GT INTERACTIVE SOFTWARE CORP, S-1/A, 1996-12-06

GT INTERACTIVE SOFTWARE CORP
S-1/A, 1996-12-06
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 6, 1996

REGISTRATION NO. 333-14441
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 2

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)

<TABLE>
<S> <C> <C>
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)
------------------------------------
COPIES TO:

DAVID P. LEVIN, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022

(212) 715-9100

------------------------------------
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: [X]

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: [ ]
------------------------------------
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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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 DECEMBER 6, 1996

LOGO

3,458,375 SHARES

COMMON STOCK

The 3,458,375 shares (the "Shares") of Common Stock offered hereby are
being sold by the holders thereof (the "Selling Stockholders"). GT Interactive
Software Corp. ("GTIS" or the "Company") has agreed to pay the expenses of this
offering but will not receive any of the proceeds from the sale of the Shares
offered hereby. The aggregate proceeds to the Selling Stockholders will be the
purchase price of the Shares sold, less the aggregate brokers' and dealers'
discounts, commissions and concessions, and other expenses of issuance and
distribution not borne by the Company. See "Plan of Distribution" and "Selling
Stockholders." The Common Stock is listed on the Nasdaq National Market under
the symbol "GTIS." On December 5, 1996, the last reported sale price for the
Common Stock, as reported on the Nasdaq National Market, was $7 11/16 per share.
See "Price Range of Common Stock."

The Shares were originally issued as consideration to the Selling
Stockholders in connection with the acquisition by the Company of Humongous
Entertainment, Inc. The Shares may be sold from time to time by the Selling
Stockholders in transactions in the over-the-counter market or otherwise at
prices and on terms then prevailing at the time of sale, at prices related to
the then-current market price or in negotiated transactions. The Selling
Stockholders and any dealers, brokers or agents that participate with the
Selling Stockholders in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"). Any commissions or discounts received by any such dealers,
brokers or agents may be deemed to be underwriting commissions or discounts
under the Securities Act. The Company has agreed to indemnify the Selling
Stockholders against certain liabilities, including certain liabilities under
the Securities Act, or to contribute to payments which the Selling Stockholders
may be required to make in respect thereof. See "Plan of Distribution."

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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.

The date of this Prospectus is , 1996.

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

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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 THE SELLING STOCKHOLDERS. 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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<S> <C>
Summary................................................................................ 4
Risk Factors........................................................................... 7
Use of Proceeds........................................................................ 15
Price Range of Common Stock............................................................ 15
Dividend Policy........................................................................ 15
Capitalization......................................................................... 16
Selected Consolidated Financial Information............................................ 17
Pro Forma Consolidated Financial Information........................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 19
Business............................................................................... 26
Management............................................................................. 36
Principal Stockholders................................................................. 44
Certain Transactions................................................................... 46
Description of Capital Stock........................................................... 49
Shares Eligible for Future Sale........................................................ 52
Selling Stockholders................................................................... 53
Plan of Distribution................................................................... 53
Legal Matters.......................................................................... 54
Experts................................................................................ 54
Additional Information................................................................. 54
Index to Consolidated Financial Statements............................................. F-1
</TABLE>

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

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.

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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. 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
2,245 Wal-Mart stores and approximately 739 Target stores and supplies
value-priced software under specially designed programs to approximately 2,149
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 Europe and Japan. In addition, the Company released Quake for PCs
in Europe in August 1996, where it was the number one selling title upon its
release.

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THE OFFERING

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<S> <C>
Common Stock Offered by the Selling
Stockholders................................... 3,458,375 shares
Common Stock Outstanding as of November 15,
1996........................................... 66,307,064 shares(1)
Use of Proceeds.................................. The Company will receive none of the
proceeds from the sale of the Shares by
the Selling Stockholders. See "Use of
Proceeds."
Nasdaq National Market Symbol.................... GTIS
</TABLE>

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

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
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<S> <C>
BALANCE SHEET DATA(2):
Cash, cash equivalents and short-term investments............................................... $ 20,911
Working capital................................................................................. 107,630
Total assets.................................................................................... 297,726
Stockholders' equity............................................................................ 142,483
</TABLE>

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(1) Excludes (i) an aggregate of 5,486,349 shares of Common Stock reserved for
issuance upon the exercise of options granted as of November 15, 1996,
pursuant to the Company's 1995 Stock Incentive Plan, at a weighted average
exercise price of $11.31 per share and (ii) 1,459,911 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 $12.01 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, FormGen and
Humongous. The pro forma information is 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 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 8 of the Notes to the Company's
Consolidated Financial Statements).

