which the Company is
creating software products. Key elements of its strategy are to:

Continue to expand and diversify the publishing business. The Company's
current strategy is to obtain new software content by blending its in-house
software development capabilities with the multi-title publishing relationships
it has established with independent software developers and content providers.
To that end, the Company completed several acquisitions of leading software
companies in 1995 and 1996 which have substantially increased its internal
development capabilities and its publishing base. The Company acquired
Humongous, a premier developer and publisher of award-winning children's
software which has become the centerpiece of its edutainment business. In
addition, the Company acquired WizardWorks, a developer and publisher of
value-priced software, and FormGen, a publisher of interactive PC shareware and
software. These 1996 acquisitions supplemented the Company's 1995 acquisition of
Slash, a publisher, purchaser, repackager and distributor of value-priced
software. On an ongoing basis, GTIS intends to evaluate potential acquisitions
of or investments in other software publishers or developers which it believes
will complement or enhance its existing business.

With the acquisitions of Slash and WizardWorks, the Company has
significantly enhanced its presence in the value-priced software market.
WizardWorks' internal development capabilities have enabled the Company to
create original lines of value-priced software. The Company's value-priced
software marketing operations give the Company the flexibility to offer a
particular product at various price points in response to market pricing
pressures. This enables the Company to manage the entire life cycle of its
published product from the initial release of the product through the final
closeout sale.

The Company intends to seek additional ways to deepen and broaden its
software product lines, including exploring new genres and platforms. Pursuant
to this goal, the Company's strategies include attracting and retaining top
developers and content providers, such as id Software, Williams, 3D Realms,
Mercer Mayer, Stan and Jan Berenstain and Scavenger, as well as developing its
own titles. Similar to the music industry, GTIS employs its own "A&R" (Artists &
Repertoire) group whose sole responsibilities are to identify, attract and
retain independent software developers.

Develop a leading position in the 32- and 64-bit game platforms. The
Company is leveraging its strength in the PC software market to build a leading
position in the emerging 32- and 64-bit game software market. To that end, the
Company has become an approved licensee of PlayStation and expects to become an
approved licensee of Saturn and N64. In addition, the Company has entered into
multi-title relationships with id Software, Williams, 3D Realms and other
content providers and software developers for the publishing of titles for use
on these game systems. As additional platforms that are suited to the Company's
products emerge, the Company intends to publish products that it believes will
have the greatest sales potential in the consumer software market.

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Broaden its international presence. The Company believes that markets
outside the United States present significant growth opportunities. The Company
began to broaden its international sales efforts in late 1994 by establishing
relationships with software publishers and distributors in the largest
international markets. In January 1995, the Company established a publishing
operation in the United Kingdom with responsibility for European markets.
Recently, GTIS successfully launched Doom for PlayStation in Japan and in
Europe. In addition, the Company released Quake for PCs in Europe, where it was
the number one selling title upon its release.

In September 1995, the Company entered into joint venture agreements with
SOFTBANK, the leading distributor of PC software in Japan, and Roadshow
Entertainment PTY LTD, a leading entertainment company in Australia, for the
publishing and distribution of the Company's products in Japan and Australia,
respectively. It was pursuant to the SOFTBANK arrangement that Doom was launched
in Japan. The Company is aggressively seeking new opportunities to form
alliances with local publishers and distributors in other foreign markets.

Develop new brands and leverage hit titles. The Company believes that,
with the proliferation of software titles and the competition for shelf space,
brand name recognition of its published products, whether created internally or
by third parties, is an important component of its success as a publisher. For
example, the Company has licensed titles from Mercer Mayer in order to
capitalize on the popularity of Mercer Mayer's multi-million selling The Little
Critter book series. In addition, the popularity of Doom has resulted in the
success of Doom-related products which have sold over 3.6 million copies.
Further, Humongous has built significant brand name recognition in the
edutainment area with its critically acclaimed software titles and identifiable
characters. The Company intends to further build its characters and other
properties to which the Company has exclusive rights through licensing and
merchandising across various media, including books, television and films.

Pursue the Internet and on-line network opportunities. The Internet and
on-line networks are an integral element of all GTIS marketing and promotional
efforts. The Company generates awareness through its Web site for its software
titles prior to their market debut. The wide acceptance of the Internet into
consumers' homes has created new opportunities for the consumer software
industry. The Company intends to further explore these opportunities, including
on-line game playing by users in various locations, additional promotional
techniques including on-line distribution of shareware, and direct on-line
marketing, sales and distribution to end users.

Maintain its leadership position as a distributor and merchandiser. GTIS
believes that it is the largest distributor of third party computer software to
mass merchants in the United States and intends to maintain its position in this
area. The Company believes that its distribution capabilities have served as a
foundation upon which it has built its current position as a leader in the
consumer software publishing business. The Company's proprietary
state-of-the-art distribution and point-of-sale replenishment system, as well as
its experienced management team, enable it to handle efficiently high sales
volumes, manage and replenish inventory on a store by store basis and assemble
for its customers regional and store by store data based on product
sell-through. GTIS intends to continue to invest in and upgrade that system and
seeks to explore innovative value-added programs to establish and strengthen
retail relationships.

GTIS PUBLISHING

The Company publishes high quality consumer software, developed internally
or in collaboration with independent developers, which is available in various
formats for use on multiple platforms. Like major film studios and record
companies, GTIS employs a portfolio approach to achieve a broad base of products
across all major consumer software categories. The Company combines its internal
software development capabilities with relationships with a variety of
independent software design groups, such as id Software, a leading developer of
3-D action games (Quake, Final Doom, Doom II and Hexen); Williams, the home
entertainment division of leading arcade company WMS Industries (Mortal Kombat
3, NBA Hang Time and War Gods); 3D Realms, the creator of the best selling Duke
Nukem 3D; Scavenger, designers of Scorcher, Amok and Into the Shadows; and
Cybersites, creators of the popular Internet game, S.P.Q.R.

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During 1996, the Company has consummated a number of strategic acquisitions
and investments that have significantly increased its internal development
capabilities and added to its expanding publishing base. In July 1996, the
Company acquired Humongous, a premier developer and publisher of original
interactive children's entertainment software. Humongous' award-winning software
line features popular characters such as Putt-Putt, Freddi Fish, Fatty Bear and
Buzzy the Knowledge Bug. USA Today (December 26, 1995) listed Humongous as one
of "Six Firms Worth Watching in '96," and Fortune magazine (July 10, 1995) named
Humongous one of "25 Cool Companies." Humongous, which has become the
centerpiece of the Company's edutainment business, joins the Company's existing
popular children's titles, strengthening the Company's presence in the growing
children's software category.

The Company further increased its internal software development
capabilities in June 1996 when it acquired WizardWorks, a developer and
publisher of a wide variety of consumer software products. The WizardWorks
product line includes Game Wizards, a series of gaming strategy, hint and tip
guides on CD-ROM that incorporate full-motion video game segments, cheat codes
and detailed maps. WizardWorks also offers the !Zone line of add-on levels that
complement the industry's most popular entertainment titles, including GTIS
titles such as Doom, Heretic, Hexen and Duke Nukem 3D (the newest !Zone title,
which has recently been released). Through the CompuWorks line, WizardWorks
offers a line of home office productivity software that includes such well-known
titles as CompuWorks Publisher and CompuWorks Draw. Also included in the
acquisition of WizardWorks was MacSoft, a leading publisher of entertainment,
edutainment and productivity software for the Macintosh. GTIS is consolidating
all of its Macintosh offerings under the MacSoft brand, strengthening its
position in this segment of the market.

In June 1996, the Company also acquired FormGen, a publisher of interactive
PC shareware and software. Foremost among FormGen's current titles is the
best-selling Duke Nukem 3D for PCs, published under license from 3D Realms.
Independent of its acquisition of FormGen, the Company has secured the rights to
publish Duke Nukem 3D world-wide directly from 3D Realms for all next generation
platforms.

In September 1996, the Company entered into an agreement to invest in
convertible preferred stock of OddWorld, which is convertible into 50% of the
common equity, subject to the approval of the shareholders of OddWorld's parent
company, Creative Programming and Technology Ventures, Inc. OddWorld's principal
developers have extensive experience in the ground-breaking application of
computer-generated images in film, commercials and theme park rides. OddWorld is
currently developing "StoryDwellings" -- a game series that combines life-like
character motion with intuitive controller interfaces inside highly rendered
backgrounds, bringing players into a rich, deeply developed world that is more
like a film than a game. The first "epic" in the StoryDwellings series is
anticipated to be released in late 1997.

The Company has also pursued strategic relationships with independent
developers of software products. GTIS believes it has been successful in
identifying talented developers and establishing mutually beneficial
relationships with those developers. The Company's early publishing success was
based in large part on the Doom series of software titles. These products have
sold an aggregate of over 3.6 million copies since the introduction of the
series in 1994 and have been the Company's most popular titles. The Doom series,
which includes Doom II, Doom-related products, Heretic and Hexen, is licensed to
the Company from, and developed by, id Software. Another id Software title,
Quake, is currently being published by the Company in Europe and is scheduled to
be released by the Company for retail distribution in the U.S. in late November
1996.

The Company believes that its success with the Doom-related titles and its
software distribution capabilities have enabled it to attract and retain
additional quality independent software developers and content providers.
Consequently, the Company has experienced significant growth in its published
titles, growing from 5 front-line titles released in 1994 to 24 titles released
in 1995 to 57 titles released during the nine months ended September 30, 1996.

The Company has entered into several multi-title publishing contracts with
Williams, pursuant to which the Company has acquired the rights to publish
software products based on virtually all of Williams' coin-operated video games,
for use on a number of platforms world-wide, excluding Japan and North America.
The

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Company has acquired similar rights to games developed by Atari Games
Corporation ("Atari"), which was recently acquired by Williams.

GTIS is also leveraging its strength in the PC software market to build a
leading position in the emerging 32- and 64-bit video game software market. To
that end, the Company has become an approved licensee of PlayStation and expects
to become an approved licensee of Saturn and N64. In addition, the Company has
entered into relationships with id Software, Williams, 3D Realms and other
content providers and software developers for the publishing of next generation
titles, such as Doom II, Quake, Duke Nukem 3D and Mortal Kombat 3.

Edutainment

In July 1996, the Company acquired Humongous, a premier developer and
publisher of original interactive children's entertainment software. Humongous
software features popular characters such as Putt-Putt, Freddi Fish, Fatty Bear
and Buzzy the Knowledge Bug. Humongous titles, such as Putt-Putt Saves The Zoo,
Freddi Fish and the Case of the Missing Kelp Seeds and Fatty Bear's Birthday
Surprise, have won dozens of awards in the past few years.

Humongous has become the centerpiece of the Company's edutainment business.
Current Humongous titles join GTIS' existing popular children's properties,
including those from award-winning children's author Mercer Mayer (Just Me and
My Dad and Just Me and My Mom), strengthening the Company's presence in the
growing children's software category. Among the edutainment software products to
be published by the Company are software titles based on the Berenstain Bears
series, created by Stan and Jan Berenstain.

Value-Priced Software

In addition to publishing front-line software, GTIS also creates, publishes
and distributes a variety of value-priced products. The Company believes that
the value-priced segment of the consumer software market affords a growth
opportunity as a result of the proliferation of software titles which cannot
find front-line shelf space and the demand by many PC owners for moderately
priced products. The Company's value-priced marketing operations give the
Company the flexibility to offer a particular product at various price points in
response to market pricing pressures. This enables the Company to manage the
entire life cycle of its published product from the initial release of the
product through the final closeout sale.

In early 1995, the Company began to repackage and offer for distribution to
mass merchants five- and ten-pack boxes of value-priced software titles. These
generally include previously top-selling software titles whose popularity had
peaked at higher retail price points or titles that never realized substantial
popular recognition. The Company's acquisition in June 1995 of Slash, a leading
publisher, purchaser, repackager and distributor of value-priced software,
solidified the Company's presence in the value-priced market. Through its Slash
Division, the Company licenses catalog titles, purchases excess inventory
(primarily in the CD-ROM format) from major publishers and may repackage the
titles into compilation boxes, such as five-packs and ten-packs.

The Company further expanded its value-priced product line in June 1996,
when it acquired WizardWorks, a leading developer and publisher of value-priced
interactive entertainment, edutainment and productivity software. The
WizardWorks value-priced product line includes the Game Wizards, a series of
gaming strategy, hint and tip guides; the !Zone line of add-on level software
for complementing the industry's most popular entertainment titles; and the
CompuWorks line of home office productivity software. The Company believes that
the imminent consolidation of the Slash Division and WizardWorks into one
distinct value-priced division will serve to strengthen its position in the
value-priced market.

In 1995, the Company commenced supplying value-priced software under
specially designed fixture-based programs to Kmart and Wal-Mart. These programs
utilize sophisticated distribution and point of sale replenishment systems
similar to those already in use by the Company for front-line products.

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International

In January 1995, the Company established a publishing operation in London,
England, with responsibility for European markets. The Company is currently
publishing, marketing and distributing its consumer software products in over 35
countries world-wide, including Quake which was the number one selling PC title
in Europe upon its release. The Company distributes its products direct to
retail merchants in most of the U.K., through a sub-distribution agreement with
Virgin Interactive Entertainment plc in French- and German-speaking countries
and through wholesalers in most of the rest of the European market.

The Company believes that the European market for 32- and 64-bit game
systems software represents a significant growth opportunity. In late 1995, the
Company successfully launched Doom for PlayStation in Japan and, in Spring 1996,
in Europe. Through its strategic alliance with Williams, the Company has
acquired the exclusive right to publish and distribute, in most major markets
excluding North America and Japan, 32-and 64-bit software products based on
virtually all of Williams' coin-operated video games, as well as games developed
by Atari, which was recently acquired by Williams. These titles include NBA Hang
Time, based on the popular arcade basketball game, NHL Open Ice, an arcade-style
hockey brawl, Robotron X, the sequel to the arcade classic, Mortal Kombat
Trilogy, based on the record-setting martial arts arcade series, and Area 51,
based on the popular arcade game.

The Company has also entered into joint venture agreements with SOFTBANK,
the leading distributor of personal computer software in Japan, and Roadshow
Entertainment PTY LTD, a leading entertainment company in Australia, under which
the Company and each of the other parties publish and distribute the Company's
titles in Japan and Australia, respectively. In October 1995, the Company and
SOFTBANK further strengthened their relationship through the purchase from the
Company and certain stockholders, by an affiliate of SOFTBANK, of an equity
interest in the Company. Additionally, in June 1996, the Company purchased a
9.9% interest in, and entered into a multi-title publishing agreement with,
Mirage, a U.K. developer of entertainment software. The Company is aggressively
seeking new opportunities to form strategic alliances with local publishers and
distributors in other foreign markets.

THE GTIS MERCHANDISING AND DISTRIBUTION APPROACH

The Company believes that it is the only software publisher that sells
directly to substantially all of the major retailers of computer software in the
U.S. and that it is the largest distributor of computer software to mass
merchants in the U.S. GTIS sells its own published titles to specialty retailers
and distributes its own products, as well as those of other publishers, to
certain mass merchants. The Company is the primary supplier of its own and
third-party consumer software to approximately 2,290 Wal-Mart stores and
approximately 735 Target stores and supplies value-priced software under
specially designed fixture-based programs to approximately 2,155 Kmart stores.
In addition, the Company sells its own published products to a variety of major
retailers, including Sam's Club, Price-Costco, CompUSA, Best Buy, Egghead and
Computer City, at over 20,000 locations nationwide.

The Company believes that its merchandising and distribution capability is
an important element of its success and gives it a competitive advantage. The
Company's distribution approach is based on direct sales to a significant number
of specialty, multi-purpose and mass merchant retailers of computer software.
This approach includes shipment of software directly to individual stores or
warehouse locations for each of its retail accounts, in-store merchandising
programs for a variety of its retail accounts and value-added distribution
programs employing a proprietary point-of-sale inventory replenishment system
for certain of its mass merchant accounts.

GTIS initially designed its merchandising and distribution program in
collaboration with Wal-Mart. Under this program currently executed for certain
mass merchants, the Company typically manages substantially all of a store's
software inventory, by designing, supplying and restocking displays of software
according to a program plan devised in concert with the customer specifically
for each individual store. Drawing upon its regional and store specific data
base, the Company updates each store plan on a continual basis. This
store-specific program plan, together with the Company's proprietary
point-of-sale replenishment

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system, enables the Company to ensure that the mass merchants' shelves will
remain fully stocked with a tailored mix of titles designed to maximize the
sales volume per square foot of shelf space.

Utilizing its point-of-sale replenishment systems and electronic data
interchange (EDI) links with its largest mass merchant accounts, the Company is
able to efficiently handle high sales volumes to those customers, manage and
replenish inventory on a store-by-store basis and assemble for its customers
regional and store-by-store data based on product sell-through. The Company
utilizes state-of-the-art technology systems for order processing, inventory
management, purchasing and tracking of shipments thereby increasing the
efficiency and accuracy of order processing and payments and shortening order
turnaround time. These systems automatically track software orders from order
processing to point-of-sale, thereby enhancing customer satisfaction through
prompt delivery of the desired software titles.

Based on the strength of its current consumer software distribution
operation, GTIS has successfully attracted other publishers to utilize its mass
merchant distribution services for their products. Such products are generally
distributed by GTIS under the name of the publisher who is, in turn, responsible
for the publishing, packaging, marketing and customer support of such products.
GTIS believes that its program of distributing other publishers' products
leverages the Company's distribution capabilities and adds a source of revenue
that does not require additional product development expenditures. The Company's
agreements with other publishers typically provide for certain retail
distribution rights in designated territories for a specific period of time,
after which those rights are subject to negotiated renewal.

MARKETING

GTIS believes that marketing is critically important to the success of its
products. The Company employs a wide range of sophisticated marketing techniques
including (i) in-store promotions that utilize display towers and endcaps, (ii)
direct mailings, (iii) advertising in computer and general consumer publications
and (iv) on-line marketing to promote sales of its products. The Company
monitors and measures the effectiveness of its marketing strategies throughout
the product lifecycle.

The Internet is an integral element of GTIS' marketing efforts used, in
part, to generate awareness for its titles months prior to their market debut.
GTIS incorporates the Internet into its marketing programs through the creation
of product-dedicated mini-sites, on-line promotions and news group seedings.

To capitalize on the innovative nature of its products, the Company has
developed a public relations program that has resulted in coverage for the
Company by trade journals and also by well-recognized publications such as The
New York Times, Entertainment Weekly, Newsweek and USA Today. Among the
marketing strategies the Company utilizes is the creation of special press
events to coincide with the launch of a new product.

GTIS' marketing programs have continued to expand along with the Company's
publishing business. For example, to launch Just Me and My Mom, an interactive
storybook based on the popular Mercer Mayer book, GTIS unveiled a multi-tiered
marketing campaign which included cross-promotions with Family PC magazine and
Scholastic Software Clubs, the showcasing of the game at an EPCOT Center exhibit
and magazine subscriber invoice inserts, as well as game demos sent to
approximately 750,000 educators.

As of October 1, 1996, the Company's staff included 54 employees in
domestic sales and marketing and 33 employees in international marketing and
distribution. The Company expects to increase its sales and marketing staff to
provide greater penetration into the retail market and increased marketing
support for its products. The Company also uses independent field sales
representative organizations to assist in the sales of software products and
customer support. See "Certain Transactions -- REPS Agreement."

COMPETITION

The market for consumer software products is highly competitive and is
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions. A number of competitors offer products that
compete with one or more of the Company's products, and some of those
competitors have recently attempted to increase their focus on the distribution
business. Only a small

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percentage of products introduced in the consumer software market achieve any
degree of sustained market acceptance. Principal competitive factors in
marketing consumer software include content, price, access to retail shelf
space, product enhancements, the ability to operate on popular platforms, the
availability of hit titles, new product introductions, marketing support and
distribution systems. GTIS believes that it competes effectively in these areas,
particularly in the areas of quality content, platform support, a breadth of
titles, price, access to retail shelf space, marketing support and distribution
systems. Moreover, in a number of geographic markets, certain of the titles
offered by the Company, including various hit titles, are offered on a limited
number of platforms and compete with the same titles offered by the Company's
competitors on other platforms. Many of the Company's current and potential
competitors, however, have comparable or greater financial, technical,
marketing, sales and customer support resources, larger and more seasoned
internal development teams, greater name recognition and a larger customer base,
than the Company. In addition, the Company believes that large software
companies, media companies and film studios are increasing their focus on the
interactive entertainment and edutainment software markets and, as a result of
their financial and other resources, name recognition and customer base, may
become significant competitors of the Company. The market is also extremely
competitive with respect to access to third party developers and content
providers. This competition is based primarily on breadth of distribution,
development funding, reputation and royalty rates. The Company believes that it
competes favorably with respect to each of these factors. To the extent that
competitors maintain or achieve greater title portfolio breadth, title rights
for popular platforms or access to third party developers and content providers,
or price, shelf access, marketing support, distribution or other selling
advantages, the Company could be materially and adversely affected. There can be
no assurance that the Company will have the resources required to respond to
market or technological changes or to compete successfully in the future.

The market for the Company's products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from its current competitors. There can be no assurance that the
Company will be able to provide products that compare favorably with the
products of the Company's competitors or that competitive pressures will not
require the Company to reduce its prices. Any material reduction in the price of
the Company's products would negatively affect operating income as a percentage
of net revenue and would require the Company to increase unit sales in order to
maintain net revenue.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company generally sells its software published under licenses from
independent developers and does not customarily acquire the copyrights. The
Company relies primarily on a combination of trademark, copyright, trade secret
and other proprietary rights laws, license agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights and
the rights of its developers. United States copyright law, international
conventions and international treaties, however, may not provide meaningful
protection against unauthorized duplication or infringement of the Company's
software.

Policing unauthorized use of an easily duplicated and broadly disseminated
product such as computer software is very difficult. Software piracy is expected
to be a persistent problem for the software industry. These problems are
particularly acute in certain international markets such as South America, the
Middle East, the Pacific Rim and the Far East. If a significant amount of
unauthorized copying of the Company's products were to occur, the Company's
business, operating results and financial condition could be adversely affected.

Software developers and publishers are subject to infringement claims.
There can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products.

There has been substantial litigation in the industry regarding copyright,
trademark and other intellectual property rights. Any such claims or litigation,
with or without merit, could be costly and a diversion of management's
attention, which could have a material adverse effect on the Company's business,
operating results and financial condition. Adverse determinations in such claims
or litigation could have a material

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adverse effect on the Company's business, operating results and financial
condition. The Company is presently in litigation against Micro Star Software
("Micro Star"), the publisher of a product entitled "Nuke It" comprised largely
of additional levels of play for Duke Nukem 3D which are created by game users
and available over the internet ("Player Created Levels"). The Company contends
that the sale of Nuke It infringes the copyright on Duke Nukem 3D (which the
Company publishes under license with the owner of 3D Realms) and violates the
Lanham Act's trademark, unfair competition and false advertising provisions. On
September 26, 1996, the Company obtained a preliminary injunction in federal
court in San Diego, California ordering the recall of all copies of Nuke It then
in the stores, based on the use of Duke Nukem 3D's protected expression on Nuke
It's packaging and in some copies of the Nuke It CD-ROM. The Court also held as
a preliminary matter that the Player Created Levels contained in Nuke It did not
themselves contain expression from the Duke Nukem 3D game in protectable form.
Because the Company believes that this holding is erroneous, it is pursuing an
expedited appeal to the U.S. Court of Appeals for the Ninth Circuit, seeking an
injunction halting the sale of Nuke It and any subsequent Micro Star product
containing additional levels of play for Duke Nukem 3D. Micro Star has appealed
the Court's decision granting the injunction. The Company intends vigorously to
pursue this litigation to protect its intellectual property rights.

MANUFACTURING

The Company's CD-ROM disk and floppy diskette duplication is contracted out
to a number of third-party disk duplication companies. Printing of user manuals
and of packaging materials is performed to the Company's specifications by
outside sources. Disks, user manuals and sales brochures are packaged for sale
by outside sources, including companies owned or controlled by certain of the
Cayre Family Stockholders. To date, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products, or
material returns due to product defects. See "Risk Factors -- Manufacturing
Risks" and "Certain Transactions -- Transactions with GoodTimes Home Video."

EMPLOYEES

As of October 1, 1996, GTIS had 932 employees, consisting of 105 in
domestic sales and marketing, 525 in distribution, 34 in manufacturing, 33 in
international marketing and distribution, 96 in publishing and product
development, 28 in information services, 9 in purchasing and 102 in
administration and finance. Of the 525 employees in distribution, 361 are
members of Local 734, L.I.U. of N.A., AFL-CIO (the "Union"). These employees,
who are located at the Company's distribution center in Edison, New Jersey, are
subject to a collective bargaining agreement the Company entered into with the
Union on May 12, 1995. The Company believes that its relations with its
employees are good.

FACILITIES

The Company's principal administrative, sales, marketing and development
facilities are located in approximately 18,000 square feet of space at 16 East
40th Street and approximately 13,000 square feet of space at 10 East 40th
Street, in New York City. The leases on the facility located at 16 East 40th
Street will expire in December 2002, and the lease on the facility located at 10
East 40th Street will expire in December 1996. The Company also maintains a
facility in London, England of approximately 6,000 square feet, from which it
conducts its European operations, under a lease that expires in the year 2020.
The buildings which house the 16 East 40th Street facility in New York City and
the London facility are owned by 16 East 40th Associates and Marylebone 248
Realty LLC, respectively, affiliates of Joseph J. Cayre. The Company believes
that the terms of the leases are no less favorable to the Company than those it
could obtain from independent third parties. See "Certain Transactions --
Leases."

The Company maintains 2,400 square feet of office space in Edina, Minnesota
for its Slash Division, under a lease that expires in December 1997. The Company
maintains a 192,900 square-foot distribution center in Edison, New Jersey under
a lease that expires in July 1999, a 34,400 square-foot distribution center in
Edina, Minnesota under a lease that expires in December 1997 and another 79,900
square-foot distribution center in Edina under a lease that expires at the end
of 1997. In Redwood, California, the Company maintains a 4,000 square-foot
office space under a lease that expires in November 1998.

33
<PAGE> 36

In addition, the Company maintains offices in the Minneapolis, Minnesota
area, Scottsdale, Arizona and Woodinville, Washington for each of its
WizardWorks, FormGen and Humongous subsidiaries, respectively. In the
Minneapolis area, the Company currently maintains three properties: a 15,000
square-foot office, warehouse and distribution space under a lease that expires
in March 2006, a 24,000 square foot warehouse space in Brainerd, Minnesota,
leased on a month-to-month basis, and a 1,000 square foot office space in Golden
Valley, Minnesota, leased on a month-to-month basis. In Scottsdale, the Company
maintains a 25,000 square-foot office space under a lease that expires in
December 1998. In Woodinville, the Company maintains a 25,000 square-foot office
and warehouse space under a lease that expires in December 1997. The Slash and
WizardWorks businesses, which are in the midst of consolidation, are in the
process of moving into one approximately 240,000 square-foot office, warehouse
and distribution space in the Minneapolis, Minnesota area under a lease that
expires in September 1999.

The Company has experienced significant and rapid expansion since its
formation and is seeking additional office space for the New York City
operations. The Company believes that suitable additional or alternative space
will be available in the future on commercially reasonable terms as needed.

LEGAL PROCEEDINGS

The Company is not a party to any pending legal proceedings material to its
financial condition or results of operations.

34
<PAGE> 37

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The executive officers and directors of the Company, their respective ages
as of October 1, 1996 and their positions held with the Company, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------
<S> <C> <C>
Joseph J. Cayre(1) 55 Chairman of the Board of Directors
Jack J. Cayre 23 Executive Vice President and Director
Kenneth Cayre 53 Director
Stanley Cayre(1)(2) 60 Director
Ronald Chaimowitz 49 President, Chief Executive Officer and Director
Harry M. Rubin 43 Executive Vice President and General Manager --
International Division and Business Affairs
Andrew Gregor 48 Chief Financial Officer and Senior Vice President,
Finance and Administration
Chris Garske 40 Senior Vice President of Publishing
Richard Burns 41 Senior Vice President of Sales
Charles F. Bond 40 President, Slash Division
Frank Herman 63 Chairman and Managing Director, G.T. Interactive
Software (Europe) Limited
Steven A. Denning(1) 48 Director
William E. Ford(2) 35 Director
Jordan A. Levy(2) 40 Director
</TABLE>

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

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

Joseph J. Cayre, a co-founder of the Company, has been Chairman of the
Board of Directors and a Director of the Company since its incorporation in
September 1992, and his term of office as director expires in 1998. Mr. Cayre
also co-founded GTHV in 1984 and has served as its President since that time.

Jack J. Cayre has been Executive Vice President and a Director of the
Company since its incorporation, and his term of office as director expires in
1997. From January 1993 to January 1995, Mr. Cayre was Vice President of
Licensing and Product Acquisition. From January 1990 to August 1992, Mr. Cayre
was the President of Double J Records, a privately-held record company.

Kenneth Cayre, a co-founder of the Company, has been a Director of the
Company since its incorporation, and his term of office as director expires in
1999. Mr. Cayre also co-founded GTHV and has served as its Executive Vice
President since that time.

Stanley Cayre, a co-founder of the Company, has been a Director of the
Company since its incorporation, and his term of office as director expires in
1998. Mr. Cayre is the Chairman of the Audit Committee. Mr. Cayre also
co-founded GTHV and has served as its Chairman since that time.

Ronald Chaimowitz, a co-founder of the Company, has been President and
Chief Executive Officer of the Company since February 1995, and his term of
office as director expires in 1998. From January 1994 to January 1995, Mr.
Chaimowitz served as Executive Vice President and General Manager of the
Company. From December 1990 to December 1992, Mr. Chaimowitz was the President
of Entertainment Consultants, a management consultant firm to the entertainment
industry. Prior thereto, Mr. Chaimowitz served as Executive Vice President of
GTHV.

Harry M. Rubin has been Executive Vice President and General Manager --
International Division and Business Affairs of the Company since March 1995.
From June 1994 to August 1995, Mr. Rubin served as Chief Financial Officer of
the Company. From November 1993 to June 1994, Mr. Rubin was an independent

35
<PAGE> 38

management consultant to several entertainment companies. From 1988 to November
1993, Mr. Rubin was the Vice President and General Manager of Home Video
Operations for the National Broadcasting Company, Inc.

Andrew Gregor has been Chief Financial Officer of the Company since August
1995. Prior to being appointed as Senior Vice President, Finance and
Administration, in April 1996, Mr. Gregor had been Vice President of Finance of
the Company since August 1995. From February 1992 to August 1995, Mr. Gregor
served as Vice President and Chief Financial Officer of Lillian Vernon Corp., a
consumer direct merchant. For more than five years prior thereto, Mr. Gregor was
Senior Vice President and Chief Financial Officer of McCrory Corp., a national
retailer.

Chris Garske has been Senior Vice President of Publishing since September
1995. From December 1991 to August 1995, Mr. Garske was employed by Sega of
America, a manufacturer of video game consoles and related products, where he
served in various capacities, including the group Vice President of Marketing.
From April 1991 to December 1991, Mr. Garske served as Brand Manager of Sierra
On-line, a consumer software publisher. Prior thereto, Mr. Garske served as
Director of Marketing for Activision, a consumer software publisher.

Richard Burns has been Senior Vice President of Sales since December 1995.
From March to November 1995, Mr. Burns was Vice President and General Manager of
Mattel Media, Inc., a consumer software publisher. From October 1994 to March
1995, Mr. Burns was Vice President of Worldwide Sales of Rocket Science Games,
Inc., a startup consumer software company. From July 1991 to October 1994, Mr.
Burns served as Senior Vice President of Sales for Sega of America, Inc. Prior
thereto, Mr. Burns was Senior Zone Vice President of Sony Corporation of
America.

Charles F. Bond has been President of the Slash Division of the Company
since June 1995, when Slash Corporation was acquired by the Company. From May
1991 to June 1995, Mr. Bond was the President of Slash Corporation. Prior
thereto, Mr. Bond was Vice President -- Merchandising for Lieberman Enterprise,
a rack-jobber.

Frank Herman has been Chairman and Managing Director of G.T. Interactive
Software (Europe) Limited since May 1995. From April to October 1995, Mr. Herman
was also Chairman of Probe Software Ltd., a software development house. From
July 1991 to April 1995, Mr. Herman was Deputy Chairman and Managing Director of
Sega (Europe) Ltd. From August 1988 to July 1991, Mr. Herman served as Managing
Director of Virgin Mastertronic Ltd., an entertainment software publisher.

Steven A. Denning has served as a Director of the Company since February
1995, and his term of office as director expires in 1997. Mr. Denning is
currently the Executive Managing Member of General Atlantic Partners, LLC, a
private investment firm, and has been the Executive Managing Member of General
Atlantic Partners, LLC or a general partner of its predecessor partnership since
February 1989. From 1980 to 1989, Mr. Denning was Managing Director of General
Atlantic Corporation. Mr. Denning is a member of the Boards of Directors of
United Meridian Corporation, an oil and natural gas company, and several private
companies in which General Atlantic Partners, LLC or one of its affiliates is an
investor.

William E. Ford has served as a Director of the Company since February
1995, and his term of office as director expires in 1999. Mr. Ford is a managing
member of General Atlantic Partners, LLC, a private investment firm, and has
been with General Atlantic Partners, LLC or a general partner of its predecessor
partnership since July 1991. From August 1987 to July 1991, Mr. Ford was an
associate with Morgan Stanley, Inc. in the mergers and acquisitions department.
Mr. Ford is also a director of Marcam Corporation, a provider of enterprise
resource planning software, Envoy Corporation, an electronic transaction
processing company, E*Trade Group, Inc., a deep-discount electronic brokerage
company, SS&C Technologies, Inc., an investment management software company, and
several private software companies in which General Atlantic Partners, LLC or
one of its affiliates is an investor.

Jordan A. Levy has served as a Director of the Company since February 1996,
and his term of office as director expires in 1999. Since February 1991, Mr.
Levy has served as the President and Co-Chief Executive Officer of Upgrade
Corporation of America, an international outsourcing services company to the
computer industry.

36
<PAGE> 39

The Board of Directors is divided into three classes with each class of
Directors serving for a staggered three-year term. At each annual meeting of
stockholders, Directors will be re-elected or elected for a full term of three
years to succeed those directors whose terms are expiring. The Board of
Directors has established an Audit Committee and a Compensation Committee. The
Audit Committee reviews the adequacy of internal controls, the results and scope
of annual audits and other services provided by the Company's independent public
accountants. The Compensation Committee establishes salaries, bonuses and other
forms of compensation for officers of the Company and administers the Company's
1995 Stock Incentive Plan.

Joseph J. Cayre, Stanley Cayre and Kenneth Cayre are brothers, and Jack J.
Cayre is the son of Joseph J. Cayre.

Each non-employee director of the Company is paid an annual retainer of
$15,000 payable in monthly installments, and a fee of $1,000 for each meeting of
the Board of Directors or any committee thereof they attend.

The Company has entered into agreements with Upgrade Corporation of America
(doing business as SOFTBANK Services Group) ("Upgrade") pursuant to which
Upgrade (i) provides toll-free customer support for the Company's published
products and (ii) takes direct customer orders and provides fulfillment services
for the Company, in each case on a per service basis. The agreement relating to
customer support service expires on December 17, 1996 and the agreement
providing for the fulfillment service expires on August 2, 1997. Both agreements
provide for automatic renewal on a month to month basis upon expiration unless
terminated by either party. As of October 11, 1996, the Company has paid
approximately $36,000 to Upgrade. Jordan A. Levy is the President and the
Co-Chief Executive Officer of Upgrade.

Each executive officer is elected annually by the Board of Directors of the
Company and serves at the pleasure of the Board.

37
<PAGE> 40

EXECUTIVE COMPENSATION

Summary Compensation Table. The following table sets forth compensation
earned, whether paid or deferred, by the Company's Chief Executive Officer and
its other four most highly compensated executive officers during the year ended
December 31, 1995 (the "Named Executive Officers") for services rendered in all
capacities to the Company for the years ended December 31, 1993, 1994 and 1995.
Mr. Harry Steck, whose information is included in the tables hereunder, is no
longer an executive officer of the Company.

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ------------
ALL OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL OCCUPATION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------------------------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald Chaimowitz.......................... 1995 $300,000 -- (1) $ 10,200(2) 975,000 $ 718(3)
President and Chief Executive Officer 1994 200,000 $320,000(4) -- -- 4,260(3)
1993 175,384 -- 9,000(2) -- --
Harry M. Rubin............................. 1995 250,000 60,000 20,000(2) 179,829 --
Executive Vice President and General 1994 169,461(4) 25,000(6) -- -- --
Manager -- International Division and
Business Affairs (5)
Harry Steck................................ 1995 220,000 69,000 -- 152,215 --
Vice President of Operations 1994 60,000(7) -- -- -- --
Jack J. Cayre.............................. 1995 208,000 -- -- 168,000 640(3)
Executive Vice President (8) 1994 208,000 -- -- -- 4,260(3)
1993 104,000 -- -- -- --
Charles F. Bond (9)........................ 1995 155,770 130,208(10) -- 6,000 --
President of Slash Division
</TABLE>

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

(1) In lieu of a cash bonus in 1995, Mr. Chaimowitz received options to purchase
75,000 shares of the Company's Common Stock at an exercise price of $14.00
per share.

(2) Represents an automobile allowance.

(3) Represents Company contributions on behalf of each of the officers to the
Company's 401(k) Profit Sharing Plan.

(4) This bonus was earned in 1994, but a portion of it was paid in 1995.

(5) Mr. Rubin served the Company as Chief Financial Officer from June 1994
through the end of that year. From January through May 1994, Mr. Rubin was
a consultant to the Company. The table reflects the aggregate amount of
compensation paid to Mr. Rubin during the year ended December 31, 1994.

(6) This bonus was earned in 1994; $13,000 was paid in 1994 and the balance was
paid in 1995.

(7) From August 1994 to December 1994, Mr. Steck served as a consultant to the
Company. This amount was earned in 1994; $40,000 was paid in 1994 and the
balance was paid in 1995.

(8) Mr. Cayre has served the Company as the Executive Vice President since
February 1995. During the years ended December 31, 1993 and December 31,
1994, Mr. Cayre was Vice President of Licensing and Product Acquisitions.

(9) Mr. Bond joined the Company in June 1995 and accordingly, the information
contained herein reflects a partial year.

(10) This bonus was earned in 1995, but paid in 1996.

38
<PAGE> 41

Option Grants. Shown below is information regarding grants of stock
options under the Company's 1995 Stock Incentive Plan during the fiscal year
ended December 31, 1995 to each of the Named Executive Officers.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
% OF TOTAL MARKET PRICE OF
NUMBER OF OPTIONS UNDERLYING
SECURITIES GRANTED TO SECURITIES ON THE
UNDERLYING EMPLOYEES EXERCISE DATE OF GRANT IF
OPTIONS IN FISCAL PRICE HIGHER THAN
NAME GRANTED YEAR(1) ($/SH) EXERCISE PRICE EXPIRATION DATE
- --------------------------- ---------- ---------- -------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Ronald Chaimowitz.......... 720,000(2) 15.7 $ 4.170 -- 2/28/05
180,000(3) 3.9 9.375 -- 6/30/05
75,000(4) 1.6 14.000 -- 12/8/05
Harry M. Rubin............. 158,400(5) 3.5 9.375 -- 6/30/05
21,429(6) 0.5 0.047 $5.95(11) 6/30/05
Harry Steck................ 144,000(7) 3.1 9.375 -- 6/30/05
8,215(8) 0.2 0.122 5.95(11) 6/30/05
Jack J. Cayre.............. 168,000(9) 3.7 9.375 -- 6/30/05
Charles F. Bond............ 6,000(10) 0.1 14.000 -- 6/30/05
</TABLE>

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

(1) The Company granted options for an aggregate of 4,573,179 shares to its
employees in fiscal year 1995.

(2) The option became exercisable as to 240,000 shares on February 28, 1996,
and becomes exercisable as to the remaining 480,000 shares in two equal
annual installments thereafter.

(3) The option became exercisable as to 45,000 shares on June 30, 1996, and
becomes exercisable as to the remaining 135,000 shares in six equal
installments of 22,500 shares every six months thereafter.

(4) The option becomes exercisable in four equal annual installments commencing
on December 8, 1996.

(5) The option became exercisable as to 39,600 shares on June 30, 1996, and
becomes exercisable as to the remaining 118,800 shares in six equal
installments of 19,800 shares every six months thereafter.

(6) The option became exercisable on January 19, 1996.

(7) 72,000 shares underlying the option were cancelled as of August 8, 1996.
The option became exercisable as to 36,000 shares on June 30, 1996, and
becomes exercisable as to the remaining 36,000 shares in two equal
installments of 18,000 shares every six months thereafter.

(8) The option became exercisable on December 20, 1995.

(9) The option became exercisable as to 42,000 shares on June 30, 1996, and
becomes exercisable as to the remaining 126,000 shares in six equal
installments of 21,000 shares every six months thereafter.

(10) The option became exercisable as to 1,500 shares on June 30, 1996, and
becomes exercisable as to the remaining 4,500 shares in three equal annual
installments thereafter.

(11) The fair market value of each share of the Company's Common Stock on the
date of the grant, June 30, 1995.

39
<PAGE> 42

The following table shows the hypothetical value of the options granted at
the end of the option terms (ten years) if the stock price were to appreciate
annually by 5% and 10%, respectively. These assumed rates of growth are required
by the Securities and Exchange Commission (the "Commission") for illustration
purposes only and are not intended to forecast possible future stock prices.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE OF
ASSUMED
ANNUAL RATES OF STOCK PRICE
NUMBER OF APPRECIATION FOR
SECURITIES OPTION TERM(1)
UNDERLYING ------------------------------------
NAME OPTIONS GRANTED 0% 5% 10%
- --------------------------------------- --------------- -------- --------- ---------
<S> <C> <C> <C> <C>
Ronald Chaimowitz...................... 720,000 -- $1,888,193 $4,785,052
180,000 -- 57,046 1,090,398
75,000 -- 660,339 1,673,430
Harry M. Rubin......................... 158,400 -- 50,201 959,550
21,429 $126,503 206,681 329,702
Harry Steck............................ 144,000 -- 45,637 872,319
8,215(2) 47,879 78,619 125,780
Jack J. Cayre.......................... 168,000 -- 53,243 1,017,705
Charles F. Bond........................ 6,000 -- -- 8,597
</TABLE>

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

(1) Represents the product of (i) difference between (A) the product of the
per-share fair market value at the time of the grant compounded annually at
the assumed rate of appreciation over the term of the option, and (B) the
per-share exercise price of the option, and (ii) the number of shares
underlying the grant at the fiscal year-end.

(2) Mr. Steck exercised this option prior to the end of the 1995 fiscal year.
See "Aggregated Option Exercise and Year-End Option Values" below.

Aggregated Option Exercises and Year-End Option Values. Shown below is
information relating to the exercise of stock options during the fiscal year
ended December 31, 1995 for each of the Named Executive Officers, and the
year-end value of unexercised options.

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS
UNDERLYING UNEXERCISED AT FISCAL YEAR-END(2)
SHARES ACQUIRED OPTIONS AT FISCAL YEAR-END (EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED(1) (EXERCISABLE/UNEXERCISABLE) UNEXERCISABLE)
- ------------------------- --------------- ----------------- -------------------------- ---------------------
<S> <C> <C> <C> <C>
Ronald Chaimowitz........ -- -- 0/975,000 $ 0/7,971,037
Harry M. Rubin........... -- -- 0/179,829 0/1,042,845
Harry Steck.............. 8,215 $ 105,795 0/144,000 0/675,000
Jack J. Cayre............ -- -- 0/168,000 0/787,500
Charles F. Bond.......... -- -- 0/6,000 0/375
</TABLE>

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

(1) Market value of underlying securities based on the average of the high and
low trading price of the Company's Common Stock on the date of exercise,
minus the aggregate exercise price.

(2) Market value of underlying securities based on the average of the high and
low trading price of the Company's Common Stock on December 29, 1995, minus
the aggregate exercise price.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Ronald
Chaimowitz, pursuant to which he serves as President and Chief Executive Officer
for a period ending December 31, 1998. The agreement establishes a base salary
of $365,000 for 1996, $415,000 for 1997 and $465,000 for 1998. In addition, Mr.
Chaimowitz is eligible to receive annual bonuses and stock option grants at the
discretion of the Board of Directors. Mr. Chaimowitz is entitled to participate
in the Company's employee benefit plans generally available to the Company's
senior executives. In addition, Mr. Chaimowitz has agreed not to engage in any
competitive business until December 31, 1998 or, if his employment with the
Company is terminated other

40
<PAGE> 43

than for cause or he resigns for good reason (as defined in the agreement), for
so long as the Company continues to pay severance amounts pursuant to the
agreement. In addition, if, following a Change of Control (as defined below),
Mr. Chaimowitz's employment is terminated other than for cause or he resigns for
good reason or Mr. Chaimowitz is not the Chief Executive Officer or President
and Chief Operating Officer of the Company or its successor, then Mr. Chaimowitz
may, within one year of any such event, terminate his employment with the
Company or such successor and in such event he will receive severance payments
otherwise payable under the employment agreement with the same effect as if he
were terminated without cause, and will no longer be subject to a
non-competition agreement. Upon the happening of a Change of Control, all
options then held by Mr. Chaimowitz will immediately vest and become
exercisable. For purposes of the agreement, the term Change of Control means any
of the following: (a) any person, as that term is used in Sections 13(d) and
14(d) of the Exchange Act (other than members of the Cayre family), becomes the
beneficial owner, directly or indirectly, of 50% or more of the voting power of
the Company's then outstanding securities; (b) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company (and any new director approved by such
person), cease for any reason to constitute at least a majority of the Board of
Directors; (c) the approval by the Company's stockholders of certain mergers or
consolidations of the Company with any other entity; or (d) the approval by the
Company's stockholders of a plan of complete liquidation of the Company or an
agreement for the sale or distribution of all or substantially all of the
Company's assets.