(5) 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.

(6) 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 8 of the Notes to the Company's Consolidated Financial
Statements).

(7) Net income for the year ended December 31, 1994 would have been $11,250 had
the Company been a C corporation for the entire year.

(8) 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.

Unless otherwise indicated, all information contained in this Prospectus
gives effect to the acquisitions of WizardWorks, FormGen and Humongous.

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RECENT DEVELOPMENTS

On December 3, 1996, the Company announced that it expected net revenues
for its fourth fiscal quarter ending December 31, 1996 to be below analysts'
expectations, and that based on recent sales data, the Company expected net
revenues for its fourth quarter to be in a range of between $115 and $125
million. The Company also stated that it expected pre-tax income for the fourth
quarter to be below analysts' expectations. The Company cited as major factors
for its expectations a widespread weakness in the PC specialty retail market
exemplified by the pending Chapter 7 proceeding of Neostar Retail Group, Inc.
("Neostar"); lower-than-anticipated demand for new releases, even those in the
"mega-hit" category; and unanticipated delays in the shipment of certain of the
Company's software titles which were scheduled to reach the market in the
quarter. The Company stated that analysis of recent sales data through
Thanksgiving weekend indicated that the specialty retail channel, which
comprises a majority of industry sales, is showing an onset of weakness on a
scale that is widespread and unexpected and that going into 1997 it is taking a
conservative view of the domestic PC market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments."

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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 48%
of the Company's net sales for 1994 and 1995, respectively, and 53% and 44% for
the nine months ended September 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

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"), in July 1996 the Company acquired Humongous
Entertainment, Inc. ("Humongous") and in November 1996 the Company acquired the
business of Warner Interactive Entertainment Europe ("Warner Interactive
Europe"). 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

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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.

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 (including the Company's published and third-party distributed titles)
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."

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

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royalties to independent developers has increased and may continue to increase.
As of September 30, 1996, the Company had recorded approximately $57.4 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, 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

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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 nine months of 1996 accounted for approximately
10% and 13% of the Company's net sales for such periods, respectively, and
approximately 34% and 35% 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
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."

10
<PAGE> 12

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 a return reserve which covers expected future returns and, if
necessary, price protection, the Company's policies for stock balancing and
returns of defective or damaged products. This estimate of the potential for
future returns of products is 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.

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 --

11
<PAGE> 13

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. See
"Certain Transactions -- REPS Agreement."

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. See "Certain Transactions -- Transactions with
GoodTimes Home Video Corp." 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 condition. See "Business -- Intellectual Property and
Proprietary Rights" for the description of the Company's litigation against
Micro Star Software.

12
<PAGE> 14

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 an uninsured receivable in the amount of approximately $1.4 million from
Neostar, a retailer currently engaged in Chapter 11 bankruptcy proceedings. A
motion to convert the proceedings to Chapter 7 liquidation proceedings has been
made, but no decision in respect thereto has been made as of the date of this
Prospectus. 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. As of November
15, 1996, the Cayre Family Stockholders collectively held approximately 53.6% of
the combined voting power of the outstanding shares of Common Stock.
Accordingly, the Cayre Family Stockholders have 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 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

As of November 15, 1996, the Company had a total of 66,307,064 shares of
Common Stock outstanding. Upon the effectiveness of the registration of the
Shares, approximately 50,840,000 shares of Common Stock will be "restricted"
securities within the meaning of Rule 144 under 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 48,480,000 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 2,750,000 additional shares of Common
Stock (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,"

13
<PAGE> 15

"-- 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.
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."

14
<PAGE> 16

USE OF PROCEEDS

The Company will not receive any of the proceeds from the sale of the
Shares.

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 December 5, 1996).................................. $26 3/4 $ 7 1/2
</TABLE>

On December 5, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $7 11/16. As of November 15, 1996, there were
approximately 94 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.

15
<PAGE> 17

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1996:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 authorized and none outstanding... $ --
Common Stock, $.01 par value, 150,000,000 authorized, 66,304,499
outstanding(1)............................................................ 663
Additional paid-in capital................................................... 117,811
Retained earnings............................................................ 24,009
--------
Total stockholders' equity and capitalization................................ $142,483
========
</TABLE>

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

(1) Excludes (i) an aggregate of 5,486,349 shares of Common Stock reserved for
issuance upon the exercise of options granted as of November 15, 1996,
pursuant to the Company's 1995 Stock Incentive Plan, at a weighted average
exercise price of $11.31 per share, and (ii) 1,459,911 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 $12.01 per
share. See "Management -- Stock Incentive Plan" and "Shares Eligible for
Future Sale."

16
<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 and the nine month periods ended September 30, 1995 and 1996, is
derived from the restated audited consolidated financial statements of the
Company. 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 as if the acquisition 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>
NINE MONTHS ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
---------------------------------------- ------------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1995(1) 1995 1995(1) 1996
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $19,448 $101,826 $234,461 $253,851 $130,401 $149,791 $230,475
Cost of goods sold................................ 7,682 54,449 138,662 152,381 77,832 91,551 130,232
Selling and distribution expenses................. 6,224 16,104 41,740 43,661 23,542 25,463 51,063
General and administrative expenses............... 4,912 10,539 21,768 24,078 13,876 16,186 21,089
Merger costs...................................... -- -- -- -- -- -- 2,694
------- -------- -------- -------- ------- ------- --------
Operating income.................................. 630 20,734 32,291 33,731 15,151 16,591 25,397
Interest and other income, net.................... 18 41 795 840 535 580 2,827
------- -------- -------- -------- ------- ------- --------
Income before income taxes........................ 648 20,775 33,086 34,571 15,686 17,171 28,224
Provision for (benefit from) income taxes:
Federal and state (historical).................. 70 2,427 14,002 14,002 6,836 6,836 11,599
Benefit from change in tax status(2)............ -- -- (3,520) (3,520) (3,520) (3,520) --
Pro forma adjustment to Federal and state taxes
(unaudited)(3)................................ -- -- -- 5,461 -- 5,413 --
------- -------- -------- -------- ------- ------- --------
Total provision for income taxes.............. 70 2,427 10,482 15,943 3,316 8,729 11,599
------- -------- -------- -------- ------- ------- --------
Net income(4)..................................... $ 578 $ 18,348 $ 22,604 $ 18,628 $ 12,370 $ 8,442 16,625
======= ======== ======== ======== ======= ======= ========
Net income per share.............................. $ 0.24
Weighted average shares outstanding............... 68,903
Pro forma net income per share (unaudited)(5)..... $ 0.30 $ 0.14
Pro forma number of weighted average shares
outstanding (unaudited)(5)...................... 61,082 59,552
</TABLE>

<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1994 1995 1996
------- -------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................................. $ 4,496 $ 93,694 $ 20,911
Working capital (deficit)......................................................... (4,180) 105,748 107,630
Total assets...................................................................... 72,332 301,641 297,726
Stockholders' equity (deficit).................................................... (3,637) 126,040 142,483
</TABLE>

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

(1) Reflects the Company's acquisition of Slash 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 8 of the Notes to the Company's
Consolidated Financial Statements).

(2) 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.

(3) 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 8 of the Notes to the Company's Consolidated Financial
Statements).

(4) Net income for the year ended December 31, 1994 would have been $11,250 had
the Company been a C corporation for the entire year.

(5) 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.

17
<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 for
the year ended December 31, 1995 and the nine months ended September 30, 1995
and the historical statements of operations of Slash for the period ended June
22, 1995. The pro forma consolidated statements of operations reflect the
acquisition of Slash 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.

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 NINE MONTHS ENDED SEPTEMBER 30, 1995
--------------------------------------------- ---------------------------------------------
COMPANY SLASH(1) ADJUSTMENTS PRO FORMA COMPANY SLASH(1) ADJUSTMENTS PRO FORMA
-------- -------- ----------- --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $234,461 $21,525 $(2,135)(2) $253,851 $130,401 $21,525 $(2,135)(2) $149,791
Cost of goods sold................. 138,662 15,700 (1,981)(2) 152,381 77,832 15,700 (1,981)(2) 91,551
Selling and distribution
expenses......................... 41,740 1,921 -- 43,661 23,542 1,921 -- 25,463
General and administrative
expenses......................... 21,768 1,785 525(3) 24,078 13,876 1,785 525(3) 16,186
-------- ------- -------- -------- ------- ------ -------- -------
Operating income................... 32,291 2,119 (679) 33,731 15,151 2,119 (679) 16,591
Interest and other income, net..... 795 45 -- 840 535 45 -- 580
-------- ------- -------- -------- ------- ------ -------- -------
Income before income taxes......... 33,086 2,164 (679) 34,571 15,686 2,164 (679) 17,171
Provision for (benefit from) income
taxes:
Federal and state (historical)..... 14,002 -- -- 14,002 6,836 -- -- 6,836
Benefit from change in tax
status........................... (3,520 ) -- -- (3,520 ) (3,520 ) -- -- (3,520 )
Pro forma adjustment to Federal and
state taxes (unaudited)(4)....... -- -- 5,461 5,461 -- -- 5,413 5,413
-------- ------- -------- -------- ------- ------ -------- -------
Total provision for income taxes... 10,482 -- 5,461 15,943 3,316 -- 5,413 8,729
-------- ------- -------- -------- ------- ------ -------- -------
Net income......................... $22,604 $ 2,164 $(6,140) $ 18,628 $12,370 $ 2,164 $(6,092) $ 8,442
======== ======= ======== ======== ======= ====== ======== =======
Pro forma net income per share
(unaudited)(5)................... $ 0.30 $ 0.14
Pro forma number of weighted
average shares outstanding
(unaudited)(5)................... 61,082 59,552
</TABLE>