The Company has entered into an employment agreement with Harry M. Rubin,
pursuant to which he serves as Executive Vice President and General Manager --
International Division and Business Affairs for a three-year period ending on
December 31, 1997. The agreement establishes a base salary of $250,000 for the
year ended December 31, 1995, $275,000 for the year ending December 31, 1996 and
$300,000 for the year ending December 31, 1997. In addition, Mr. Rubin is
eligible to receive bonuses and stock option grants at the discretion of the
Board of Directors, and is entitled to participate in the Company's employee
benefit plans generally available to the Company's senior executives. In
addition, Mr. Rubin has agreed not to engage in any competitive business until
December 31, 1997 or, if his employment with the Company is terminated other
than for cause, for as long as the Company continues to pay severance amounts
pursuant to the agreement. If, within one year following a Change of Control, as
defined above, (1) neither Joseph Cayre nor Ronald Chaimowitz is the Chairman of
the Board of Directors or the President of the Company or its successor, or, if
either such person does hold one of such offices, Mr. Rubin does not report
directly to one of such persons, or (2) if Mr. Rubin's employment is terminated
other than for cause, or (3) Mr. Rubin's duties and responsibilities are
reduced, then all options held by Mr. Rubin will immediately vest and become
exercisable.

The Company has entered into an employment agreement with Chris Garske,
pursuant to which he serves as Senior Vice President of Publishing for a
three-year period ending on August 6, 1998. The agreement establishes a base
salary of $240,000 per annum during the term of employment, subject to
discretionary increases by the Company's President and Board of Directors. In
addition, Mr. Garske is eligible to receive annual bonuses not to exceed fifty
percent of his base salary in effect at such time, in such amounts as determined
by the Company's President and Board of Directors; provided that Mr. Garske is
guaranteed bonuses of $33,000 and $100,000 for the years ending December 31,
1995 and December 31, 1996, respectively. Mr. Garske is entitled to participate
in the Company's employee benefit plans generally available to the Company's
senior executives. In addition, Mr. Garske has agreed not to engage in any
competitive business until August 6, 1998 or, if his employment with the Company
is terminated other than for cause, for as long as the Company continues to pay
severance amounts pursuant to the agreement.

The Company has entered into an employment agreement with Andrew Gregor,
pursuant to which he serves as Chief Financial Officer and Senior Vice
President, Finance and Administration. The agreement provides that Mr. Gregor's
annual base salary is $235,000, that his base salary will be subject to
discretionary increase by the Company's President and Board of Directors and
that Mr. Gregor will be eligible to receive annual bonuses not to exceed an
amount equal to fifty percent of his base salary in effect at such time, in such
amounts as determined by the Company's President and Board of Directors. Mr.
Gregor is entitled to participate in the Company's employee benefit plans
generally available to the Company's senior executives. In addition, Mr. Gregor
has agreed not to engage in any competitive business until August 18, 1998 or,
if his

41
<PAGE> 44

employment with the Company is terminated other than for cause, for as long as
the Company continues to pay severance amounts pursuant to the agreement. If,
within one year following a Change of Control, as defined above, neither Joseph
Cayre nor Ronald Chaimowitz is the Chairman of the Board of Directors or the
President of the Company or its successor, or if either person does hold one of
such offices, Mr. Gregor does not report directly to one of such persons, then
all options held by Mr. Gregor will immediately vest and become exercisable.

The Company has entered into an employment agreement with Charles F. Bond,
pursuant to which he serves as President of the Slash Division of the Company
for a three-year term ending on June 30, 1998. The agreement also establishes a
base salary of $300,000 per annum during the term of employment and provides
that Mr. Bond will receive an annual bonus in prescribed amounts if certain
pre-tax net income levels are reached by the Company. Mr. Bond is entitled to
participate in the Company's employee benefit plans generally available to the
Company's senior executives. In addition, in connection with the purchase of
Slash by the Company, as of June 23, 1995, the Company entered into a
Non-Competition Agreement with Mr. Bond, pursuant to which he has agreed not to
be involved in any competing business in the United States until the earlier of
one year following termination without cause or June 23, 2000.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee (the "Committee") consists of Messrs.
Joseph J. Cayre, Stanley Cayre and Steven A. Denning. For certain transactions
involving the Company and the members of the Committee or entities controlled by
such individuals, see "Certain Transactions."

STOCK INCENTIVE PLAN

On February 28, 1995, the Company's Board of Directors adopted and the
Company's stockholders approved a stock incentive plan. The stock incentive
plan, as amended and restated on November 8, 1995 (the "1995 Plan"), provides
for the issuance of a total of up to 7,800,000 authorized and unissued shares of
Common Stock, treasury shares and/or shares acquired by the Company for purposes
of the 1995 Plan. The 1995 Plan is being administered by the Committee. Awards
under the 1995 Plan may be made in the form of (i) incentive stock options, (ii)
non-qualified stock options, (iii) stock appreciation rights, (iv) restricted
stock and (v) performance shares. Awards may be made to such directors, officers
and other employees of the Company and its subsidiary (including employees who
are directors and prospective employees who become employees), and to such
consultants to the Company and its subsidiaries, as the Committee shall in its
discretion select. An aggregate of 5,443,849 shares of Common Stock is reserved
for issuance upon the exercise of options granted as of September 30, 1996 under
the 1995 Plan, at a weighted average exercise price of $11.11 per share. See
"Shares Eligible for Future Sale."

401(K) PROFIT SHARING PLAN

The Company sponsors several tax-qualified employee profit sharing and
savings plans (the "401(k) Plans"), which cover in the aggregate all of the
Company's non-union employees with one year of service. The Company may limit
participation by highly compensated employees to comply with the Code's
nondiscrimination requirements. Pursuant to the 401(k) Plans, employees may
elect to reduce their current compensation by up to 15%, subject to statutorily
prescribed limitations. Certain plans also permit the Company to provide a
matching contribution, up to 1% of an employee's compensation, subject to
statutory limitations. The Company may also make discretionary contributions.
The 401(k) Plans are intended to qualify under Section 401(k) of the Code, so
that contributions by employees or by the Company and the income earned on plan
contributions, are not taxable to employees until withdrawn from the 401(k)
Plans, and so that contributions by the Company, if any, will be deductible by
the Company when made. All employee contributions to the 401(k) Plans are fully
vested at all times and Company contributions, if any, vest ratably over a
period based on the participant's years of service (up to seven years). Benefits
under the 401(k) Plans are paid upon a participant's retirement, death,
disability or termination of employment and are based upon the amount of
participant contributions and vested employer contributions, as adjusted for
gains, losses and earnings. In-service withdrawals may be made by participants
facing certain hardship situations. 401(k) Plan loans are also available to
participants.

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<PAGE> 45

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information, as of October 4, 1996,
concerning the Common Stock of the Company beneficially owned (i) by each
director of the Company, (ii) by each of the Company's Named Executive Officers
and all executive officers and directors as a group, (iii) by each of the
Selling Stockholders, and (iv) by each stockholder known by the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock. Unless
otherwise indicated in the footnotes to the table, the beneficial owners named
have, to the knowledge of the Company, sole voting and dispositive power with
respect to the shares beneficially owned, subject to community property laws
where applicable.

SHARES BENEFICIALLY NUMBER OF SHARES SHARES BENEFICIALLY
OWNED PRIOR TO BE SOLD OWNED AFTER
TO OFFERING IN THE OFFERING(1) OFFERING(1)
FIVE PERCENT STOCKHOLDERS, ----------------------- ------------------ --------------------
DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT(2) NUMBER PERCENT
- --------------------------------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Joseph J. Cayre(3)............... 14,110,188 21.3% 2,383,500 11,726,688 16.6%
Jack J. Cayre(4)................. 3,692,085 5.6 616,500 3,075,585 4.4
Stanley Cayre(5)................. 8,993,922 13.6 1,500,000 7,493,922 10.6
Kenneth Cayre(6)................. 8,925,136 13.5 1,500,000 7,425,136 10.5
Ronald Chaimowitz(7)............. 919,582 1.4 400,000 519,582 *
General Atlantic Partners, LLC(8)
3 Pickwick Plaza, Greenwich, CT
06830.......................... 6,924,525 10.4 1,163,000 5,761,525 8.2
Steven A. Denning(9)............. 6,924,525 10.4 1,163,000 5,761,525 8.2
William E. Ford(10).............. 6,924,525 10.4 1,163,000 5,761,525 8.2
Jordan A. Levy................... 6,500 * -- 6,500 *
Harry M. Rubin(11)............... 58,929 * -- 58,929 *
Harry Steck(12).................. 46,215 * -- 46,215 *
Charles F. Bond(13).............. 2,015,900 3.0 500,000 1,515,900 2.1
Various trusts for the benefit of
the children of Joseph J. Cayre
16 East 40th Street, New York,
NY 10016....................... 7,299,389 11.0 1,233,000 6,066,389 8.6
Various trusts for the benefit of
the children of Stanley Cayre
16 East 40th Street, New York,
NY 10016....................... 5,008,669 7.6 835,500 4,173,169 5.9
Various trusts for the benefit of
the children of Kenneth and
Lillian Cayre
16 East 40th Street, New York,
NY 10016....................... 7,119,689 10.7 1,197,000 5,922,689 8.4
Trust for the benefit of Keri
Chaimowitz
16 East 40th Street, New York,
NY 10016....................... 72,000 * 50,000 22,000 *
All executive officers and
directors as a group (14
persons)(14)................... 45,770,467 68.6 8,063,000 37,707,467 53.2
</TABLE>

43
<PAGE> 46
<TABLE>
<CAPTION>

SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING NUMBER OF SHARES OFFERING(1)
----------------------- TO BE SOLD --------------------
OTHER SELLING STOCKHOLDERS NUMBER PERCENT(2) IN THE OFFERING(1) NUMBER PERCENT
- --------------------------------- --------- ---------- ------------------ --------- -------
<S> <C> <C> <C> <C> <C>
Shelley M. Day(15)............... 1,134,294 1.7% 350,000 784,294 1.1%
Ronald D. Gilbert(15)............ 1,134,294 1.7 350,000 784,294 1.1
Random House, Inc.(15)........... 498,058 * 448,252 49,806 *
Hummer Winblad Venture
Partners, L.P.(15)............. 283,573 * 255,216 28,357 *
Hummer Winblad Venture
Partners II, L.P.(15).......... 272,230 * 245,007 27,223 *
Hummer Winblad Technology
Fund II, L.P.(15).............. 11,343 * 10,209 1,134 *
Wayne Smith(15).................. 113,429 * 102,086 11,343 *
Robert J. Armstrong(15).......... 1,045,750 1.6 155,750 890,000 1.3
Paul D. Rinde(15)................ 1,045,750 1.6 155,750 890,000 1.3
W. Terry Olson(15)............... 258,500 * 38,500 220,000 *
SOFTBANK Holdings Inc............ 2,399,112 3.6 403,000 1,996,112 2.8
id Software, Inc.(16)............ 211,268 * 211,268 -- --
All Other Selling Stockholders
(12 persons)................... 1,043,931 1.6 711,962 331,969 *
</TABLE>

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

* less than 1%

(1) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters exercise their over-allotment option in full, the persons or
entities set forth in the above table will beneficially own 41,396,999
shares, or 58.4%, of the outstanding shares of Common Stock after the
Offering.

(2) Based on 66,304,499 shares of the Company's Common Stock outstanding as of
October 4, 1996.

(3) Includes 7,299,389 shares in the aggregate held in various trusts for the
benefit of Joseph Cayre's children, for which trusts his wife serves as
trustee. The Number of Shares to be Sold in the Offering by Joseph Cayre
includes 1,233,000 shares to be sold in the aggregate by such trusts.
Joseph Cayre disclaims beneficial ownership of the shares held by such
trusts. Also includes 420,000 shares held by Joseph Cayre in a grantor
retained annuity trust.

(4) Includes 105,000 shares held by Jack Cayre in a grantor retained annuity
trust and 42,000 shares subject to options exercisable within 60 days.

(5) Includes 5,008,669 shares in the aggregate held in various trusts for the
benefit of Stanley Cayre's children, for which trusts his wife serves as
trustee. The Number of Shares to be Sold in the Offering by Stanley Cayre
includes 835,500 shares to be sold in the aggregate by such trusts. Stanley
Cayre disclaims beneficial ownership of the shares held by such trusts.
Also includes 640,000 shares held by Stanley Cayre in a grantor retained
annuity trust.

(6) Includes 7,119,689 shares in the aggregate held in various trusts for the
benefit of Kenneth and Lillian Cayre's children, for which trusts Lillian
Cayre serves as trustee. The Number of Shares to be Sold in the Offering by
Kenneth Cayre includes 1,197,000 shares to be sold in the aggregate by such
trusts. Kenneth Cayre disclaims beneficial ownership of the shares held by
such trusts. Also includes 230,000 shares held by Kenneth Cayre in a
grantor retained annuity trust.

(7) Includes 72,000 shares held in a trust for the benefit of Ronald
Chaimowitz's daughter, Keri Chaimowitz, for which trust Ronald Chaimowitz's
wife serves as trustee. The Number of Shares to be Sold in the Offering by
Ronald Chaimowitz includes 50,000 shares to be sold by such trust. Ronald
Chaimowitz disclaims beneficial ownership of the shares held by such trust.
Also includes an aggregate of 99,718 shares held by Mr. Chaimowitz in two
grantor retained annuity trusts, and 215,000 shares subject to options
exercisable within 60 days.

44
<PAGE> 47

(8) Includes 4,184,545 shares held by General Atlantic Partners 16, L.P. ("GAP
16"), 2,092,273 shares held by General Atlantic Partners 19, L.P. ("GAP
19") and 647,707 shares held by GAP Coinvestment Partners, L.P. ("GAP
Coinvestment"). The general partner of GAP 16 and GAP 19 is General
Atlantic Partners, LLC, a Delaware limited liability company. The managing
members of General Atlantic Partners, LLC are Steven A. Denning, David C.
Hodgson, Stephen P. Reynolds, J. Michael Cline, William O. Grabe and
William E. Ford. The same individuals are the general partners of GAP
Coinvestment. Messrs. Denning and Ford, directors of the Company, are the
Executive Managing Member and a managing member, respectively, of General
Atlantic Partners, LLC and general partners of GAP Coinvestment. Messrs.
Denning and Ford disclaim beneficial ownership of shares owned by GAP 16,
GAP 19 and GAP Coinvestment, except to the extent of their respective
pecuniary interests therein.

(9) Includes 4,184,545 shares held by GAP 16, 2,092,273 shares held by GAP 19
and 647,707 shares held by GAP Coinvestment. Mr. Denning disclaims
beneficial ownership of shares owned by GAP 16, GAP 19 and GAP
Coinvestment, except to the extent of his respective pecuniary interests
therein.

(10) Includes 4,184,545 shares held by GAP 16, 2,092,273 shares held by GAP 19
and 647,707 shares held by GAP Coinvestment. Mr. Ford disclaims beneficial
ownership of shares owned by GAP 16, GAP 19 and GAP Coinvestment, except to
the extent of his respective pecuniary interests therein.

(11) Represents 58,929 shares subject to options exercisable within 60 days.

(12) Mr. Steck is no longer an executive officer of the Company.

(13) Includes 763,200 shares which are held in escrow and are subject to a
limited right of repurchase by the Company. See "Certain
Transactions -- Transactions with Charles F. Bond." Also includes 50,000
shares held by Mr. Bond's wife (as to which he disclaims beneficial
ownership), 100,000 shares held in a grantor retained annuity trust and
1,500 shares subject to options exercisable within 60 days.

(14) Includes an aggregate of 419,429 shares subject to options exercisable
within 60 days held by the executive officers of the Company (see also
notes 4, 7, 11 and 13 above). Also includes 763,200 shares held by Mr. Bond
subject to escrow (see note 13 above) but excludes the shares held by Mr.
Steck (see note 12 above).

(15) 10% of the shares held by each of these Selling Stockholders are held in
escrow.

(16) Represents 211,268 shares of Common Stock underlying the warrants to be
exercised immediately prior to the consummation of the Offering.

45
<PAGE> 48

CERTAIN TRANSACTIONS

TRANSACTIONS WITH GAP STOCKHOLDERS

On February 28, 1995, the Company issued to General Atlantic Partners II,
L.P. ("GAP II"), an affiliate of certain stockholders of the Company, a
subordinated, secured promissory note (the "GAP II Note") in the original
principal amount of $15,000,000 in connection with a Note Purchase Agreement
entered into on such date by the Company and GAP II. Interest on the GAP II Note
accrued at the rate of 4.5% per annum and was payable semiannually on each March
1 and September 1. The maturity date of the GAP II Note was February 28, 1996;
provided, however, that the Company was required to prepay the GAP II Note under
certain circumstances, including upon the consummation of the Company's initial
public offering. The Company prepaid the GAP II Note, including interest accrued
thereon, with the proceeds of the initial public offering. In connection with
their acquisition of shares of Common Stock, GAP II, GAP 16 and GAP Coinvestment
were granted certain rights with respect to the registration under the
Securities Act of the shares of Common Stock owned by them.

Messrs. Denning and Ford, Directors of the Company, are the Executive
Managing Member and a managing member, respectively, of General Atlantic
Partners, LLC which is the general partner of GAP II. In connection with their
acquisition of shares of Common Stock, GAP II, GAP 16 and GAP Coinvestment
entered into a stockholders' agreement with the Company and certain other
stockholders, pursuant to which Messrs. Denning and Ford were elected to the
Board of Directors. The stockholders' agreement automatically expired by its
terms upon the effectiveness of the Company's initial public offering.

On June 30, 1995, GAP 19 and GAP Coinvestment paid the Company $15,000,000
for shares of Series A Preferred Stock, which converted into 2,520,000 shares of
Common Stock immediately prior to the consummation of the Company's initial
public offering.

TRANSACTIONS WITH CHARLES F. BOND

In connection with the Company's acquisition of Slash, Charles F. Bond,
president and sole stockholder of Slash, received 2,793,600 shares of Common
Stock. Of the shares issued to Mr. Bond, 763,200 shares of Common Stock are
presently held in escrow. Mr. Bond has granted to the Company the right, under
certain circumstances related to the termination of Mr. Bond's employment by the
Company, to purchase all such escrowed shares for $25,000. Such right is
exercisable by the Company on or prior to January 20, 1998.

Pursuant to an agreement with the Company dated June 22, 1995, Mr. Bond was
granted certain rights with respect to the registration under the Securities Act
of the non-escrowed shares of Common Stock owned and, under certain
circumstances, to be owned by him.

TRANSACTIONS WITH CAYRE FAMILY STOCKHOLDERS

In connection with the Company's initial public offering, Messrs. Joseph J.
Cayre, Kenneth Cayre, Stanley Cayre, the various trusts for the benefit of their
respective children, Jack J. Cayre (collectively, the "Cayre Family
Stockholders") and the Company entered into a stockholders' agreement (the
"Stockholders' Agreement"), which provides among other things, that the Cayre
Family Stockholders will vote their respective shares of Common Stock to elect
as directors of the Company (i) two individuals designated by Mr. Joseph J.
Cayre, (ii) one individual designated by Mr. Kenneth Cayre and (iii) one
individual designated by Mr. Stanley Cayre. The Stockholders' Agreement also
provides that each stockholder who is a party to the Stockholders' Agreement
(the "Offering Stockholder") will grant to the other stockholders (the
"Offerees") a right of first offer to purchase the shares of Common Stock that
the Offering Stockholder intends to sell to a person (or group of persons) who
is not a Cayre Family Stockholder, except in certain circumstances, such as
sales in a widely distributed underwritten public offering or sales made in
compliance with Rule 144. Each Offeree will have the opportunity to purchase the
Offeree's pro rata portion of the shares to be offered by the Offering
Stockholder, as well as additional shares not purchased by other Offerees. Any
shares not purchased pursuant to the right of first offer may be sold at or
above 95% of the price offered to the Offerees. The Stockholders' Agreement will
terminate upon the occurrence of certain specified events, including the
transfer

46
<PAGE> 49

of shares of Common Stock by a party to the Stockholders' Agreement that causes
all parties thereto immediately after such transaction to own beneficially in
the aggregate shares having less than 10% of the total voting power of the
Company.

In connection with the Company's initial public offering, the Company and
the Cayre Family Stockholders entered into an agreement pursuant to which the
Cayre Family Stockholders have certain rights to require the Company to register
under the Securities Act all or any portion of the shares of Common Stock held
by them.

LEASES

The Company currently leases its principal administrative, sales, marketing
and development facility at 16 East 40th Street in New York City from 16 East
40th Associates, an entity in which Joseph Cayre, Stanley Cayre and Kenneth
Cayre collectively have a 50% ownership interest. The leases for various floors
at such facility expire in December 2002. During the year ended December 31,
1995 and the six months ended June 30, 1996, the Company paid approximately
$415,000 and $296,000, respectively, in the aggregate in rent to 16 East 40th
Associates.

In May 1995, G.T. Interactive Software (Europe) Limited, the Company's
European subsidiary, entered into a lease with respect to its principal
executive offices with Marylebone 248 Realty LLC ("Marylebone 248"), an entity
controlled by Messrs. Joseph J. Cayre and Jack Cayre. The lease expires in 2020.
During the year ended December 31, 1995 and the six months ended June 30, 1996,
the Company paid approximately $336,000 and $177,000, respectively, in rent to
Marylebone 248.

TRANSACTIONS WITH GOODTIMES HOME VIDEO CORP.

As of January 1, 1995, the Company and GTHV, a majority of whose stock is
owned by Joseph J. Cayre, Stanley Cayre and Kenneth Cayre, entered into a
Services Agreement (the "Services Agreement") pursuant to which GTHV agreed to
provide the Company with certain distribution, field, manufacturing,
administrative and other services for an interim period while the Company
expanded its facilities and personnel to perform such services. The Services
Agreement was terminable in part or in full by the Company upon prior notice to
GTHV. As of December 31, 1995, the Company had terminated all services under the
Services Agreement, which expired on December 31, 1995. In 1995, the Company
paid GTHV and affiliated companies approximately $5,163,000 for services
rendered pursuant to the Services Agreement.

GTHV currently performs certain assembly and packaging services previously
provided under the Services Agreement for the Company. During the six months
ended June 30, 1996, the Company paid approximately $1,500,000 to GTHV for such
services.

During 1994, the Company incurred fees of $10,235,000 in respect of certain
management, accounting, selling and distribution services provided by GTHV. This
amount included approximately $6,000,000 which was paid subsequent to December
31, 1994.

On January 3, 1995, the Company entered into an agreement with GTHV whereby
it obtained a perpetual, exclusive license for the software for its proprietary
distribution and point of sale replenishment system.

On May 10, 1995, the Company entered into a license agreement with
Microsoft Corporation (the "Microsoft Agreement") pursuant to which the Company
was granted the right to use the trademark Microsoft(R) Windows(R) 95
Informational Video in connection with the Company's production of an
instructional video for Microsoft(R) Windows(R) 95. In connection with the
Microsoft Agreement, the Company entered into a distribution agreement with GTHV
on June 1, 1995, pursuant to which GTHV has agreed to distribute the
instructional video to certain pre-recorded videotape outlets. The Company sells
the informational video to all other retail outlets.

47
<PAGE> 50

REPS AGREEMENT

In servicing its mass merchant accounts, the Company uses field
representatives supplied by REPS, a company owned by Joseph, Stanley and Kenneth
Cayre. REPS provides such services to the Company as well as to third parties
not affiliated with the Cayre family. The Company has an agreement with REPS
pursuant to which REPS will supply such services, at its cost, through December
31, 1997, which agreement may be terminated only by the Company. During the six
months ended June 30, 1996, the Company paid approximately $1,300,000 to REPS.
Prior to entering into the REPS Agreement, REPS' services were provided to the
Company as part of the Services Agreement with GTHV.

TRAVEL SERVICES

The Company frequently hires Taughannock Aviation Corp. ("Taughannock") and
Eastway Aircraft Services, Inc. ("Eastway") to provide business travel services
for its officers and employees. Taughannock leases one plane from JT Aviation
Corp. ("JTAC"), a company owned by Joseph J. Cayre, and one plane from KCS
Aviation Corp., a company owned by Kenneth Cayre. Eastway leases two planes from
JTAC. Neither Taughannock nor Eastway is owned in whole or in part by any member
of the Cayre family.

Taughannock and Eastway provide air travel to the Company at an hourly rate
and on an as needed as available basis. During the year ended December 31, 1995
and the six months ended June 30, 1996, the Company's aggregate air travel fees
to Taughannock were approximately $357,000 and $7,000, respectively. The Company
made no payments to Eastway during the year ended December 31, 1995. During the
six months ended June 30, 1996, the Company paid $103,000 to Eastway.

CHAIMOWITZ LOAN

On December 30, 1994, the Company extended a loan to Ronald Chaimowitz in
the principal amount of $209,000. Such loan bore interest at the rate of 4.5%
per annum and has been repaid.

GREGOR LOAN

On August 31, 1996, the Company extended a loan to Andrew Gregor in the
principal amount of $250,000. Such loan bears interest at the rate of 6.15% per
annum and becomes due and payable on August 31, 1998.

GARSKE LOAN

On August 31, 1996, the Company extended a loan to Chris Garske in the
principal amount of $200,000. Such loan bears interest at the rate of 6.15% per
annum and becomes due and payable on August 31, 1998.

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<PAGE> 51

DESCRIPTION OF CAPITAL STOCK

The following summary description of the capital stock of the Company does
not purport to be complete and is qualified in its entirety by reference to the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws"), a copy of each
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.

The Certificate of Incorporation provides for the authorized capital stock
of 150,000,000 shares of Common Stock, $.01 par value per share, of which
70,515,767 shares will be outstanding upon completion of the Offering, and
5,000,000 shares of Preferred Stock, $.01 par value per share, of which no
shares will be outstanding upon completion of the Offering.

COMMON STOCK

Holders of shares of Common Stock vote as a single class on all matters
submitted to a vote of the stockholders, including the election of directors,
with each share of Common Stock entitled to one vote. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors. The Company's Certificate of Incorporation also
provides for a staggered Board of Directors. See "Management -- Board of
Directors."

Stockholders of the Company are required to provide advance notice of
nominations of directors to be made at, and of business proposed to be brought
before, a meeting of stockholders. The failure to deliver proper notice within
the period specified in the Company's Bylaws will result in the denial to the
stockholder of the right to make such nominations or propose such action at the
meeting.

Holders of Common Stock on the applicable record date are entitled to share
ratably in such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor, subject to the
rights of the holders of any series of Preferred Stock. See "Dividend Policy."
Upon the liquidation, dissolution or winding up of the Company, each holder of
Common Stock will be entitled to share ratably in any distribution of the
Company's assets after the payment of all debts and other liabilities, subject
to any superior rights of the holders of any outstanding shares of Preferred
Stock.

Holders of the shares of Common Stock have no preemptive or other
subscription rights and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares. All of the outstanding shares of
Common Stock, including the shares of Common Stock offered hereby, are fully
paid and non-assessable.

Special meetings of stockholders may be called by the Company's Board of
Directors, the Chairman of the Board of Directors or the President. Except as
otherwise required by law, stockholders, in their capacity as such, are not
entitled to request or call a special meeting of stockholders.

PREFERRED STOCK

The Company's Board of Directors has authority (without action by the
stockholders) to issue the 5,000,000 authorized and unissued shares of Preferred
Stock in one or more series, to designate the number of shares constituting any
series, and to fix, by resolution, the voting powers, designations, preferences
and relative, optional or other special rights thereof, including liquidation
preferences and the dividend, conversion and redemption rights of each such
series. Under certain circumstances, the Company could issue the Preferred Stock
as a method of discouraging, delaying or preventing a change of control of the
Company.

CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW

Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15% of more of a
corporation's outstanding voting stock) for three years following the date such
person became an interested stockholder unless (i) before the person becomes an
interested stockholder, the

49
<PAGE> 52

transaction resulting in such person becoming an interested stockholder or the
business combination is approved by the board of directors of the corporation,
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the outstanding voting stock of the corporation (excluding shares owned by
directors who are also officers of the corporation or shares held by employee
stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender offer or exchange offer), or (iii) on or after such date on which such
person became an interested stockholder the business combination is approved by
the board of directors and authorized at an annual or special meeting, and not
by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock excluding shares owned by the interested stockholders.
The restrictions of Section 203 do not apply, among other reasons, if a
corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or by-laws expressly electing not to be governed by
Section 203, provided that, in addition to any other vote required by law, such
amendment to the certificate of incorporation or by-laws must be approved by the
affirmative vote of a majority of the shares entitled to vote. Moreover, an
amendment so adopted is not effective until twelve months after its adoption and
does not apply to any business combination between the corporation and any
person who became an interested stockholder of such corporation on or prior to
such adoption. The Certificate of Incorporation and Bylaws do not currently
contain any provisions electing not to be governed by Section 203 of the DGCL.

Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Common Stock. This could have
the effect of inhibiting changes in management and may also prevent temporary
fluctuations in the Common Stock that often result from takeover attempts.

Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
of such corporation does not contain a provision to the contrary. The
Certificate of Incorporation contains no such provision, and therefore
stockholders holding a majority of the voting power of the Common Stock will be
able to approve a broad range of corporate actions requiring stockholder
approval without the necessity of holding a meeting of stockholders.

LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION

The Certificate of Incorporation limits personal liability for directors to
the fullest extent permitted under the DGCL. Section 102(b)(7) of the DGCL
permits a corporation to eliminate or limit the personal liability of a
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL relating to unlawful dividends, stock
purchases redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. The Company maintains director and officer
liability insurance.

Section 102(b)(7) of the DGCL is designed, among other things, to encourage
qualified individuals to serve as directors of Delaware corporations. The
Company believes this provision will assist it in maintaining and securing the
services of qualified directors who are not employees of the Company. This
provision has no effect on the availability of equitable remedies, such as
injunction or rescission. If equitable remedies are found not to be available to
stockholders in any particular case, stockholders may not have any effective
remedy against actions taken by directors that constitute negligence or gross
negligence.

Section 145 of the DGCL permits the Company to, and the Certificate of
Incorporation provides that the Company shall, indemnify and hold harmless any
director, officer or incorporator of the Company and any person serving at the
request of the Company as a director, officer, incorporator, employee, partner,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including an employee benefit plan) from and against any and
all expenses (including counsel fees and disbursements), judgments,

50
<PAGE> 53

fines (including excise taxes assessed on a person with respect to an employee
benefit plan), and amounts paid in settlement that may be imposed upon or
incurred by him or her in connection with, or as a result of, any proceeding,
whether civil, criminal, administrative or investigative (whether or not by or
in the right of the Company), in which he or she may become involved, as a party
or otherwise, by reason of the fact that he or she is or was such a director,
officer or incorporator of the Company or is or was serving at the request of
the Company as a director, officer, incorporator, employee, partner, trustee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including an employee benefit plan), whether or not he or she
continues to be such at the time such expenses and judgments, fines and amounts
paid in settlement shall have been imposed or incurred, to the fullest extent
permitted by the laws of the State of Delaware, as they may be amended from time
to time. Such right of indemnification shall inure whether or not the claim
asserted is based on matters which antedate the adoption of the Certificate of
Incorporation. Such right of indemnification shall continue as to a person who
has ceased to be a director, officer or incorporator and shall inure to the
benefit of the heirs and personal representatives of such a person. The
indemnification provided by the Certificate of Incorporation shall not be deemed
exclusive of any other rights which may be provided now or in the future under
any provision currently in effect or hereafter adopted of the Certificate of
Incorporation, by any agreement, by vote of stockholders, by resolution of
directors, by provision of law or otherwise. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors of
the Company pursuant to the foregoing provision, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Fleet National
Bank. Fleet National Bank is located at 111 Westminster Street, Providence,
Rhode Island 02903 and its telephone number is (401) 278-3760.

51
<PAGE> 54

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
70,515,167 shares of Common Stock, assuming no exercise of outstanding options
or warrants (other than the warrants for 211,268 shares to be exercised by id
Software immediately prior to the consummation of the Offering). Of these
shares, 27,338,197 shares of Common Stock are freely tradable without
restriction under the Securities Act, unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 promulgated under the Securities
Act. In addition, 29,983,913 outstanding shares of Common Stock are eligible for
resale in the public market, subject to certain volume and other restrictions
under Rule 144.

Notwithstanding the foregoing, the Company and the executive officers,
directors and certain significant stockholders of the Company have entered into
"lockup" agreements providing that they will not offer, sell, contract to sell
or grant any option to purchase or otherwise dispose of the shares of Common
Stock owned by them, subject to certain exceptions, for a period of 90 days
after the date of this Prospectus without the prior written consent of
Robertson, Stephens & Company LLC, on behalf of the Underwriters. As a result of
these contractual restrictions, notwithstanding possible earlier eligibility for
sale under the provisions of Rule 144, shares subject to lock-up agreements may
not be sold until the agreements expire. Robertson, Stephens & Company LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. See "Underwriting."

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock that have been outstanding and not held by an "affiliate" of the
Company for a period of two years is entitled to sell within any three-month
period a number of shares that does not exceed the greater of one percent of the
then outstanding shares of Common Stock or the average weekly reported trading
volume of the Common Stock during the four calendar weeks preceding the date on
which notice of such sales is given, provided certain manner of sale and notice
requirements and requirements as to the availability of current public
information concerning the Company are satisfied (which requirements as to the
availability of current public information are currently satisfied). Affiliates
of the Company must comply with the restrictions and requirements of Rule 144,
other than the two-year holding period requirement, in order to sell shares of
Common Stock that are not "restricted securities." Under Rule 144(k), a person
who is not deemed an "affiliate" of the Company at any time during the three
months preceding a sale by him, and who has beneficially owned shares of Common
Stock that were not acquired from the Company or an "affiliate" of the Company
within the previous three years, would be entitled to sell such shares without
regard to volume limitations, manner of sale provisions, notification
requirements or the availability of current public information concerning the
Company. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly or indirectly through the use of one or more intermediaries controls,
or is controlled by, or is under common control with, such issuer. Any employee,
officer or director of or consultant to the Company who purchased his or her
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701 promulgated under the Securities Act
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144.

The Company has filed a Registration Statement on Form S-8 (Registration
No. 333-428) ("S-8") to register shares of Common Stock which have been reserved
for issuance pursuant to grants of options to purchase Common Stock under the
Company's 1995 Stock Incentive Plan. Shares issued on exercise of options after
the effective date of the S-8 will be eligible for sale by non-affiliates in the
public market without limitation and by affiliates subject to the provisions of
Rule 144, except for the holding period limitation of Rule 144. As of September
30, 1996, options to purchase 5,443,849 shares of Common Stock were outstanding,
of which approximately 770,000 option shares were exercisable as of October 15,
1996.

In addition, pursuant to registration rights agreements with the Company,
certain stock and warrant holders of the Company have certain rights to require
the Company to register some or all of the shares of Common Stock held by them.
Excluding the shares registered hereby and subject to certain restrictions,
holders of approximately 41,490,000 shares of Common Stock (including Common
Stock issuable upon the exercise of warrants) have contractual rights to require
the Company to register such shares under the

52
<PAGE> 55

Securities Act, and holders of approximately 2,348,000 additional shares of
Common Stock (including Common Stock issuable upon exercise of warrants) have
contractual rights to include such shares in future registration statements
filed by the Company under the Securities Act. 1,320,072 shares of Common Stock
have been reserved for issuance upon exercise of warrants outstanding as of the
date of this Prospectus. Other than the warrants to purchase an aggregate of
504,000 shares of Common Stock sold to GAP II, these warrants have been issued
in connection with certain licensing arrangements with developers and content
providers. See "Certain Transactions -- Transactions with GAP Stockholders", "--
Transactions with Cayre Family Stockholders", "-- Transactions with Charles F.
Bond" and "Risk Factors -- Shares Eligible for Future Sale."

53
<PAGE> 56

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

GENERAL

The following is a general discussion of certain anticipated United States
federal income tax consequences of the ownership and disposition of Common Stock
by a person that, for United States federal income tax purposes, is not a
"United States Person" (a "Non-U.S. Holder"). For these purposes, a "United
States Person" means a citizen or resident of the United States, a corporation,
a partnership or other entity created or organized in or under the laws of the
United States or any state thereof, or an estate or trust, the income of which
is subject to United States federal income taxation regardless of its source.

The following discussion does not consider specific facts and circumstances
that may be relevant to a particular Non-U.S. Holder's tax position, including
the benefits that may be available to any person under an applicable tax treaty
to which the United States is a party. Specifically, without limitation, this
discussion does not address the United States tax consequences to any Non-U.S.
Holder who at any time owns (directly, indirectly, or through attribution) more
than 5% of the Common Stock or to any Non-U.S. Holder that is a controlled
foreign corporation, a foreign personal holding company, a foreign private
foundation, a foreign government, or a U.S. expatriate. Furthermore, the
following discussion is based on current provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), and on administrative and judicial
pronouncements thereunder, all of which are subject to change, possibly with
retroactive effect.

Proposed United States Treasury regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-U.S. Holder of Common Stock. The Proposed
Regulations are generally proposed to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. The
discussion below is not intended to be a complete discussion of the provisions
of the Proposed Regulations, and prospective investors are urged to consult
their tax advisors with respect to the effect the Proposed Regulations would
have if adopted.

Each Non-U.S. Holder is urged to consult a tax advisor with respect to the
United States tax consequences to him of acquiring, holding and disposing of
Common Stock, as well as any tax consequences that may arise under the laws of
any foreign, state, local or other tax jurisdiction.

DIVIDENDS

Distributions with respect to shares of Common Stock will be treated as
dividends for United States federal income tax purposes to the extent of the
Company's current or accumulated earnings and profits (as determined pursuant to
the Code). Any portion of a payment that exceeds such earnings and profits will
be treated as a return of capital to the extent of each Non-U.S. Holder's
adjusted tax basis in his or her Common Stock. Any portion of a payment that
exceeds the sum of a stockholder's proportionate share of earnings and profits
and his or her adjusted tax basis will be treated as a gain from the sale or
exchange of his or her Common Stock to the extent of any such excess, with the
consequences described below under "Gain on Disposition of Common Stock."

Each Non-U.S. Holder who receives a payment treated as a dividend for
United States federal income tax purposes (including, for this purpose, payments
representing a return of capital or gain) will be subject to withholding of
United States federal income tax at a rate of 30% of such payment unless either
(i) such holder is eligible for a reduced tax rate or a tax exemption under an
applicable income tax treaty or (ii) such holder is engaged in the conduct of a
trade or business within the United States and the dividend is effectively
connected with that trade or business. If the dividend is effectively connected
with the conduct of a trade or business within the United States by a Non-U.S.
Holder, the dividend (as adjusted by any applicable deductions) will be subject
to United States federal income tax at regular rates generally applicable to
United States Persons. Any such effectively connected dividends received by a
corporate Non-U.S. Holder may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. Certain certification requirements
may have to be satisfied to claim treaty benefits or exemption from withholding
under the foregoing rules. For purposes of determining whether tax is to be
withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, the Company ordinarily will presume that dividends paid to an address in
a foreign country are paid to a resident of such country absent knowledge that
such presumption is not warranted.

54
<PAGE> 57

Under the Proposed Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-U.S. Holder would generally be required to provide a Form
W-8 certifying such Non-U.S. Holder's entitlement to the benefits under a
treaty. The Proposed Regulations would also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty,
dividends paid to a Non-U.S. Holder that is an entity should be treated as paid
to the entity or those holding an interest in that entity.

A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. federal withholding tax pursuant to a tax treaty or for any other reason
may obtain a refund of any excess amounts currently withheld by filing an
appropriate claim for refund with the U.S. Internal Revenue Service. Non-U.S.
Holders that are partnerships or trusts may be subject to certain additional
withholding requirements and are urged to consult their tax advisors as to the
application of such requirements.

GAIN ON DISPOSITION OF COMMON STOCK

Except as described below, a Non-U.S. Holder will generally not be subject
to United States federal income tax (and no tax will generally be withheld) with
respect to gain if recognized on a sale or other disposition of the Common Stock
unless (i) the gain is effectively connected with a trade or business conducted
by the Non-U.S. Holder in the United States (and, if an applicable tax treaty so
provides, is attributable to trade or business conducted through a United States
permanent establishment of such holder), (ii) the Company is, or has been during
the five-year period ending on the date of disposition, a United States real
property holding corporation for United States federal income tax purposes (a
"USRPHC"), or (iii) in the case of an individual Non-U.S. Holder who holds the
Common Stock as a capital asset, such holder is present in the United States for
183 days or more in the taxable year of the disposition and either (a) has a tax
home in the United States within the meaning of Section 911(d)(3) of the Code or
(b) the gain is attributable to an office or other fixed place of business
maintained by such holder in the United States.

With respect to (i), if the gain is effectively connected with the conduct
of a trade or business within the United States by the Non-U.S. Holder (and, if
an applicable tax treaty so provides, is attributable to a trade or business
conducted through a United States permanent establishment of such holder), the
gain as adjusted by any applicable deductions will be subject to United States
federal income tax at rates generally applicable to United States Persons (and
may, in the case of a corporate Non-U.S. Holder, also be subject to the "branch
profits tax"). With respect to (ii), the Company believes that it has not been
and is not currently a USRPHC and does not anticipate becoming a USRPHC.
Notwithstanding the foregoing, even if the Company were treated as a USRPHC, the
Common Stock would not be treated as an interest in a USRPHC in the hands of a
Non-U.S. Holder if (a) such Holder has not owned (directly or through
attribution) more than 5% of the Common Stock for the five year period ending on
the date of disposition, and (b) the Common Stock is regularly traded on an
established securities exchange. An individual Non-U.S. Holder to whom (iii)
applies will generally be taxed at a rate of 30% on any gain recognized during
the taxable year on the sale of Common Stock (as offset by U.S. capital losses,
if any).

FEDERAL ESTATE TAXES

Common Stock held by an individual Non-U.S. Holder at the date of his or
her death will be included in his or her gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.

UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

The Company must report annually to the Internal Revenue Service the total
amount of United States federal income taxes withheld from dividends paid to
Non-U.S. Holders. In addition, the Company must report annually to the Internal
Revenue Service and each Non-U.S. Holder the amount of dividends and other
payments distributed to and the tax withheld with respect to such Holder. These
information reporting requirements apply regardless of whether withholding is
reduced or eliminated by an applicable treaty or is not required because the
dividends are effectively connected with a U.S. trade or business of a Non-U.S.
Holder.

55
<PAGE> 58

Under certain treaties, the Internal Revenue Service may make this information
available to the tax authorities in the country of a Non-U.S. Holder's
residence.

Backup withholding tax (which generally is a withholding tax imposed at the
rate of 31% on certain payments to persons that are not "exempt recipients" and
that fail to furnish certain information under United States information
reporting requirements) and information reporting relating thereto generally
will not apply to dividends and other payments paid to Non-U.S. Holders that are
either (i) subject to the 30% withholding discussed above or (ii) not so subject
because a tax treaty applies that reduces or eliminates such withholding. In
addition, under current temporary United States Treasury regulations, dividends
payable at an address located outside the United States to a Non-U.S. Holder are
generally not subject to the backup withholding and information reporting rules.
These backup withholding requirements and information reporting rules will apply
to the gross proceeds paid by or through a United States office of a broker to a
Non-U.S. Holder upon the disposition of shares of Common Stock, unless the
Non-U.S. Holder certifies under penalty of perjury that it is a foreign person
or the Non-U.S. Holder otherwise establishes an exemption. Under existing
regulations, information reporting and backup withholding will also apply to the
payment of gross proceeds of a sale or other disposition of Common Stock by or
through a foreign office of a broker with certain United States connections,
unless the broker has documentary evidence that the holder is a Non-U.S. Holder
and the broker has no actual knowledge to the contrary.

The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a Non-U.S. Holder would be subject to backup
withholding in the absence of certification from the holder as to non-U.S.
status.

Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded (or credited against the Non-U.S. Holder's
United States federal income tax liability, if any), provided that the required
information is furnished to the Internal Revenue Service.

56
<PAGE> 59

UNDERWRITING

The Underwriters named below (the "U.S. Underwriters"), acting through
their representatives Robertson, Stephens & Company LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., Hambrect & Quist LLC,
Lehman Brothers Inc. and Piper Jaffray Inc. (the "U.S. Representatives"), have
severally agreed with the Company and the Selling Stockholders, subject to the
terms and conditions of the U.S. Underwriting Agreement, to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock set
forth opposite their respective names below. The U.S. Underwriters are committed
to purchase and pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------- ---------
<S> <C>
Robertson, Stephens & Company LLC..............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................
Bear, Stearns & Co. Inc........................................................
Hambrect & Quist LLC...........................................................
Lehman Brothers Inc............................................................
Piper Jaffray Inc..............................................................
----------
Total..................................................................... 12,500,000
==========
</TABLE>

The International Underwriters (together with the U.S. Underwriters, the
"Underwriters"), acting through their representatives Merrill Lynch
International Limited, Robertson, Stephens & Company LLC, Bear, Stearns
International Limited, Hambrect & Quist LLC, Lehman Brothers International
(Europe) and Piper Jaffray International Inc. (the "International
Representatives," together with the U.S. Representatives, the "Representatives")
have severally agreed with the Company and the Selling Stockholders, subject to
the terms and conditions of the International Purchase Agreement, to purchase
from the Company and the Selling Stockholders 3,000,000 shares of Common Stock.