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

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

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

(3) 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.

(4) 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 8 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 50.8% for the nine months ended September 30, 1995 due
to some of the acquired companies not being able to utilize net operating
losses.

18
<PAGE> 20

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 nine months
ended September 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.

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.

WizardWorks, FormGen and Humongous (collectively the "'Acquired
Companies"), have each been accounted for as a pooling of interests.
Accordingly, the Company's historical Financial Statements have been restated to
include the results of the Acquired Companies.

19
<PAGE> 21

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>
FOR THE NINE
YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 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....................... 39.5 53.5 59.1 59.7 56.5
Selling and distribution expenses........ 32.0 15.8 17.8 18.1 22.2
General and administrative expenses...... 25.3 10.3 9.3 10.6 9.2
Merger costs............................. -- -- -- -- 1.2
----- ----- ----- ------- ------
Operating income......................... 3.2 20.4 13.8 11.6 11.0
Interest and other income, net........... .1 -- .3 .4 1.2
----- ----- ----- ------- ------
Income before income taxes............... 3.3 20.4 14.1 12.0 12.2
Provision for income taxes............... .3 2.4 4.5 2.5 5.0
----- ----- ----- ------- ------
Net income............................... 3.0% 18.0% 9.6% 9.5% 7.2 %
===== ===== ===== ====== =====
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995

Net sales for the nine months ended September 30, 1996 increased
approximately $100.1 million or 77% as compared to the nine months ended
September 30, 1995. In the third quarter of 1995, Microsoft(@) Windows(@) 95 was
introduced. This one time event added net sales of approximately $13.2 million;
without these sales, net sales would have increased 97%. This growth in net
sales was primarily attributable to the introduction of newly published titles
such as Duke Nukem 3D, Quake (full version in Europe, shareware version in North
America), Area 51, Final Doom for the Sony PlayStation, Heretic: Shadow of the
Serpent Rider, Bedlam, "9" and Just Me & My Dad, the continuing strong sales of
Doom and Doom-related products and increased royalty income. Additionally, the
expansion of the Company's value-priced line of software, an increase in the
shelf space available from its existing mass merchant customers, an increase in
the number of mass merchant stores supplied and serviced by the Company 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 nine months
ended September 30, 1996 increased approximately $52.4 million or 67% as
compared to the nine months ended September 30, 1995. Cost of goods sold as a
percentage of net sales decreased to 56.5% compared to 59.7%. This decrease was
primarily due to a change in product mix toward the Company's higher margin
published products, which increased to approximately 57% of net sales as
compared to approximately 47%.

Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. These expenses increased approximately $27.5
million or 117% during the nine months ended September 30, 1996 compared to the
comparable period of the prior year. The increase was due to the additional
advertising costs of approximately $6.9 million to support the growth of the
Company's published products and an increase in shipping costs of approximately
$3.6 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 approxi-

20
<PAGE> 22

mately $11.5 million to support its growth. Selling and distribution expenses as
a percentage of net sales increased to 22.2% compared to 18.1%.

General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses for the nine months ended September 30, 1996 increased approximately
$7.2 million or 52% as compared to the nine months ended September 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 decreased to 9.2% from
10.6% due to certain economies of scale.

Merger costs consist of legal, accounting and other professional fees
incurred by the Company to complete the acquisitions of the Acquired Companies.

Operating income for the nine months ended September 30, 1996 increased
from approximately $15.2 million to approximately $25.4 million, while operating
margins remained relatively consistent. Excluding merger costs, operating income
and operating margins would have been approximately $28.1 million and 12.2% for
the nine months ended September 30, 1996.

Interest and other income, net increased approximately $2.3 million for the
nine months ended September 30, 1996 as compared to the comparable period of the
prior year. This is primarily attributable to greater short-term investments and
cash balances.