The Company and the Selling Stockholders have been advised by the U.S.
Representatives that the U.S. Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession of not in
excess of $ per share, of which $ may be reallowed to other
dealers. After the public offering, the public offering price, concession and
reallowance to dealers may be reduced by the U.S. Representatives. No such
reduction shall change the amount of proceeds to be received by the Company and
the Selling Stockholders as set forth on the cover page of this Prospectus.

The Selling Stockholders have granted an option to the U.S. Underwriters
and the International Underwriters, exercisable during the 30-day period after
the date of this Prospectus, to purchase up to 2,325,000 additional shares of
Common Stock, at the same price per share as the Company and the Selling
Stockholders will receive for the 15,500,000 shares that the Underwriters have
agreed to purchase. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage of such additional shares that the number of shares of
Common Stock to be purchased by it shown in the above table represents as a
percentage of the 15,500,000 shares to be offered hereby. If purchased, the
additional shares will be sold by the Underwriters on the same terms as those on
which the 15,500,000 shares are being sold.

The U.S. Underwriting Agreement and the International Purchase Agreement
each contains covenants of indemnity among the Underwriters, the Company and the
Selling Stockholders against certain civil liabilities, including liabilities
under the Act.

57
<PAGE> 60

The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the U.S.
Underwriters and the International Underwriters are permitted to sell shares of
Common Stock to each other.

Pursuant to the terms of lock-up agreements, certain executive officers,
directors and significant stockholders of the Company have agreed with
Robertson, Stephens & Company LLC that during the Lock-Up Period they will not,
with certain exceptions, sell any shares of Common Stock now owned or
hereinafter acquired by such holder, other than with the prior written consent
of Robertson, Stephens & Company LLC, which may in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. See "Shares Eligible for Future Sale." The Company has also
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or any options or warrants to purchase Common
Stock other than options issued under the Company's 1995 Stock Incentive Plan
during the Lock-Up Period except with the prior written consent of Robertson,
Stephens & Company LLC.

The Underwriters will not make any sales to accounts over which they
exercise discretionary authority (i) in excess of 5% of the number of shares of
Common Stock offered hereby and (ii) unless they obtain specific written consent
from the customer.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
Certain members of, and persons associated with, such firm own an aggregate of
23,995 shares of Common Stock. Certain legal matters will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.

EXPERTS

The Consolidated Financial Statements and schedule of the Company for the
years ended December 31, 1993, December 31, 1994 and December 31, 1995, included
in this Prospectus and elsewhere in this Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report. The financial statements of Slash for the year ended December 31, 1994,
included in this Prospectus, have been audited by Eide Helmeke, PLLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of said firm as experts
in accounting and auditing in giving said report. The financial statements of
Slash for the year ended December 31, 1993, included in this Prospectus, have
been audited by McLaughlin & Associates, independent public accountants, as
indicated in their reports with respect thereto, and are included in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said reports. The audited financial statements of WizardWorks included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Ernst & Young LLP, independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon such report given
on the authority of said firm as experts in accounting and auditing.

58
<PAGE> 61

ADDITIONAL INFORMATION

The Company is subject to the reporting requirements of the Exchange Act
and in accordance therewith files reports and other information with the
Commission. The Common Stock is quoted for trading on the Nasdaq National
Market, and the Registration Statement and such reports, and other information
concerning the Company may be inspected at the offices of the Nasdaq Stock
Market located at 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission, a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Common Stock, reference is made to such Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete and,
with respect to any contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such reference
to such exhibit. Copies of the Registration Statement and exhibits may be
inspected without charge at the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such office upon payment of fees prescribed by the Commission, and at the
Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The Registration Statement, including all
exhibits and schedules, and such reports and other information may also be
accessed electronically by means of the Commission's site on the World Wide Web
at http://www.sec.gov. The Company has been an electronic filer since the filing
of its Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.

59
<PAGE> 62

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
Consolidated Balance Sheet as of June 30, 1996 (unaudited)................... F-2
Consolidated Statements of Operations for the six months ended June 30, 1995
and 1996 (unaudited)...................................................... F-3
Consolidated Statements of Cash Flows for the six months ended June 30, 1995
and 1996 (unaudited)...................................................... F-4
Notes to the Consolidated Financial Statements (unaudited)................... F-5 to F-6
Report of Independent Public Accountants..................................... F-7
Consolidated Balance Sheets as of December 31, 1994 and 1995................. F-8
Consolidated Statements of Operations for the years ended December 31, 1993,
1994 and 1995............................................................. F-9
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995............................................................. F-10
Consolidated Statement of Stockholders' Equity for the years ended December
31, 1994
and 1995.................................................................. F-11
Notes to the Consolidated Financial Statements............................... F-12 to F-22
WIZARDWORKS GROUP
Reports of Independent Auditors.............................................. F-23
Combined Balance Sheets as of March 31, 1995 and 1996........................ F-24
Combined Statements of Income and Retained Earnings for the years ended March
31, 1995 and 1996......................................................... F-25
Combined Statements of Cash Flows for the years ended March 31, 1995 and
1996...................................................................... F-26
Notes to Combined Financial Statements....................................... F-27 to F-33
SLASH CORPORATION
Reports of Independent Public Accountants.................................... F-34 to F-35
Balance Sheets as of December 31, 1993 and 1994.............................. F-36
Statements of Operations for the years ended December 31, 1993 and 1994 and
for the period ended June 22, 1995........................................ F-37
Statements of Cash Flows for the years ended December 31, 1993 and 1994 and
for the period ended June 22, 1995........................................ F-38
Notes to Financial Statements................................................ F-39 to F-41
FINANCIAL STATEMENT SCHEDULE
For the Two Years Ended December 31, 1995
Schedule II -- Valuation and Qualifying Accounts............................. F-42
</TABLE>

F-1
<PAGE> 63

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

JUNE 30, 1996
(unaudited)
(in thousands)

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 59,976
Short-term investments........................................................ 9,767
Receivables, net.............................................................. 63,226
Inventories, net.............................................................. 44,514
Royalty advances.............................................................. 48,757
Deferred income taxes......................................................... 15,465
Prepaid expenses and other current assets..................................... 4,246
--------
Total current assets....................................................... 245,951
Property and equipment, net................................................... 6,954
Goodwill, net................................................................. 20,740
Investments................................................................... 2,794
Other assets.................................................................. 1,422
--------
Total assets............................................................... $277,861
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 64,946
Accrued liabilities........................................................... 35,599
Royalties payable............................................................. 25,507
Deferred income............................................................... 5,347
Income taxes payable.......................................................... 4,390
Current portion of long-term liabilities...................................... 1,536
Due to related party.......................................................... 159
--------
Total current liabilities.................................................. 137,484
Other long-term liabilities................................................... 6,506
--------
Total liabilities.......................................................... 143,990
--------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par, 150,000,000 shares authorized, 62,687,416 shares
issued and outstanding..................................................... 627
Additional paid-in capital.................................................... 112,763
Retained earnings............................................................. 20,481
--------
Total stockholders' equity................................................. 133,871
--------
Total liabilities and stockholders' equity................................. $277,861
========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these financial statements.

F-2
<PAGE> 64

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1995 1996
------- --------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Net sales............................................................. $64,420 $140,934
Cost of goods sold.................................................... 36,368 81,687
Selling and distribution expenses..................................... 10,924 29,561
General and administrative expenses................................... 7,347 12,885
Merger costs.......................................................... -- 1,573
------- --------
Operating income.................................................... 9,781 15,228
Interest and other income, net........................................ 254 2,459
------- --------
Income before income taxes.......................................... 10,035 17,687
Provision for income taxes............................................ 318 7,599
------- --------
Net income.......................................................... $ 9,717 $ 10,088
======= ========
Pro forma adjustment to income tax provision.......................... 3,997
-------
Pro forma net income.................................................. $ 5,720
=======
Net income per share.................................................. $ 0.16
Weighted average shares outstanding................................... 62,687
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these financial statements.

F-3
<PAGE> 65

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income......................................................... $ 9,717 $ 10,088
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................... 389 1,228
Deferred income taxes........................................... (5,756) (1,419)
Deferred income................................................. 1,065 216
Changes in operating assets and liabilities:
Receivables, net.............................................. 17,620 19,965
Inventories, net.............................................. (5,300) 3,998
Royalty advances.............................................. (10,725) (19,180)
Due to related party, net..................................... (1,697) (796)
Prepaid expenses and other current assets..................... (1,338) (2,332)
Accounts payable.............................................. (1,117) (22,420)
Accrued liabilities........................................... (1,675) (8,853)
Royalties payable............................................. (723) 2,041
Income taxes payable.......................................... 1,803 (348)
Other......................................................... (861) (358)
-------- --------
Net cash provided by (used in) operating activities........ 1,402 (18,170)
-------- --------
INVESTING ACTIVITIES:
Purchases of investments........................................... -- (2,794)
Purchases of property and equipment................................ (2,862) (2,064)
Purchases of short-term investments, net........................... -- (204)
Proceeds from disposal of property and equipment................... -- 32
Purchases of Slash Corporation, net of cash acquired of
approximately $516,000.......................................... 461 --
-------- --------
Net cash used in investing activities...................... (2,401) (5,030)
-------- --------
FINANCING ACTIVITIES:
Issuance of Series A preferred stock and warrants.................. 15,015 --
Proceeds from issuance of note to a related party.................. 15,225 --
Repayment of notes................................................. (10,471) --
Distributions to stockholders...................................... (6,000) --
Long-term liabilities.............................................. (510) 377
-------- --------
Net cash provided by financing activities.................. 13,259 377
-------- --------
Net increase (decrease) in cash and cash equivalents................. 12,260 (22,823)
Cash and cash equivalents -- beginning of period..................... 1,217 82,799
-------- --------
Cash and cash equivalents -- end of period........................... $ 13,477 $ 59,976
======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these financial statements.

F-4
<PAGE> 66

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim consolidated financial statements of GT
Interactive Software Corp. and Subsidiaries (the "Company") are unaudited but in
the opinion of management reflect all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results for the
interim period. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included elsewhere in this Prospectus for the fiscal year ended December 31,
1995.

Net Income Per Share For Six Months Ended June 30, 1996

Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period.

NOTE 2 -- ACQUISITIONS

On June 24, 1996, the Company acquired all of the outstanding common stock
of WizardWorks Group, Inc. ("WizardWorks"), a developer and publisher of value
priced interactive entertainment, edutainment and productivity software, in
exchange for 2,350 shares of the Company's common stock.

On June 28, 1996, the Company acquired all of the outstanding common stock
of Candel Inc., the parent company of FormGen Corp. ("FormGen"), a publisher of
multimedia consumer software, in exchange for 1,033 shares of the Company's
common stock.

WizardWorks and FormGen (collectively the "Acquired Companies") have been
accounted for as pooling of interests and accordingly are included in the
Company's Consolidated Financial Statements as if the acquisitions had occurred
on January 1, 1993.

The following represents the summarized results of operations for the
period prior to the consummation of the transaction, which is the three months
ended March 31, 1996, on a separate company basis and combined basis:

<TABLE>
<CAPTION>
GT INTERACTIVE ACQUIRED PRO FORMA
SOFTWARE CORP. COMPANIES COMBINED
-------------- --------- ---------
<S> <C> <C> <C>
Net sales............................................. $ 62,270 $ 6,632 $68,902
Operating income...................................... 7,745 232 7,977
Net income............................................ 5,100 200 5,300
</TABLE>

F-5
<PAGE> 67

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
(in thousands)

NOTE 3 -- INVENTORIES, NET

Inventories as of June 30, 1996 consist of the following:

<TABLE>
<S> <C>
Finished goods................................................................... $51,205
Raw materials.................................................................... 2,633
-------
53,838
Less: reserve for obsolescence................................................... 9,324
-------
$44,514
=======
</TABLE>

NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Issuance of Common Stock in connection with the acquisition of Slash
Corporation.......................................................... $20,000 $ --
Cash paid for income taxes............................................. 3,980 9,336
Cash paid for interest................................................. 170 43
</TABLE>

NOTE 5 -- SUBSEQUENT EVENT

On July 9, 1996, the Company acquired all of the outstanding common stock
of Humongous Entertainment Inc., a premier developer and publisher of quality
children's software, in exchange for 3,458 shares of the Company's common stock.
The acquisition will be accounted for as a pooling of interests. The following
represents the results of operation of Humongous for the six months ended June
30, 1996:

<TABLE>
<S> <C>
Net sales................................................................... $3,349
Operating loss.............................................................. (2,018)
Net loss.................................................................... (2,225)
</TABLE>

F-6
<PAGE> 68

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To GT Interactive Software Corp. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of GT
Interactive Software Corp. (a Delaware corporation) and Subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of WizardWorks Group, a company acquired during 1996 in a
transaction accounted for as a pooling of interests, as discussed in Note 1.
Such statements are included in the consolidated financial statements of GT
Interactive Software Corp. and Subsidiaries and reflect total assets and total
net sales of 3.3% and 7.1% in 1995 and 5.9% and 9.6% in 1994, respectively, of
the related consolidated totals. The financial statements of WizardWorks Group
were audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to the amounts included for WizardWorks Group, is
based solely upon the report of the other auditors.

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 and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of GT Interactive Software Corp. and Subsidiaries as of
December 31, 1995 and 1994 and the results of their operations and cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

New York, New York
February 12, 1996 (except with respect to the acquisitions discussed in Note 1,
as to which the date is June 28, 1996).

F-7
<PAGE> 69

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 1,217 $ 82,799
Short-term investments.............................................. -- 9,563
Receivables, net.................................................... 46,397 83,191
Inventories, net.................................................... 11,392 48,512
Royalty advances.................................................... 5,820 29,577
Deferred income taxes............................................... 1,178 14,046
Prepaid expenses and other current assets........................... 1,049 1,914
------- --------
Total current assets............................................. 67,053 269,602
Property and equipment, net......................................... 1,402 5,670
Goodwill, net....................................................... -- 21,286
Other assets........................................................ 145 1,011
------- --------
Total assets..................................................... $68,600 $297,569
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $29,187 $ 87,366
Accrued liabilities................................................. 21,231 44,452
Royalties payable................................................... 11,846 23,466
Note payable to related party....................................... 6,000 --
Deferred income..................................................... 584 3,824
Income taxes payable................................................ 2,444 4,738
Current portion of long-term liabilities............................ 1,017 1,184
Due to related party................................................ 1,546 955
------- --------
Total current liabilities........................................ 73,855 165,985
Other long-term liabilities......................................... 1,141 7,788
------- --------
Total liabilities................................................ 74,996 173,773
------- --------
Commitment and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par, 150,000,000 shares authorized, 62,687,146
shares issued and outstanding.................................... -- 627
Additional paid-in capital.......................................... 331 112,763
Retained earnings................................................... (6,727) 10,406
------- --------
Total stockholders' equity (deficit)............................. (6,396) 123,796
------- --------
Total liabilities and stockholders' equity (deficit)............. $68,600 $297,569
======= ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these financial statements.

F-8
<PAGE> 70

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................. $18,075 $100,029 $225,773
Cost of goods sold ($406, $717 and $3,558 to a related
party for the period presented, respectively)........... 7,321 53,598 136,325
Selling and distribution expenses ($570, $7,234, and
$3,129 to a related party for the periods presented,
respectively)........................................... 5,065 14,375 36,076
General and administrative expenses ($180, $2,284 and $654
to a related party for the periods presented,
respectively)........................................... 4,312 9,896 20,507
------- -------- --------
Operating income........................................ 1,377 22,160 32,865
Interest and other income, net............................ 23 20 772
------- -------- --------
Income before income taxes.............................. 1,400 22,180 33,637
Provision for income taxes................................ 286 2,431 10,517
------- -------- --------
Net income.............................................. $ 1,114 $ 19,749 $ 23,120
======= ======== ========
Pro forma adjustment to income tax provision.............. 7,098 4,616
-------- --------
Pro forma net income...................................... $ 12,651 $ 18,504
======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these financial statements.

F-9
<PAGE> 71

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 1,114 $ 19,749 $23,120
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization......................... 224 260 1,428
Deferred income taxes................................. (44) (1,133) (11,691)
Deferred income....................................... -- 584 10,876
Changes in operating assets and liabilities:
Receivables, net.................................... (5,575) (39,354) (34,262)
Inventories, net.................................... (1,291) (9,348) (30,167)
Royalty advances.................................... (256) (5,436) (23,590)
Due to related party, net........................... (352) 1,546 (591)
Prepaid expenses and other current assets........... (994) 92 (759)
Accounts payable.................................... 2,503 25,889 49,951
Accrued liabilities................................. 3,230 17,780 23,221
Royalties payable................................... 1,025 10,821 11,215
Income taxes payable................................ 82 2,307 2,293
Other............................................... (26) (134) (781)
------- -------- --------
Net cash (used in) provided by operating
activities..................................... (360) 23,623 20,263
------- -------- --------
INVESTING ACTIVITIES:
Purchases of investments................................. -- -- --
Purchase of property and equipment....................... (425) (1,151) (4,997)
Purchases of short-term investments, net................. -- -- (9,563)
Proceeds from disposal of property and equipment......... -- -- --
Purchase of Slash Corporation, net of cash acquired of
approximately $516,000................................ -- -- 218
------- -------- --------
Net cash used in investing activities............ (425) (1,151) (14,342)
------- -------- --------
FINANCING ACTIVITIES:
Issuance of common stock................................. -- 1 77,935
Issuance of preferred stock and warrants................. -- -- 15,017
Proceeds from issuance of note to a related party........ -- 6,000 --
Repayment of notes....................................... -- -- (10,471)
Distributions to stockholders............................ -- (28,390) (6,000)
Long-term liabilities.................................... 2,806 (1,019) (820)
------- -------- --------
Net cash provided by (used in) financing
activities..................................... 2,806 (23,408) 75,661
------- -------- --------
Net increase in cash and cash equivalents.................. 2,021 (936) 81,582
Cash and cash equivalents -- beginning of year............. 132 2,153 1,217
------- -------- --------
Cash and cash equivalents -- end of year $ 2,153 $ 1,217 $82,799
======= ======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these financial statements.

F-10
<PAGE> 72

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 1, 1994....................... $-- $ 372 $ 1,915 $ 2,287
Net income..................................... -- -- 19,749 19,749
Distributions.................................. -- (41) (28,350) (28,391)
Currency translation adjustment................ -- -- (41) (41)
---- -------- -------- --------
Balance, December 31, 1994..................... -- 331 (6,727) (6,396)
Increase in par value of stock................. 434 (434) -- --
Issuance of stock in connection with the
acquisition of Slash Corporation............. 28 19,972 -- 20,000
Proceeds from sales of preferred stock and
warrants..................................... -- 15,017 -- 15,017
Proceeds from sales of common stock in private
placement.................................... 4 7,647 -- 7,651
Net proceeds from initial public offering...... 55 70,229 -- 70,284
Conversion of preferred stock to common stock
immediately prior to the initial public
offering..................................... 106 (106) -- --
Exercise of stock options...................... -- 107 -- 107
Net income..................................... -- -- 23,120 23,120
Distributions.................................. (6,000) (6,000)
Currency translation adjustment................ -- -- 13 13
---- -------- -------- --------
Balance, December 31, 1995..................... $627 $ 112,763 $ 10,406 $123,796
==== ======== ======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these financial statements.

F-11
<PAGE> 73

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

GT Interactive Software Corp., a Delaware corporation, and its subsidiaries
(the "Company") is a leading developer, publisher, merchandiser and distributor
of consumer software. The Company derives its revenues primarily from the sale
of its published, licensed and purchased products to mass merchants, specialty
software stores, computer superstores and distributors located throughout North
America and also in selected international locations. The Company was
incorporated in September 1992 and commenced operations in February 1993.

Acquisitions

In 1996, the Company acquired all of the outstanding common stock of
WizardWorks Group, Inc. ("WizardWorks") and all of the outstanding common stock
of Candel Inc., the parent company of FormGen Corp. ("FormGen").

Principles of Consolidation

The consolidated financial statements include the accounts of GT
Interactive Software Corp. and its wholly owned subsidiaries, G.T. Interactive
Software (Europe) Limited, WizardWorks and FormGen. All intercompany
transactions and balances have been eliminated.

Revenue Recognition

Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized, a reserve is provided for expected future
returns net of the related cost of such items. The net reserve is included in
accrued liabilities.

The reserve for expected future returns is based upon management's estimate
using historical and forecasted data. Actual results could differ from the
estimated amount.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and highly liquid,
short-term investments with original maturities of three months or less at the
date acquired.

Inventories

Inventories are stated at the lower of cost (based upon the first-in,
first-out method) or market. Allowances are established (and reassessed
quarterly) to reduce the recorded cost of obsolete inventory and slow moving
inventory to its net realizable value.

Royalty Advances

Royalty advances represent the unamortized elements of prepayments to third
party licensors of software products for the right to manufacture and/or
distribute their products under various licensing agreements. Such advances are
amortized to cost of goods sold on a per unit basis as licensed products are
sold in accordance with the individual agreements. Future realization of royalty
advances is assessed quarterly by

F-12
<PAGE> 74

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
management and charged to expense if it is not likely that the amounts will be
recovered through sales of the related product.

Goodwill

Goodwill is amortized using the straight-line method over a 20 year life.
Management reassesses quarterly the appropriateness of both the carrying value
and remaining life of goodwill, principally based on forecasts of future
undiscounted cash flows of businesses acquired. Amortization expense for the
year ended December 31, 1995 was approximately $567 and zero for the years ended
December 31, 1994 and 1993.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the related assets.

Income Taxes

The Company recognizes income taxes in accordance with the liability
method. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.

Through February 28, 1995 the Company was an S corporation for Federal and
New York state income tax purposes. On March 1, 1995, the Company became a C
corporation for Federal and New York state income taxes. Unaudited pro forma
adjustments to the income tax provision represent the additional tax provision
the Company would have recorded had it been a C corporation for Federal and New
York state income tax purposes during the relevant periods.

Fair Values of Financial Instruments

The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximates fair
value due to the short-term nature of such items.

Reclassification

Certain reclassifications have been made to the prior years' financial
statements to conform to classifications used in the current period.

Net Income Per Share for the Quarter Ended December 31, 1995

Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are shares issuable upon the exercise of stock
options and warrants, net of shares assumed to have been purchased using the
treasury stock method.

F-13
<PAGE> 75

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 2 -- ACQUISITION OF SLASH CORPORATION

On June 23, 1995, the Company acquired Slash Corporation ("Slash"), for a
total purchase price of approximately $20,299. The acquisition was accounted for
as a purchase and, accordingly, the accompanying consolidated financial
statements include the results of operations of Slash as of the date of
acquisition. The excess cost over fair value of assets acquired of approximately
$21,853 is being amortized on a straight-line basis over twenty years. The fair
value of acquired assets and assumed liabilities is as follows as of the
acquisition date:

<TABLE>
<S> <C>
Purchase price:
Cash paid..................................................................... $ 299
Common stock paid............................................................. 20,000
--------
Total purchase price....................................................... $ 20,299
========
Allocated as follows:
Current assets................................................................ $ 11,437
Other assets.................................................................. 132
Current liabilities........................................................... (13,123)
Cost in excess of net assets acquired......................................... 21,853
--------
$ 20,299
========
</TABLE>

The following unaudited pro forma summary represents the consolidated
results of operations of the Company as though the acquisition had been made as
of January 1, 1994:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Net sales............................................................ $146,825 $246,337
Operating income..................................................... 31,664 34,305
Net income........................................................... 17,673 19,144
Net income per share................................................. 0.32 0.33
Pro forma weighted average shares outstanding........................ 55,188 57,624
</TABLE>

The primary pro forma adjustments for the year ended December 31, 1994 and
1995 are the additional taxes that would have been provided had Slash been a C
corporation for the relevant periods of approximately $4,410 and $845,
respectively, the elimination of sales between the Company and Slash of
approximately $961 and $962, respectively, and the recording of the amortization
of goodwill of approximately $1,081 and $525, respectively.

The calculation of pro forma net income per share was determined by
dividing the net income by the weighted average number of common shares
outstanding during the period, after retroactive adjustments for stock splits,
plus the shares that would be outstanding assuming the exercise of dilutive
stock options and warrants which are considered common stock equivalents. In
addition, pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, all common shares issued and options and warrants granted by
the Company during the twelve months preceding the initial public offering date
have been reflected in the calculation of common shares outstanding for the
period presented, using the treasury stock method.

F-14
<PAGE> 76

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 3 -- RECEIVABLES, NET

Receivables consist of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1994 1995
------- -------
<S> <C> <C>
Trade accounts receivable............................................ $45,127 $84,900
Royalties receivable................................................. 1,385 135
Other receivables.................................................... 120 --
------- -------
46,632 85,035
Less: allowance for doubtful accounts................................ 235 1,844
------- -------
$46,397 $83,191
======= =======
</TABLE>

NOTE 4 -- INVENTORIES, NET

Inventories consist of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1994 1995
------- -------
<S> <C> <C>
Finished goods....................................................... $11,980 $51,545
Raw materials........................................................ 965 3,648
------- -------
12,945 55,193
Less: reserve for obsolescence....................................... 1,553 6,681
------- -------
$11,392 $48,512
======= =======
</TABLE>

NOTE 5 -- PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Furniture and fixtures................................................... $ 163 $2,003
Machinery and equipment.................................................. 793 2,235
Computer equipment....................................................... 508 1,588
Leasehold improvements................................................... 445 1,212
------ ------
1,909 7,038
Less: accumulated depreciation........................................... 507 1,368
------ ------
$1,402 $5,670
====== ======
</TABLE>

Depreciation expense for the years ended December 31, 1993, 1994 and 1995,
amounted to approximately $77, $164 and $965, respectively.

F-15
<PAGE> 77

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 6 -- ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Sales return reserve, net.............................................. $18,520 $37,153
Other.................................................................. 2,711 7,299
------- -------
$21,231 $44,452
======= =======
</TABLE>

NOTE 7 -- INCOME TAXES

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
---- ------ -------
<S> <C> <C> <C>
Federal:
Current....................................................... $182 $ 181 $16,199
Deferred...................................................... -- 452 (5,607)
---- ------ -------
182 633 10,592
---- ------ -------
State and Local:
Current....................................................... 169 2,689 3,808
Deferred...................................................... (44) (951) (812)
---- ------ -------
125 1,738 2,996
---- ------ -------
Foreign
Current....................................................... (21) 60 449
---- ------ -------
Provision for income taxes...................................... $286 $2,431 14,037
==== ====== =======

Benefit arising from change in tax status....................... (3,520)
-------
$10,517
=======
Pro forma adjustment to income taxes (unaudited)................ 7,098 4,616
------ -------
Pro forma provision for income taxes (unaudited)................ $9,529 $15,133
====== =======
</TABLE>

On March 1, 1995, the Company became a C corporation for Federal and New
York state income tax purposes. As a result, the C corporation assumed the tax
basis of the assets and liabilities of the former S corporation, which differed
from the financial statement basis of those items. Accordingly, the Company
recorded a deferred tax asset as of March 1, 1995 of approximately $3,520, which
primarily relates to the sales return reserve and inventory valuation.

F-16
<PAGE> 78

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 7 -- INCOME TAXES (CONTINUED)
The reconciliation of the income tax provision computed at the Federal
statutory rate to the reported unaudited pro forma provision for income taxes is
as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1994 1995
------ -------
<S> <C> <C>
Provision computed at Federal statutory rate.......................... $7,763 $11,773
Increase (decrease) in provision resulting from:
State and local taxes, net of Federal tax benefit................... 1,774 2,691
Foreign tax credit.................................................. -- (150)
Other, net............................................................ (8) 819
------ -------
Pro forma provision for income taxes (unaudited)...................... $9,529 $15,133
====== =======
Effective income tax rate............................................. 43% 45%
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets and liabilities as of December 31, 1994 and 1995
are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1994 1995
------ -------
<S> <C> <C>
Deferred tax assets:
Inventory valuation................................................. $ 369 $ 5,342
Deferred income..................................................... 77 4,425
Sales return reserve................................................ 682 2,037
Other............................................................... 53 2,259
------ -------
1,181 14,063
------ -------
Deferred tax liabilities:
Depreciation........................................................ (3) (17)
------ -------
Net deferred tax asset................................................ $1,178 $14,046
====== =======
</TABLE>

F-17
<PAGE> 79

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 8 -- STOCKHOLDERS' EQUITY

As of December 31, 1994 and 1995, Capital Stock consisted of the following:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Preferred Stock:
Par value per share................................................. $ -- $ 0.01
Shares authorized................................................... -- 5,000
Shares issued....................................................... -- --
Common Stock:
Par value per share................................................. $ 0.01 $ 0.01
Shares authorized................................................... 49,440 150,000
Shares issued....................................................... 48,000 62,688
</TABLE>

On July 31, 1995, the Company established par value at $.01 on all classes
of its stock. Concurrently, the Company effected a four thousand for one split
of its then existing Class A and Class B Common Stock together with an increase
in the number of authorized shares.

On December 14, 1995, the Company sold 5,500 shares of its Common Stock to
the public at $14 per share. Proceeds to the Company, net of underwriting
discount of $5,115 and offering costs of approximately $1,601 amounted to
approximately $70,284. In connection with its initial public offering, the
Company effected a recapitalization whereby it combined and converted all
outstanding Class A and Class B Common Stock to a single class of Common Stock
in a six for five stock split and the five hundred twenty five outstanding
shares of Preferred Stock were converted into 2,520 shares of Common Stock.

In October 1995, the Company sold approximately $7,650 of Common Stock to
an investor.

In connection with the acquisition of Slash on June 23, 1995, the Company
issued approximately 2,794 shares of its Common Stock.

On February 28, 1995, the Company's stockholders sold 10.5% of their then
outstanding shares in the Company to another investor (the "Investor"). The
Company issued warrants to the Investor for the right to purchase an aggregate
of 2,520 shares of Common Stock at an exercise price of $4.17 per share.

Additionally, the Company received a $15,000 loan from the Investor. This
loan was repaid upon the consummation of the initial public offering and bore
interest at 4.5% per annum. In conjunction with such loan the Company issued
warrants to the Investor representing the right to purchase an aggregate of 504
shares of Common Stock at an exercise price of $4.17 per share. Under certain
circumstances, the Company has the right to redeem the warrants for a nominal
amount.

The Company received $15 in connection with the issuance of the
aforementioned warrants.

On June 30, 1995, the Investor paid the Company fifteen million dollars for
five hundred twenty five shares of Series A Convertible Preferred Stock, which
was converted into 2,520 shares of Common Stock immediately prior to the
consummation of the Company's initial public offering. Additionally, the
Investor surrendered its warrants to purchase an aggregate of 2,520 shares of
Class A and Class B Common Stock.

As of December 31, 1995, pursuant to a Stock Incentive Plan (the "Plan"),
the Company had granted options to purchase approximately 4,500 shares of the
Company's Common Stock to officers, directors and other eligible employees and
consultants of the Company. With the exception of options to purchase

F-18
<PAGE> 80

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 8 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
approximately 30 shares which were issued at a nominal exercise price, such
options were issued at exercise prices (ranging from $4.17 to the initial public
offering price) not less than the fair market value at the date of grant.
Generally, the options vest over a four to five year period and expire ten years
from the date of the grant.

As of December 31, 1995, the Company had also issued warrants to purchase
an aggregate of approximately 701 shares of Common Stock to content-providers at
exercise prices (ranging from $9.47 to the initial public offering price) not
less than the fair market value at the date of issue. None of the outstanding
warrants vest prior to May 1996; vesting subsequent to such date is dependent
upon the achievement of sales levels of certain products, the rights to which
were granted to the Company.

On June 24, 1996, the Company acquired all of the outstanding common stock
of WizardWorks in exchange for 2,350 shares of the Company's common stock.

On June 28, 1996, the Company acquired all of the outstanding common stock
of FormGen in exchange for 1,033 shares of the Company's common stock.

WizardWorks and FormGen have been accounted for as pooling of interests and
accordingly are included in the Company's Consolidated Financial Statements as
if the acquisitions had occurred on January 1, 1993.

NOTE 9 -- RELATED PARTY TRANSACTIONS

During 1993 and 1994, the Company had an agreement with a related party,
GoodTimes Home Video Corporation ("GoodTimes"), whereby GoodTimes and affiliated
companies provided certain management, accounting, selling and distribution
services. Amounts charged to operations for these services were $1,156 and
$10,235 in 1993 and 1994, respectively. Fees in 1993 were based on a percentage
of gross sales and, in 1994, on a percentage of gross sales plus a fixed amount.
The amount due for 1994 included $6,000 which was unpaid as of December 31,
1994. This amount was paid in January 1995.

On January 1, 1995, the Company entered into a one year services agreement
with GoodTimes. The services agreement was intended to facilitate the Company's
establishment of fully independent systems and administration during 1995. The
services agreement provided for a fee based on specific services performed and
was terminable by the Company at any time upon written notice. The total amount
charged to operations for services provided by GoodTimes and affiliated
companies for the year ended December 31, 1995 amounted to approximately $7,341.
As of December 31, 1995, there were no services being provided to the Company
under the services agreement, however, GoodTimes is providing manufacturing
services under a separate manufacturing agreement.

In servicing its mass merchant accounts, the Company uses field
representatives supplied by REPS, a company owned by three Directors of the
Company. REPS provides such services to the Company as well as to third parties.
The Company has an agreement with REPS pursuant to which REPS will supply such
services, at its cost, through December 31, 1997. Prior to entering into the
REPS Agreement, REPS' services were provided to the Company as part of the
services agreement with GoodTimes.

The Company hires Taughannock Aviation Corp. ("Taughannock") to provide
business travel services for its officers and employees. Taughannock leases one
plane from JT Aviation Corp., a company owned by the Chairman of the Board of
Directors, and one plane from KCS Aviation Corp., a company owned by another
Director.

Taughannock provides air travel to the Company at an hourly rate and on an
as needed and as available basis. In 1994, the first year in which the Company
utilized Taughannock's services, the Company's aggregate air travel fees to
Taughannock were approximately $80. For the year ended December 31, 1995, the
Company's aggregate air travel fees to Taughannock were approximately $357.

F-19
<PAGE> 81

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 9 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company believes that the amounts charged by related parties materially
approximate those amounts which would have been incurred from non-affiliates.

On December 30, 1994, the Company extended a loan to the President and
Chief Executive Officer of the Company in the amount of $209. Such loan bears
interest at the rate of 4.5% per annum. The loan has been repaid.

In connection with the Company's production of an instructional video for
Microsoft(R) Windows(R) 95, on June 1, 1995, the Company entered into a
distribution and licensing agreement with GoodTimes, pursuant to which GoodTimes
has agreed to distribute the instructional video to certain pre-recorded
videotape outlets.

See Notes 8 and 10 for information concerning other related party
transactions.

NOTE 10 -- LEASES

The Company leases its executive and administrative offices from a related
party, and its distribution center, under leases that are accounted for as
operating leases. These leases have expiration dates ranging from 2002 through
2020. Future minimum annual rental payments and receipts under the leases are as
follows:

<TABLE>
<S> <C>
1996..................................................... $ 2,208
1997..................................................... 2,279
1998..................................................... 1,881
1999..................................................... 1,537
2000..................................................... 1,189
Thereafter............................................... 7,553
-------
$16,647
=======
</TABLE>

Total rent expense charged to operations for the years ended December 31,
1994 and 1995 amounted to approximately $346 and $1,679, respectively. Of the
total rent expense charged to operations, approximately $100 and $751 was paid
to the Company's related party during the years ended December 31, 1994 and
1995, respectively.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

The Company has an unused letter of credit at December 31, 1994 and 1995
amounting to approximately $6,800 and $26,700, respectively, which is secured by
certain assets of the Company.

F-20
<PAGE> 82

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 12 -- ROYALTY ADVANCES

The Company has committed to pay advance royalty payments under certain
royalty agreements. These obligations are not guaranteed and are dependent, in
part, on the delivery of the contracted services by the licensor. Future advance
royalty payments due under these royalty agreements are as follows:

<TABLE>
<S> <C>
1996..................................................... $22,509
1997..................................................... 5,663
1998..................................................... 273
1999..................................................... 250
2000..................................................... --
Thereafter............................................... 5,000
-------
$33,695
=======
</TABLE>

NOTE 13 -- CONCENTRATION OF CREDIT RISK

The Company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise which results in a
concentration of credit risk. This concentration of credit risk may be affected
by changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential losses are maintained.

The Company had sales constituting 54%, 62% and 54% of net sales to a
single customer in the years ended December 31, 1993, 1994 and 1995,
respectively.

Accounts receivable due from this significant customer aggregated 76% and
49% of accounts receivable at December 31, 1994 and 1995, respectively.

The Company continually monitors its positions with, and the credit quality
of, the financial institutions with which the Company conducts business. Cash
and cash equivalents and short-term investments consist of cash on hand and
investments in state and local government bonds.

NOTE 14 -- SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
----- ----- -------
<S> <C> <C> <C>
Issuance of common stock in connection with the acquisition of
Slash Corporation............................................. $-- $-- $20,000
Cash paid for income taxes...................................... -- 1,416 19,169
Cash paid for interest.......................................... -- 19 644
</TABLE>

F-21
<PAGE> 83

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per share data)

NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for the year ended December 31, 1995
are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales................................... $34,122 $30,298 $ 61,270 $ 100,083
Operating income............................ 6,309 3,472 6,452 16,632
Net income.................................. 7,577 2,140 3,659 9,744
Net income per share........................ $ 0.16
Weighted average shares outstanding......... 59,328
</TABLE>

F-22
<PAGE> 84

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
WizardWorks Group
Armstrong-Olson, Inc.
Promotional Software Group, Inc.
SVI, LLC

We have audited the accompanying combined balance sheets of WizardWare
Group, Inc. (d.b.a. WizardWorks), Armstrong-Olson, Inc., Promotional Software
Group, Inc. and SVI, LLC (hereafter referred to as WizardWorks Group or the
Company) as of March 31, 1996 and 1995, and the related combined statements of
income and retained earnings and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of WizardWorks Group
at March 31, 1996 and 1995, and the combined results of their operations and
their cash flows for each of the years then ended, in conformity with generally
accepted accounting principles.

Ernst & Young LLP

Minneapolis, Minnesota
May 10, 1996

F-23
<PAGE> 85

WIZARDWORKS GROUP

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 776,344 $ 29,406
Investments..................................................... 100 104,959
Accounts receivable, net of allowances of $1,163,000 and
$1,263,419 in 1995 and 1996, respectively.................... 3,417,895 4,458,323
Inventories, net................................................ 612,225 1,810,294
Receivable due from shareholder................................. -- 52,413
Note receivable from officer.................................... 64,646 174,575
Prepaid expenses and other current assets....................... 248,325 1,055,878
---------- ----------
Total current assets.............................................. 5,119,535 7,685,848
Property, plant, and equipment, net............................... 118,482 252,106
Other assets...................................................... 17,443 158,631
---------- ----------
Total assets...................................................... $5,255,460 $8,096,585
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 932,617 $1,265,108
Checks written in excess of bank balances....................... -- 179,718
Accrued expenses................................................ 1,268,121 625,559
Income taxes payable............................................ 196,000 287,715
Line of credit.................................................. -- 170,000
Current portion of long-term debt............................... 59,006 64,095
Deferred income taxes........................................... 853,000 1,489,789
---------- ----------
Total current liabilities......................................... 3,308,744 4,081,984
Long-term debt, net of current portion............................ 141,872 77,777
Stockholders' equity:
Common stock:
WizardWare Group, Inc., $.01 par value:
Authorized shares -- 1,000,000
Issued and outstanding -- 20,000........................... 200 200
Armstrong-Olson, Inc., $1 par value:
Authorized shares -- 25,000
Issued and outstanding -- 7,500............................ 7,500 7,500
Promotional Software Group, Inc., no par value:
Authorized shares -- 10,000
Issued and outstanding -- 1,000............................ 1,000 1,000
Unrealized gains on available-for-sale securities, net of tax... -- 24,992
Retained earnings............................................... 1,796,144 3,903,132
---------- ----------
Total stockholders' equity........................................ 1,804,844 3,936,824
---------- ----------
Total liabilities and stockholders' equity........................ $5,255,460 $8,096,585
========== ==========
</TABLE>

See accompanying notes.

F-24
<PAGE> 86

WIZARDWORKS GROUP

COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net sales....................................................... $12,143,922 $16,837,933
Cost of sales................................................... 7,600,854 9,306,217
Selling, general and administrative expenses.................... 2,141,770 4,304,094
---------- ----------
Operating income................................................ 2,401,298 3,227,622
Other income (expense):
Interest expense.............................................. (31,510) (22,584)
Interest income............................................... 8,244 56,722
Gain on sale of assets........................................ -- 190,000
---------- ----------
Income before income taxes...................................... 2,378,032 3,451,760
Income taxes.................................................... 904,282 1,344,772
---------- ----------
Net income...................................................... 1,473,750 2,106,988
Retained earnings, beginning of year............................ 322,394 1,796,144
---------- ----------
Retained earnings, end of year.................................. $1,796,144 $3,903,132
========== ==========
</TABLE>

See accompanying notes.

F-25
<PAGE> 87

WIZARDWORKS GROUP

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $1,473,750 $2,106,988
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 47,000 82,655
Deferred income taxes......................................... 631,027 619,421
Gain on sale of assets........................................ -- (194,928)
Changes in operating assets and liabilities:
Accounts receivable, net................................... (2,363,209) (1,040,428)
Inventories, net........................................... (317,757) (1,198,069)
Prepaid expenses and other current assets.................. (289,958) (921,083)
Income taxes payable....................................... 196,000 91,715
Accounts payable and accrued expenses...................... 1,454,942 (130,353)
----------- -----------
Net cash (used in) provided by operating activities............. 832,695 (584,082)
INVESTING ACTIVITIES
Purchase of property, plant and equipment....................... (95,340) (220,036)
Sale of property, plant and equipment........................... -- 8,686
Purchase of investments......................................... -- (62,500)
----------- -----------
Net cash used in investing activities........................... (95,340) (273,850)
FINANCING ACTIVITIES
Net borrowings under revolving line of credit................... -- 170,000
Principal payments on long-term debt............................ (54,584) (59,006)
Principal payments on notes payable to shareholders............. (68,581) --
----------- -----------
Net cash provided by (used in) financing activities............. (123,165) 110,994
----------- -----------
(Decrease) increase in cash..................................... 614,190 (746,938)
Cash at beginning of year....................................... 162,154 776,344
----------- -----------
Cash at end of year............................................. $ 776,344 $ 29,406
=========== ===========
</TABLE>

See accompanying notes.

F-26
<PAGE> 88

WIZARDWORKS GROUP

COMBINED NOTES TO FINANCIAL STATEMENTS

MARCH 31, 1996

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The combined financial statements include WizardWare Group, Inc. (d.b.a.
"WizardWorks"), Promotional Software Group, Inc. ("PSG"), Armstrong-Olson, Inc.
and SVI, LLC, entities owned and operated by three shareholders. All material
intercompany transactions and balances have been eliminated in the combined
statements.

On December 29, 1995, the shareholders agreed to merge WizardWare Group,
Inc. and PSG into Armstrong-Olson, Inc., an S-corporation, and immediately
changed the name to WizardWorks Group, Inc. The merger became effective on May
10, 1996, upon completion of a filing with the State of Minnesota, the state of
incorporation for Armstrong-Olson, Inc.

Nature of Business

WizardWorks publishes and distributes consumer software developed by
external authors for Windows, DOS and Macintosh formats, primarily in domestic
markets. The Company has four distinct software lines. The brand names include
CompuWorks, WizardWorks, MacSoft and ValueWorks. The Company distributes
products nationally from its operations in Minnesota, which include a
distribution center in Brainerd, Minnesota and their main distribution center
and office space located in Minneapolis.

Armstrong-Olson is an employment search and temporary agency. Additionally,
the organization has provided payroll services for its clients.

PSG and SVI, LLC distribute "shareware" for use on the Internet, software
to original equipment PC manufacturers and software to the international market.
A substantial portion of all products sold by these entities is purchased from
WizardWorks.

Sales and income before taxes for the entities for fiscal 1995 and 1996
were as follows:

<TABLE>
<CAPTION>
INCOME BEFORE
NET SALES INCOME TAXES
------------------- -----------------
1995 1996 1995 1996
------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
WizardWorks......................................... $10,302 $15,269 $2,204 $3,098
Armstrong-Olson..................................... 1,903 1,710 104 445
PSG and SVI......................................... 165 560 70 (78)
Intercompany sales.................................. (226) (701) -- (13)
------- ------- ------ ------
$12,144 $16,838 $2,378 $3,452
======= ======= ====== ======
</TABLE>

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.

F-27
<PAGE> 89

WIZARDWORKS GROUP

COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Investments

Under the provisions of FAS #115, management determines the appropriate
classification of investments at the time of purchase. Investments, consisting
of an interest in a limited partnership convertible to shares of stock upon an
initial public offering of the partnership, are classified as
available-for-sale. Investments are stated at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholders'
equity.

Inventories

Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out ("FIFO") basis. Management performs ongoing
assessments to determine the existence of obsolete, slow-moving and nonsalable
inventories and records necessary provisions to reduce such inventories to net
realizable value.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is
computed by the straight-line method for financial reporting purposes over the
estimated useful lives of the assets, generally 3 - 5 years.

Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the accounts and any gain or loss recognized
currently.

Revenue Recognition

Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized a reserve is provided for expected future returns
net of the related costs of such items.

Accounts Receivable

Accounts receivable are principally due from distributors and retailers of
the Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses ($162,923 and
$100,000 at March 31, 1996 and 1995, respectively) and returns and price
adjustments ($1,100,496 and $1,063,000 at March 31, 1996 and 1995,
respectively).

The Company's customers are invoiced upon shipment and have no contractual
right to return products (except pursuant to the Company's limited warranty,
which only allows for the replacement of defective disks within 90 days of
purchase). Subsequent to March 31, 1996, the Company obtained credit indemnity
insurance to cover potential credit losses. The Company has not included any
anticipated indemnification from insurance in the determination of the
allowances for credit losses and returns for the year ended March 31, 1996.

Estimates for returns are based on management's evaluation of historical
experience and current industry trends and such estimates are charged against
gross revenues. The Company is subject to rapid changes in technology and shifts
in consumer demand which could result in product returns in excess of the
Company's reserves at March 31, 1996.

F-28
<PAGE> 90

WIZARDWORKS GROUP

COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Sales to the Company's top five customers for fiscal 1996 and 1995, less
actual returns in the period are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31
-------------
1996 1995
---- ----
<S> <C> <C>
Customer A................................................................... 17% 27%
Customer B................................................................... 10 24
Customer C................................................................... 9 --
Customer D................................................................... 7 9
Customer E................................................................... 7 9
Customer F................................................................... -- 8
---- ----
50% 77%
</TABLE>

Royalties

Royalties are accrued based on net sales pursuant to agreements with
external developers of software products published by the Company. Royalty
costs, which are included in cost of sales, were $1,614,000 and $1,894,900
during the years ended March 31, 1996 and 1995, respectively.

Royalty Advances

Income Taxes

The Company accounts for income taxes using the liability method. Deferred
income taxes are recorded for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting bases at rates based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Certain
entities of the combined group are S-corporations for income tax purposes.
Accordingly, taxable income and other items of tax consequence are passed
through directly to the respective shareholders.

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

F-29
<PAGE> 91

WIZARDWORKS GROUP

COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. INVENTORIES, NET

Inventories consist of the following as of March 31:

<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Raw materials...................................................... $451,517 $1,321,475
Finished goods..................................................... 229,408 574,176
Less obsolescence reserves......................................... (68,700) (85,357)
---------- --------
$612,225 $1,810,294
========== ========
</TABLE>

3. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following as of March 31:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Vehicles............................................................. $ 10,022 $ --
Furniture and fixtures............................................... 13,543 13,944
Warehouse equipment.................................................. 13,079 17,271
Product development equipment........................................ -- 7,216
Office equipment and leasehold improvements.......................... 235,004 341,606
-------- --------
271,648 380,037
Less accumulated depreciation........................................ 153,166 127,931
-------- --------
$118,482 $252,106
======== ========
</TABLE>

4. ACCRUED EXPENSES

Accrued expenses consisted of the following at March 31:

<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Royalties.......................................................... $1,133,841 $474,538
Commissions........................................................ 47,682 74,147
Other.............................................................. 86,598 76,874
-------- ----------
$1,268,121 $625,559
======== ==========
</TABLE>

5. REVOLVING LINE OF CREDIT

The Company has a line of credit with a bank wherein the Company can borrow
up to $1,400,000 based on eligible receivables and inventories. Borrowings on
the line of credit at March 31, 1996 were $170,000. Interest is at prime and is
payable monthly. The line of credit is secured by accounts receivable and
inventories, and is personally guaranteed by the two major shareholders of the
Company.

F-30
<PAGE> 92

WIZARDWORKS GROUP

COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT

Long-term debt consists of the following as of March 31:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Note payable to bank, interest at 8.25%, due in monthly installments
including interest of $6,119 with the remaining balance due
February 1998, secured by accounts receivable, equipment and
contract rights. The note is personally guaranteed by the two major
shareholders....................................................... $200,878 $141,872
Less current portion................................................. (59,006) (64,095)
-------- --------
$141,872 $ 77,777
======== ========
</TABLE>

Aggregate maturities of long-term debt are as follows:

Interest paid was $14,424 and $19,047 for the years ended March 31, 1996 and
1995, respectively.

7. LEASES

The Company rents office space and equipment under lease agreements which
are classified as operating leases. The leases call for monthly payments which
are either fixed or adjusted based on an increasing scale.

The following is a summary of future minimum lease payments under
noncancelable operating leases at March 31, 1996:

Rent expense for the years ended March 31, 1996 and 1995 was $96,092 and
$81,600, respectively.

F-31
<PAGE> 93

WIZARDWORKS GROUP

COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

The Company uses the cash method for filing its income tax returns.
Deferred income taxes result from temporary differences in the recognition of
assets and liabilities for income tax and financial reporting purposes. The
components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
-------- ---------
<S> <C> <C>
Current:
Federal.......................................................... $207,045 $ 549,695
State............................................................ 66,210 175,656
---------- --------
273,255 725,351
Deferred:
Federal.......................................................... 478,338 469,417
State............................................................ 152,689 150,004
---------- --------
631,027 619,421
---------- --------
Total income tax................................................... $904,282 $1,344,772
========== ========
</TABLE>

The difference between total income tax expense and the amount computed by
applying the statutory federal income tax rate to income before income taxes was
as follows:

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------
1995 1996
---- ----
<S> <C> <C>
Taxes at statutory rate of 34%............................................... 34% 34%
State income taxes, net of federal tax benefit............................... 6 6
Other........................................................................ 1 --
S Corp earnings taxed at shareholder level................................... (3) (1)
--- ---
38% 39%
=== ===
</TABLE>

The components of the net deferred tax liability at year end were:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSET (LIABILITY)
Accounts receivable............................................. $(1,853,600) $ --
Prepaid expenses................................................ (100,400) --
Non-inventory accounts payable.................................. 95,200 --
Accrued liabilities............................................. 507,200 --
IRC sec. 481(a) adjustment...................................... -- (2,027,552)
Inventory reserve............................................... 27,900 34,542
Reserve for bad debts........................................... 40,500 65,932
Reserve for sales promotion/advertising......................... 98,363 101,170
Reserve for returns and price protection........................ 331,837 344,178
Unrealized gain on available-for-sale securities................ -- (17,367)
Other........................................................... -- 9,308
------------ ------------
Net deferred liability.......................................... $ (853,000) $(1,489,789)
============ ============
</TABLE>

F-32
<PAGE> 94

WIZARDWORKS GROUP

COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES -- (CONTINUED)
As of January 1, 1996, WizardWorks was required to become an accrual basis
taxpayer because it no longer met the $5,000,000 average annual gross receipts
exception of IRC sec.488. Since the Company has been on the cash basis for tax
purposes through December 31, 1995, it was necessary to compute the effect of
the change in accounting for taxes on the accrual basis. For the period January
1 -- March 31, 1996, the tax expense and related liability were calculated using
the accrual method. The IRC sec.481 adjustment is the effect of the switchover
in tax accounting methods. The total amount of the gross adjustment is $5.3
million, which will be amortized over four years per IRC regulations.

Current expense related to the IRC sec.481 adjustment is $134,000.

9. RELATED PARTY TRANSACTIONS

A principal shareholder and CEO of the Company has a $143,000 note
outstanding with the Company at March 31, 1996. The original note amount was
$191,695 and bears an annual interest rate of 8.25%. The note is payable in
monthly installments and is due on November 17, 1996.

A minority shareholder has a $52,413 note outstanding with the Company at
March 31, 1996. The note is payable on demand and bears an annual interest rate
of 8%.

F-33
<PAGE> 95

INDEPENDENT AUDITOR'S REPORT

The Board of Directors
Slash Corporation
Edina, Minnesota

We have audited the accompanying balance sheet of Slash Corporation, as of
December 31, 1994, and the related statements of operations, retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Slash Corporation, as of December 31, 1993, were audited by other
auditors whose report, dated March 23, 1994, expressed an unqualified opinion on
those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Slash Corporation as of
December 31, 1994, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.

February 17, 1995
Except for Note 9
as to which the date
is March 20, 1995
Minneapolis, Minnesota EIDE HELMEKE PLLP

F-34
<PAGE> 96

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
Slash Corporation:

We have audited the accompanying balance sheet of Slash Corporation as of
December 31, 1993 and the related statements of income and cash flows for the
years ended December 31, 1993 and 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of Slash Corporation as of
December 31, 1993 and the results of its operations and its cash flows for the
years ended December 31, 1993 and 1992 in conformity with generally accepted
accounting principles.

Minneapolis, Minnesota
March 23, 1994 McLAUGHLIN & ASSOCIATES

F-35
<PAGE> 97

SLASH CORPORATION

BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1994
------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 807 $ 3,845
Receivables, net...................................................... 4,321 10,882
Inventories........................................................... 4,411 8,551
Royalty advances...................................................... 252 379
Prepaid expenses and other current assets............................. 89 718
------ -------
Total current assets............................................... 9,880 24,375
Property and equipment, net............................................. 71 170
------ -------
Total assets....................................................... $9,951 $24,545
====== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities.............................. $4,708 $11,005
Royalties payable..................................................... 219 482
------ -------
Total liabilities.................................................. 4,927 11,487
------ -------
Commitments and contingencies
Stockholder's equity
Common stock, $.01 par, 10 shares authorized, 1 share issued and
outstanding........................................................ -- --
Additional paid-in capital............................................ 106 106
Retained earnings..................................................... 4,918 12,952
------ -------
Total stockholder's equity......................................... 5,024 13,058
------ -------
Total liabilities and stockholder's equity......................... $9,951 $24,545
====== =======
</TABLE>

The accompanying footnotes are an integral part of these financial statements.

F-36
<PAGE> 98

SLASH CORPORATION

STATEMENTS OF OPERATIONS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------- PERIOD ENDED
1993 1994 JUNE 22, 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales................................................ $26,999 $47,758 $21,525
Cost of goods sold....................................... 20,087 34,246 15,700
Selling and distribution expenses........................ 1,856 1,674 1,920
General and administrative expenses...................... 1,681 1,171 1,785
------- ------- -------
Operating income......................................... 3,375 10,667 2,120
Interest income (expense), net........................... (10) (75) 45
Other income............................................. -- 3 --
------- ------- -------
Income before income taxes............................... 3,365 10,595 2,165
Provision for income taxes............................... -- 5 --
------- ------- -------
Net income............................................. $ 3,365 $10,590 $ 2,165
======= ======= =======
</TABLE>

The accompanying footnotes are an integral part of these financial statements.

F-37
<PAGE> 99

SLASH CORPORATION

STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------- PERIOD ENDED
1993 1994 JUNE 22, 1995
------- ------- -------------
<S> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income............................................... $ 3,365 $10,590 $ 2,165
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 9 41 23
Changes in operating assets and liabilities:
Receivables, net.................................... (1,187) (6,561) 5,344
Inventories......................................... (3,238) (4,140) 1,597
Royalty advances.................................... (252) (127) 212
Prepaid expenses and other current assets........... (58) (630) 609
Accounts payable and accrued liabilities............ 2,022 6,297 (2,234)
Royalties payable................................... 219 263 (77)
------- ------- --------
Net cash provided by operating activities......... 880 5,733 7,639
------- ------- --------
INVESTING ACTIVITIES
Purchase of property and equipment..................... (61) (139) (16)
------- ------- --------
Net cash used in investing activities............... (61) (139) (16)
------- ------- --------
FINANCING ACTIVITIES
Proceeds from bank note................................ -- -- 4,471
Distribution to stockholder............................ (213) (2,556) (15,423)
------- ------- --------
Net cash used in financing activities.................... (213) (2,556) (10,952)
------- ------- --------
Net increase (decrease) in cash.......................... 606 3,038 (3,329)
Cash -- beginning of period.............................. 201 807 3,845
------- ------- --------
Cash -- end of period.................................... $ 807 $ 3,845 $ 516
======= ======= ========
Supplemental Cash Flow Information:
Cash paid for income taxes............................... $ -- $ 10 $ 3
Cash paid for interest................................... 25 93 27
</TABLE>

The accompanying footnotes are an integral part of these financial statements.

F-38
<PAGE> 100

SLASH CORPORATION

NOTES TO FINANCIAL STATEMENTS
(in thousands)

NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Slash Corporation (the "Company"), is a publisher, purchaser, repackager
and distributor of consumer software for personal computers. The Company derives
its revenues primarily from the sale of software close-out products to mass
merchants, specialty software stores, computer superstores and distributors
located throughout the United States.

Revenue Recognition

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and highly liquid-short
term investments with original maturities of three months or less at the date
acquired.

Inventories

Royalty Advances

Royalty advances represent the unamortized elements of prepayments to
outside licensors of software products for the right to manufacture and/or
distribute their products under various licensing agreements. Such advances are
amortized to cost of goods sold on a per unit basis as licensed products are
sold in accordance with the individual agreements. Future realization of royalty
advances is assessed quarterly by management and charged to expense if it is not
likely that the amounts will be recovered through sales of the related product.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using
an accelerated method over the estimated useful lives of the assets, which range
from five to seven years. Leasehold improvements are amortized using an
accelerated method based on useful lives established by statutory guidelines.

Income Taxes

During 1993, 1994 and through June 22, 1995, the Company elected to be
treated as a small business corporation under Subchapter S of the Internal
Revenue Code. Under the aforementioned provisions, corporate income or loss and
any tax credits earned are included in the stockholders' individual Federal
income tax return. Accordingly, no provision has been made for Federal income
taxes for the years ended December 31, 1993 and 1994 and for the period ended
June 22, 1995.

Fair Values of Financial Instruments

The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value due to the short term nature of such
items.

F-39
<PAGE> 101

SLASH CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands)

NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
Reclassifications

Certain reclassifications have been made to the prior year's financial
statements to conform to classifications used in the current period.

NOTE 2 -- RECEIVABLES, NET

Receivables consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1994
------ -------
<S> <C> <C>
Trade accounts receivable............................................... $4,322 $10,877
Other receivables....................................................... 9 15
------ -------
4,331 10,892
Less: allowance for doubtful accounts................................... 10 10
------ -------
$4,321 $10,882
====== =======
</TABLE>

NOTE 3 -- INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1994
------ ------
<S> <C> <C>
Finished goods........................................................... $4,411 $8,111
Raw materials............................................................ -- 440
------ ------
$4,411 $8,551
====== ======
</TABLE>

NOTE 4 -- PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1993 1994
---- ----
<S> <C> <C>
Furniture and Fixtures...................................................... $40 $103
Machinery and equipment..................................................... -- 62
Automobiles................................................................. 49 49
Leasehold improvements...................................................... 5 20
--- ----
94 234
Less: accumulated depreciation 23 64
--- ----
$71 $170
=== ====
</TABLE>

Depreciation expense for the years ended December 31, 1993 and 1994 and the
period ended June 22, 1995 amounted to approximately $9, $41 and $23,
respectively.

F-40
<PAGE> 102

SLASH CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands)

NOTE 5 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1994
------ -------
<S> <C> <C>
Accounts payable........................................................ $4,220 $ 9,042
Sales return reserve, net............................................... 143 1,275
Other................................................................... 345 688
------ -------
$4,708 $11,005
====== =======
</TABLE>

NOTE 6 -- FINANCING ARRANGEMENTS

The Company had a loan agreement with First Bank National Association. The
agreement provided for a revolving loan of $3,500 secured by accounts
receivable, inventory and a personal guarantee by the Company's stockholder.
Interest was payable at the prime rate plus .75%. There were no outstanding
borrowings on the line of credit at December 31, 1993 and 1994. In conjunction
with the acquisition of the Company by GT Interactive Software Corp., the loan
agreement was terminated.

NOTE 7 -- PROFIT SHARING PLAN

The Company has a profit sharing plan for the benefit of its employees who
qualify for participation. The plan provides for contributions by the Company in
annual amounts as determined by the Board of Directors. The Company's
contributions for 1993 and 1994 were $75 and $0, respectively.

NOTE 8 -- LEASES

The Company leases its executive offices and a warehouse under leases that
are accounted for as operating leases. These leases expire in December 1997.
Future minimum annual rental payments under the leases are as follows:

NOTE 9 -- CONCENTRATION OF CREDIT RISK

For the year ended December 31, 1994, a material part of the Company's
business was with five customers which accounted for approximately 23%, 17%,
15%, 11% and 9% of net sales, respectively. For the year ended December 31,
1993, a material part of the Company's business was with four customers which
accounted for approximately 26%, 25%, 25% and 11% of net sales, respectively. At
December 31, 1993 and 1994, these customers accounted for approximately 76% and
59% of net accounts receivable, respectively.

The Company maintains cash at one bank. The account is insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100. At December 31, 1994,
the Company had a bank balance which exceeded the FDIC Insurance limits by
approximately $5,000.

F-41
<PAGE> 103

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE -- CHARGED TO BALANCE--
BEGINNING OF COSTS AND END OF
DESCRIPTION YEAR EXPENSES DEDUCTIONS YEAR
- -------------------------------------------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Years ended:
December 31, 1995......................... $ 235 $1,609 $-- $ 1,844
====== ====== ====== ======
December 31, 1994......................... $ 30 $ 205 $-- $ 235
====== ====== ====== ======
Reserve for obsolescence:
Years ended:
December 31, 1995......................... $1,553 $5,128 $-- $ 6,681
====== ====== ====== ======
December 31, 1994......................... $ 315 $1,238 $-- $ 1,553
====== ====== ====== ======
</TABLE>

F-42
<PAGE> 104

LOGO
<PAGE> 105

[Alternate Cover for International Prospectus]
SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996

LOGO
15,500,000 SHARES

COMMON STOCK

Of the 15,500,000 shares of Common Stock offered hereby, 3,000,000 shares
are being offered initially outside the United States and Canada by the
International Underwriters and 12,500,000 shares are being offered initially in
the United States and Canada by the U.S. Underwriters. Of the shares of Common
Stock being offered, 4,000,000 shares are being offered for sale by GT
Interactive Software Corp. ("GTIS" or the "Company") and 11,500,000 shares are
being offered for sale by the Selling Stockholders. The Company will not receive
any of the proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders." On October 17, 1996, the last sale price
of the Common Stock, as reported on the Nasdaq National Market, was $20.00 per
share. See "Price Range of Common Stock." The Common Stock is traded on the
Nasdaq National Market under the symbol "GTIS."

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

(2) Before deducting expenses payable by the Company estimated at $1,300,000.

(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to an additional 2,325,000 shares of Common Stock solely to
cover overallotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and the Proceeds to Selling Stockholders will be $ ,
$ and $ , respectively.
---------------------

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such Shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.

MERRILL LYNCH INTERNATIONAL LIMITED ROBERTSON, STEPHENS & COMPANY
BEAR, STEARNS INTERNATIONAL LIMITED
HAMBRECHT & QUIST
LEHMAN BROTHERS
PIPER JAFFRAY INTERNATIONAL INC.

The date of this Prospectus is , 1996.
<PAGE> 106

[ALTERNATE UNDERWRITING SECTION FOR INTERNATIONAL PROSPECTUS]

UNDERWRITING

The Underwriters named below (the "International Underwriters"), acting
through their representatives Merrill Lynch International Limited, Robertson,
Stephens & Company LLC, Bear, Stearns International Limited, Hambrect & Quist
LLC, Lehman Brothers International (Europe) and Piper Jaffray International Inc.
(the "International Representatives"), have severally agreed with the Company
and the Selling Stockholders, subject to the terms and conditions of the
International Purchase Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock set forth opposite their
respective names below. The International Underwriters are committed to purchase
and pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch International Limited............................................
Robertson, Stephens & Company LLC..............................................
Bear, Stearns International Limited............................................
Hambrect & Quist LLC...........................................................
Lehman Brothers International (Europe).........................................
Piper Jaffray International Inc................................................
----------
Total..................................................................... 3,000,000
==========
</TABLE>

The U.S. Underwriters (together with the International Underwriters, the
"Underwriters"), acting through their representatives Robertson, Stephens &
Company LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns &
Co. Inc., Hambrect & Quist LLC, Lehman Brothers Inc. and Piper Jaffray Inc. (the
"U.S. Representatives," together with the International Representatives, the
"Representatives") have severally agreed with the Company and the Selling
Stockholders, subject to the terms and conditions of the U.S. Underwriting
Agreement, to purchase from the Company and the Selling Stockholders 12,500,000
shares of Common Stock.

The Company and the Selling Stockholders have been advised by the
International Representatives that the International Underwriters propose to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not in excess of $ per share, of which $
may be reallowed to other dealers. After the public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
International Representatives. No such reduction shall change the amount of
proceeds to be received by the Company and the Selling Stockholders as set forth
on the cover page of this Prospectus.

The Selling Stockholders have granted an option to the International
Underwriters and the U.S. Underwriters, exercisable during the 30-day period
after the date of this Prospectus, to purchase up to 2,325,000 additional shares
of Common Stock, at the same price per share as the Company and the Selling
Stockholders will receive for the 15,500,000 shares that the Underwriters have
agreed to purchase. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage of such additional shares that the number of shares of
Common Stock to be purchased by it shown in the above table represents as a
percentage of the 15,500,000 shares to be offered hereby. If purchased, the
additional shares will be sold by the Underwriters on the same terms as those on
which the 15,500,000 shares are being sold.

The International Purchase Agreement and U.S. Underwriting Agreement each
contains covenants of indemnity among the Underwriters, the Company and the
Selling Stockholders against certain civil liabilities, including liabilities
under the Act.

2
<PAGE> 107

The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the International
Underwriters and the U.S. Underwriters are permitted to sell shares of Common
Stock to each other.

Pursuant to the terms of lock-up agreements, certain executive officers,
directors and significant stockholders of the Company have agreed with
Robertson, Stephens & Company LLC that during the Lock-Up Period they will not,
with certain exceptions, sell any shares of Common Stock now owned or
hereinafter acquired by such holder, other than with the prior written consent
of Robertson, Stephens & Company LLC, which may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. See "Shares Eligible for Future Sale." The Company has also
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for any shares of Common Stock, or any options or warrants to
purchase Common Stock other than options issued under the Company's 1995 Stock
Incentive Plan during the Lock-Up Period except with the prior written consent
of Robertson, Stephens & Company LLC.

3
<PAGE> 108

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this Registration Statement will be as
follows:

<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
SEC registration fee (actual).................................................. $ 108,031
NASD filing fee (actual)....................................................... 30,500
Nasdaq filing fee (actual)..................................................... 17,500
Blue Sky fees and expenses (including counsel fees)............................ *
Accounting fees and expenses................................................... *
Legal fees and expenses........................................................ *
Printing and engraving expenses................................................ *
Transfer Agent and Registrar fees and expenses................................. *
Miscellaneous expenses......................................................... *
----------
Total........................................................................ $1,300,000
==========
</TABLE>

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

*To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. The Registrant's Amended and Restated Certificate of Incorporation
contains provisions permitted by Section 102(b)(7) of the DGCL.

Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such director, officer, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal actions or
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify directors and/or officers in an action or
suit by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the director
or officer is adjudged to be liable to the corporation. Where a director or
officer is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such director or officer actually and reasonably incurred.

The Registrant's Amended and Restated Certificate of Incorporation provides
indemnification of directors and officers of the Registrant to the fullest
extent permitted by the DGCL. Pursuant to the registration rights agreements
entered into with the Company, the Selling Stockholders have agreed to

II-1
<PAGE> 109

indemnify directors and officers of the Company against certain liabilities,
including liabilities under the Securities Act. Pursuant to the U.S.
Underwriting Agreement and the International Purchase Agreement filed as
Exhibits 1.1 and 1.2, respectively, to this Registration Statement, the
Underwriters have agreed to indemnify the directors, officers and controlling
persons of the Registrant against certain civil liabilities that may be incurred
in connection with the Offering, including certain liabilities under the
Securities Act.

The Registrant maintains liability insurance for each director and officer
for certain losses arising from claims or charges made against them while acting
in their capacities as directors or officers of the Registrant.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

There have been no sales of unregistered securities by the Registrant
during the past three years, except the issuance (i) in December 1994, to WMS
Industries Inc., of a warrant to purchase 214,286 shares of Common Stock at an
exercise price equal to the initial public offering price, in connection with a
licensing arrangement; (ii) in January 1995, to Big Tuna New Media, LLC (the
publishing vehicle of Mercer Mayer), of a warrant to purchase 64,286 shares of
Common Stock at an exercise price equal to the initial public offering price, in
connection with a licensing arrangement; (iii) in February 1995, to General
Atlantic Partners 16, L.P. and certain of its affiliates (the "GAP Entities"),
for an aggregate of $10,000, warrants to purchase an aggregate of 2,520,000
shares of Common Stock, at an exercise price of $4.17 per share; (iv) in
February 1995, to General Atlantic Partners II, L.P., of a warrant, for an
aggregate of $5,000, to purchase an aggregate of 504,000 shares of Common Stock,
at an exercise price of $4.17 per share; (v) in June 1995, to certain GAP
Entities, an aggregate of 525 shares of Series A Convertible Preferred Stock
convertible into 2,520,000 shares of Common Stock, in consideration of
$15,000,000 (an effective per share purchase price for such Common Stock of
$5.95 per share); subsequently, certain warrants were surrendered by the GAP
Entities and cancelled; (vi) in June 1995, to the former stockholder of Slash
Corporation ("Slash"), of 2,793,600 shares of Common Stock in connection with
the acquisition of Slash; (vii) in October 1995, to id Software Inc., of a
warrant to purchase 422,536 shares of Common Stock at an exercise price of $9.47
per share, in connection with a licensing arrangement; (viii) in October 1995,
to SOFTBANK Holdings Inc., for $7,650,000, 2,399,112 shares of Common Stock, at
a price per share of $15.94; (ix) in May 1996, to Big Tuna New Media, LLC, of a
warrant to purchase 250,000 shares of Common Stock at an exercise price of
$20.00 per share, in connection with a licensing arrangement; (x) in May 1996,
to Apogee Software, Ltd., of a warrant to purchase 250,000 shares of Common
Stock at an exercise price of $19.125 per share, in connection with a licensing
arrangement; (xi) in June 1996, to the former stockholders of WizardWorks Group,
Inc. ("WizardWorks"), of 2,350,000 shares of Common Stock, in connection with
the acquisition of WizardWorks; (xii) in June 1996, to the former stockholders
of Candel Inc. ("FormGen"), of 1,032,777 shares of Common Stock, in connection
with the acquisition of FormGen; (xiii) in July 1996, to the former stockholders
of Humongous Entertainment, Inc. ("Humongous"), of 3,458,375 shares of Common
Stock, in connection with the acquisition of Humongous; and (xiv) in August
1996, to Epic Megagames, Inc., of a warrant to purchase 37,500 shares of Common
Stock at an exercise price of $20.00 per share, in connection with a licensing
arrangement. All of such sales were made in reliance upon Section 4(2) of the
Securities Act. The foregoing information gives effect to the recapitalization
effected immediately prior to the consummation of the Registrant's initial
public offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

Exhibits 2.1 and 2.2 below are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Current Report on
Form 8-K filed on July 9, 1996. Exhibit 3.1 is incorporated herein by reference
to the exhibit with the corresponding number filed as part of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. Exhibits 3.2
and 4.1, and Exhibits 10.1 through 10.20 below are incorporated herein by
reference to the exhibit with the corresponding number filed as part of the
Company's Registration Statement on Form S-1 filed on October 20, 1995, and all
amendments thereto (Registration No. 33-98448).

II-2
<PAGE> 110

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
1.1** Form of U.S. Underwriting Agreement.
1.2** Form of International Purchase Agreement.
2.1 Agreement and Plan of Reorganization by and among GT Interactive Software Corp.,
GT Acquisition Sub, Inc., Wizard Works Group, Inc. and the Stockholders of Wizard
Works Group, Inc. dated June 24, 1996.
2.2 Escrow Agreement by and among GT Interactive Software Corp., Paul D. Rinde, as the
Stockholder Representative of Wizard Works Group, Inc., and Republic National Bank
of New York, as Escrow Agent, dated June 24, 1996.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated By-laws.
4.1 Specimen form of stock certificate for Common Stock.
5.1** Opinion of Kramer, Levin, Naftalis & Frankel.
10.1 The 1995 Stock Incentive Plan.
10.2 Services Agreement between the Registrant and GoodTimes Home Video Corp., dated as
of January 1, 1995.
10.3 4.5% Subordinated Secured Promissory Note, due February 28, 1996.
10.4 Employment Agreement between the Registrant and Ronald Chaimowitz.
10.5 Employment Agreement between the Registrant and Charles F. Bond.
10.6 Non-Competition Agreement between the Registrant and Charles F. Bond.
10.7 Employment Agreement between the Registrant and Harry M. Rubin.
10.8 Employment Agreement between the Registrant and Harry Steck.
10.9 Employment Agreement between the Registrant and Chris Garske.
10.10 GTIS Master Option and License Agreement between the Registrant and the Williams
Entertainment Group, dated December 28, 1994, and the Amendment to such agreement,
dated March 31, 1995.
10.11 GTIS Master Option and License Agreement (Home Video Games) between the Registrant
and the Williams Entertainment Group, dated March 31, 1995.
10.12 Agreement between the Registrant and SOFTBANK Corporation, dated October 9, 1995.
10.13 Agreement between the Registrant and Roadshow PTY LTD, dated October 3, 1995.
10.14 Agreement and Plan of Reorganization by and between Charles F. Bond, Slash
Corporation and the Registrant, dated June 22, 1995.
10.15 Lease Agreements between the Registrant and 16 East 40th Associates.
10.16 Sub-lease Agreement between the Registrant and Michael Stevens Ltd., dated
February 22, 1995.
10.17 Lease Agreement between GT Interactive Software (Europe) Limited and Marylebone
248 Realty LLC, dated May 2, 1995.
10.18 Stockholders' Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley
Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the
Registrant.
10.19 Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley
Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the
Registrant.
10.20 Agreement by and between the Company and REPS.
10.21 Second Amendment to GTIS Master Option and License Agreement between the
Registrant and Williams Entertainment Group, dated March 27, 1996 (incorporated
herein by reference to Exhibit 10.1 filed as part of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996).
10.22 Amendment to GTIS Master Option and License Agreement (Home Video Games) between
the Registrant and Williams Entertainment Group, dated March 27, 1996
(incorporated herein by reference to Exhibit 10.2 filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
</TABLE>

II-3
<PAGE> 111

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.23 Master Option and License Agreement for Atari PC Games between the Registrant and
WMS Industries Inc., dated March 27, 1996 (incorporated herein by reference to
Exhibit 10.3 filed as part of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).
10.24 Master Option and License Agreement for Atari Home Video Games between the
Registrant and WMS Industries Inc., dated March 27, 1996 (incorporated herein by
reference to Exhibit 10.4 filed as part of the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
10.25 Employment Agreement between the Registrant and Andrew Gregor (incorporated herein
by reference to Exhibit 10.5 filed as part of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
10.26* 6.15% Promissory Note, due August 31, 1998, of Andrew Gregor.
10.27* 6.15% Promissory Note, due August 31, 1998, of Chris Garske.
10.28** Lease Agreement between the Registrant and Scott Moss, dated September 6, 1996.
11.1* Computation of Earnings Per Share.
21.1* The Registrant's Subsidiaries.
23.1* Consent of Arthur Andersen LLP.
23.2* Consent of Eide Helmeke and Co. PLLP.
23.3* Consent of McLaughlin & Associates.
23.4* Consent of Ernst & Young LLP.
23.5** Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the opinion to be
filed as Exhibit 5.1 hereto).
24.1* Power of Attorney (contained on the signature page of this Registration
Statement).
27.1* Financial Data Schedule for the year ended December 31, 1994.
27.2* Financial Data Schedule for the year ended December 31, 1995.
</TABLE>

- ---------------
* Filed herewith.

** To be filed by amendment.

(b) Financial Statement Schedules

The following financial statement schedules are filed herewith:

<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- -------------- ---------------------------------------------------------------------------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts
</TABLE>

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 above, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the Common Stock covered hereby, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and

II-4
<PAGE> 112

contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the U.S. Underwriting Agreement and the
International Purchase Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

II-5
<PAGE> 113

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement or amendment to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of New
York, New York, on October 18, 1996.

GT INTERACTIVE SOFTWARE CORP.

By: /s/ RONALD CHAIMOWITZ
--------------------------------------
Name: Ronald Chaimowitz
Title: President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Joseph J. Cayre, Ronald Chaimowitz and
Jack J. Cayre his true and lawful attorney-in-fact and agent, each acting alone,
with full powers of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments to
this registration statement and to file the 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, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------- -------------------------------------- -----------------
<C> <S> <C>
/s/ JOSEPH J. CAYRE Chairman of the Board October 18, 1996
- -------------------------------------
Joseph J. Cayre

/s/ ANDREW GREGOR Senior Vice President, Finance and October 18, 1996
- ------------------------------------- Administration, and Chief Financial
Andrew Gregor Officer (Principal Financial and
Accounting Officer)

/s/ RONALD CHAIMOWITZ President, Chief Executive Officer and October 18, 1996
- ------------------------------------- Director
Ronald Chaimowitz

/s/ JACK J. CAYRE Executive Vice President, Director October 18, 1996
- -------------------------------------
Jack J. Cayre

/s/ KENNETH CAYRE Director October 18, 1996
- -------------------------------------
Kenneth Cayre

Director October 18, 1996
- -------------------------------------
Stanley Cayre

/s/ STEVEN A. DENNING Director October 18, 1996
- -------------------------------------
Steven A. Denning

/s/ WILLIAM E. FORD Director October 18, 1996
- -------------------------------------
William E. Ford

/s/ JORDAN A. LEVY Director October 18, 1996
- -------------------------------------
Jordan A. Levy
</TABLE>
<PAGE> 114

EXHIBIT INDEX

(a) Exhibits:

<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
1.1** Form of U.S. Underwriting Agreement.
1.2** Form of International Purchase Agreement.
2.1 Agreement and Plan of Reorganization by and among GT Interactive
Software Corp., GT Acquisition Sub, Inc., Wizard Works Group, Inc. and
the Stockholders of Wizard Works Group, Inc. dated June 24, 1996.
2.2 Escrow Agreement by and among GT Interactive Software Corp., Paul D.
Rinde, as the Stockholder Representative of Wizard Works Group, Inc.,
and Republic National Bank of New York, as Escrow Agent, dated June 24,
1996.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated By-laws.
4.1 Specimen form of stock certificate for Common Stock.
5.1** Opinion of Kramer, Levin, Naftalis & Frankel.
10.1 The 1995 Stock Incentive Plan.
10.2 Services Agreement between the Registrant and GoodTimes Home Video
Corp., dated as of January 1, 1995.
10.3 4.5% Subordinated Secured Promissory Note, due February 28, 1996.
10.4 Employment Agreement between the Registrant and Ronald Chaimowitz.
10.5 Employment Agreement between the Registrant and Charles F. Bond.
10.6 Non-Competition Agreement between the Registrant and Charles F. Bond.
10.7 Employment Agreement between the Registrant and Harry M. Rubin.
10.8 Employment Agreement between the Registrant and Harry Steck.
10.9 Employment Agreement between the Registrant and Chris Garske.
10.10 GTIS Master Option and License Agreement between the Registrant and the
Williams Entertainment Group, dated December 28, 1994, and the
Amendment to such agreement, dated March 31, 1995.
10.11 GTIS Master Option and License Agreement (Home Video Games) between the
Registrant and the Williams Entertainment Group, dated March 31, 1995.
10.12 Agreement between the Registrant and SOFTBANK Corporation, dated
October 9, 1995.
10.13 Agreement between the Registrant and Roadshow PTY LTD, dated October 3,
1995.
10.14 Agreement and Plan of Reorganization by and between Charles F. Bond,
Slash Corporation and the Registrant, dated June 22, 1995.
10.15 Lease Agreements between the Registrant and 16 East 40th Associates.
10.16 Sub-lease Agreement between the Registrant and Michael Stevens Ltd.,
dated February 22, 1995.
10.17 Lease Agreement between GT Interactive Software (Europe) Limited and
Marylebone 248 Realty LLC, dated May 2, 1995.
</TABLE>
<PAGE> 115

<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
10.18 Stockholders' Agreement by and among Joseph J. Cayre, Kenneth Cayre,
Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached
thereto and the Registrant.
10.19 Registration Rights Agreement by and among Joseph J. Cayre, Kenneth
Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I
attached thereto and the Registrant.
10.20 Agreement by and between the Company and REPS.
10.21 Second Amendment to GTIS Master Option and License Agreement between
the Registrant and Williams Entertainment Group, dated March 27, 1996
(incorporated herein by reference to Exhibit 10.1 filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
10.22 Amendment to GTIS Master Option and License Agreement (Home Video
Games) between the Registrant and Williams Entertainment Group, dated
March 27, 1996 (incorporated herein by reference to Exhibit 10.2 filed
as part of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
10.23 Master Option and License Agreement for Atari PC Games between the
Registrant and WMS Industries Inc., dated March 27, 1996 (incorporated
herein by reference to Exhibit 10.3 filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
10.24 Master Option and License Agreement for Atari Home Video Games between
the Registrant and WMS Industries Inc., dated March 27, 1996
(incorporated herein by reference to Exhibit 10.4 filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
10.25 Employment Agreement between the Registrant and Andrew Gregor
(incorporated herein by reference to Exhibit 10.5 filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
10.26* 6.15% Promissory Note, due August 31, 1998, of Andrew Gregor.
10.27* 6.15% Promissory Note, due August 31, 1998, of Chris Garske.
10.28** Lease Agreement between the Registrant and Scott Moss, dated September
6, 1996.
11.1* Computation of Earnings Per Share.
21.1* The Registrant's Subsidiaries.
23.1* Consent of Arthur Andersen LLP.
23.2* Consent of Eide Helmeke and Co. PLLP.
23.3* Consent of McLaughlin & Associates.
23.4* Consent of Ernst & Young LLP.
23.5** Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the
opinion to be filed as Exhibit 5.1 hereto).
24.1* Power of Attorney (contained on the signature page of this Registration
Statement).
27.1* Financial Data Schedule for the year ended December 31, 1994.
27.2* Financial Data Schedule for the year ended December 31, 1995.
</TABLE>

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

* Filed herewith.

** To be filed by amendment.

<PAGE> 1

EXHIBIT 10.26

PROMISSORY NOTE

<TABLE>
<S> <C>
$250,000 August 31, 1996
Principal Amount New York, New York
</TABLE>

FOR VALUE RECEIVED, Andrew Gregor, an individual, whose residence is at 11
Lighthouse Lane, Greenwich, CT 06870 (the "Maker"), hereby promises to pay to
the order of GT Interactive Software Corp., a Delaware corporation (the
"Payee"), or its assigns, the sum of Two Hundred Fifty Thousand Dollars
($250,000) on August 31, 1998 (the "Maturity Date"), together with interest
accrued from the date hereof on the unpaid principal balance hereunder, at a
rate of six and fifteen one-hundredths percent (6.15%) per annum. Interest shall
be computed on the basis of a 365-day year and the actual number of days elapsed
and shall be due and payable on the Maturity Date.

This Note may be prepaid in full or in part (with interest to the date of
prepayment) at any time without premium or penalty.

All payments received hereunder shall be applied first to the payment of
accrued interest (if applicable) and any expenses or charges payable hereunder
(in such order as Payee may determine) and the balance, if any, to principal.

In the event of any failure to make a full and timely payment of any amount
due under this Note, Maker will pay to the holder such further amount as shall
be sufficient to cover all costs and expenses directly or indirectly incurred in
connection with any action relating to collection of this Note and/or the
enforcement of the holder's rights, including but not limited to attorneys'
fees, expenses and disbursements.

No course of dealing and no delay on the part of the holder of this Note in
exercising any right, power or remedy shall operate as a waiver thereof or
otherwise prejudice any of such holder's rights, powers and remedies, and no
single or partial exercise of a right, power or remedy shall preclude a further
exercise thereof or the exercise of another right, power or remedy.

The Maker hereby waives presentment, notice of demand for payment, protest,
notice of dishonor and any other notice of any kind with respect to this Note.

The Note shall be governed by and construed in accordance with the internal
laws of the State of New York without giving effect to the conflict of laws
principles thereof.

All of the terms and provisions of this Note shall be applicable to and
binding upon each and every maker, holder, endorser, surety, guarantor, and all
other persons who are or may become liable for the payment hereof and their
respective successors or assigns.

IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Note as of the date and year first above written.

/s/ ANDREW GREGOR
-----------------
Andrew Gregor

<PAGE> 1

EXHIBIT 10.27

PROMISSORY NOTE

<TABLE>
<S> <C>
$200,000 August 31, 1996
Principal Amount New York, New York
</TABLE>

FOR VALUE RECEIVED, Chris Garske, an individual, whose residence is at 235
West 56th Street, Apt. 38M, New York, New York 10019 (the "Maker"), hereby
promises to pay to the order of GT Interactive Software Corp., a Delaware
corporation (the "Payee"), or its assigns, the sum of Two Hundred Thousand
Dollars ($200,000) on August 31, 1998 (the "Maturity Date"), together with
interest accrued from the date hereof on the unpaid principal balance hereunder,
at a rate of six and fifteen one-hundredths percent (6.15%) per annum. Interest
shall be computed on the basis of a 365-day year and the actual number of days
elapsed and shall be due and payable on the Maturity Date.

This Note may be prepaid in full or in part (with interest to the date of
prepayment) at any time without premium or penalty.

The Maker hereby waives presentment, notice of demand for payment, protest,
notice of dishonor and any other notice of any kind with respect to this Note.

The Note shall be governed by and construed in accordance with the internal
laws of the State of New York without giving effect to the conflict of laws
principles thereof.

IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Note as of the date and year first above written.

/s/ CHRIS GARSKE
----------------
Chris Garske

<PAGE> 1

EXHIBIT 11.1

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES

COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(in thousands, except per share data)

<TABLE>
<CAPTION>
FOR YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Pro forma net income....................................................... $18,628
=======
Pro forma weighted average number of shares outstanding:
Actual................................................................... 59,305
Dilutive impact of shares issued during the period and treated as being
outstanding throughout the periods presented.......................... 1,777
-------
61,082
-------
Pro forma net income per share............................................. $ 0.30
=======
</TABLE>

<PAGE> 1

EXHIBIT 21.1

<TABLE>
<CAPTION>
NAME STATE OR JURISDICTION OF INCORPORATION
- --------------------------------------------------------------- --------------------------------------
<S> <C>
G.T. Interactive Software (Europe) Limited..................... England
WizardWorks Group, Inc......................................... Minnesota
Candel Inc..................................................... Delaware
Humongous Entertainment, Inc................................... Washington
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of this
registration statement.

ARTHUR ANDERSEN LLP

New York, New York
October 18, 1996

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 17, 1995, with respect to the consolidated
financial statements of Slash Corporation included in the Registration Statement
on Form S-1 and related Prospectus of GT Interactive Software Corporation for
the registration of shares of its Common Stock.

EIDE HELMEKE PLLP

October 14, 1996
Minneapolis, Minnesota

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the reference to our firm under caption "Experts" and to the
use of our report dated March 23, 1994, with respect to the financial statements
of Slash Corporation included in the Registration Statement on Form S-1 and
related Prospectus of GT Interactive Software Corporation for the registration
of shares of its Common stock.

MCLAUGHLIN & ASSOCIATES

Minneapolis, Minnesota
October 14, 1996

<PAGE> 1

EXHIBIT 23.4

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 10, 1996, with respect to the financial
statements and schedule of WizardWorks Group, Inc. included in the Registration
Statement (Form S-1 No. 333- ) and related Prospectus of GT Interactive
Software Corporation for the registration of 17,825,000 shares of its Common
Stock.

ERNST & YOUNG LLP

Minneapolis, Minnesota
October 14, 1996

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,217
<SECURITIES> 0
<RECEIVABLES> 46,397
<ALLOWANCES> 235
<INVENTORY> 11,392
<CURRENT-ASSETS> 67,053
<PP&E> 1,909
<DEPRECIATION> 507
<TOTAL-ASSETS> 68,600
<CURRENT-LIABILITIES> 73,855
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (6,396)
<TOTAL-LIABILITY-AND-EQUITY> 68,600
<SALES> 100,029
<TOTAL-REVENUES> 100,029
<CGS> 53,598
<TOTAL-COSTS> 53,598
<OTHER-EXPENSES> 24,271
<LOSS-PROVISION> 205
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,180
<INCOME-TAX> 2,431
<INCOME-CONTINUING> 19,749
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,749
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 82,799
<SECURITIES> 9,563
<RECEIVABLES> 83,191
<ALLOWANCES> 1,844
<INVENTORY> 48,512
<CURRENT-ASSETS> 269,602
<PP&E> 7,038
<DEPRECIATION> 1,368
<TOTAL-ASSETS> 297,569
<CURRENT-LIABILITIES> 165,985
<BONDS> 0
0
0
<COMMON> 627
<OTHER-SE> 123,169
<TOTAL-LIABILITY-AND-EQUITY> 297,569
<SALES> 225,773
<TOTAL-REVENUES> 225,773
<CGS> 136,325
<TOTAL-COSTS> 136,325
<OTHER-EXPENSES> 56,583
<LOSS-PROVISION> 1,609
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,637
<INCOME-TAX> 10,517
<INCOME-CONTINUING> 23,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,120
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>