The Company's provision for income taxes for the nine months ended
September 30, 1996 includes the reversal of a valuation allowance relating to a
net operating loss carry-forward of one of the Acquired Companies. Additionally,
had the Company been a C corporation for the entire nine months ended September
30, 1995, the Company's provision for income taxes would have been approximately
$7.9 million and 6.0% of net sales for the period.

Net income and net income as a percentage of net sales, on a tax adjusted
basis, for the nine months ended September 30, 1996 increased from $7.8 million
and 6.0% to $16.6 million and 7.2%. Excluding merger costs after taxes, net
income and net income as a percentage of net sales, on a pro forma basis, would
have been $18.2 million and 7.9% for the nine months ended September 30, 1996.

1995 COMPARED TO 1994

Net sales for the year ended December 31, 1995 ("1995") increased
approximately $132.6 million or 130% 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 $84.2 million or 155%
as compared to 1994. Costs of goods sold as a percentage of net sales for 1995
increased to 59.1% from 53.5% 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 53.8%. 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 $25.6 million or
159% during 1995 as compared to 1994. The increase was due to the Company's
increased sales volume, additional advertising costs

21
<PAGE> 23

of approximately $11.7 million to support the Company's published products and
costs associated with the expansion of sales and distribution staff and
distribution center of approximately $1.2 million, to support the Company's
growth. Selling and distribution expenses as a percentage of net sales increased
to 17.8% for 1995 as compared to 15.8% for 1994.

General and administrative expenses increased approximately $11.2 million
or 106.5% as compared to 1994. The increase was due primarily to costs of
approximately $6.6 million associated with additional personnel required to
support the expansion of the Company's operations, costs of approximately $1.0
million associated with new facilities (including depreciation) to accommodate
the increase in personnel, approximately $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 9.3%
from 10.3% for 1994.

1994 COMPARED TO 1993

Net sales for the year ended December 31, 1994 ("1994") increased
approximately $82.4 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 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 $46.8 million as
compared to 1993. Cost of goods sold as a percentage of net sales for 1994
increased to 53.5% from 39.5% 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 products.

Selling and distribution expenses for 1994 increased approximately $9.9
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 15.8% for 1994 from 32.0% 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 10.3% for 1994 from 25.3% for 1993. The decrease as a
percentage of net sales was primarily due to increased economies of scale.

22
<PAGE> 24

SELECTED QUARTERLY OPERATING RESULTS

The following tables set forth unaudited consolidated statements of
operations data for each of the seven calendar quarters in the period ended
September 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>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. $34,894 $31,752 $63,755 $104,060 $70,757 $73,526 $86,192
Cost of goods sold..................... 18,786 17,953 41,093 60,830 41,071 41,477 47,684
Selling and distribution expenses...... 6,577 6,527 10,438 18,198 15,132 18,162 17,769
General and administrative expenses.... 3,863 4,318 5,695 7,892 7,343 6,314 7,432
Merger costs........................... -- -- -- -- -- 1,574 1,120
------- ------- ------- -------- ------- ------- -------
Operating income....................... 5,668 2,954 6,529 17,140 7,211 5,999 12,187
Interest and other income, net......... 102 152 281 260 1,368 884 575
------- ------- ------- -------- ------- ------- -------
Income before income taxes............. 5,770 3,106 6,810 17,400 8,579 6,883 12,762
Provision for (benefit from) income
taxes................................ (1,161) 1,424 3,053 7,166 4,186 3,381 4,032
------- ------- ------- -------- ------- ------- -------
Net income............................. $ 6,931 $ 1,682 $ 3,757 $ 10,234 $ 4,393 $ 3,502 $ 8,730
======= ======= ======= ======== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED (AS A PERCENTAGE OF NET SALES)
------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 53.8 56.5 64.5 58.5 58.0 56.4 55.3
Selling and distribution expenses...... 18.8 20.6 16.4 17.5 21.4 24.7 20.6
General and administrative expenses.... 11.1 13.6 8.9 7.5 10.4 8.6 8.6
Merger costs........................... -- -- -- -- -- 2.1 1.3
------ ------ ------ ------ ------ ------ ------
Operating income....................... 16.3 9.3 10.2 16.5 10.2 8.2 14.2
Interest and other income, net......... 0.3 0.5 0.5 0.2 1.9 1.2 0.6
------ ------ ------ ------ ------ ------ ------
Income before income taxes............. 16.6 9.8 10.7 16.7 12.1 9.4 14.8
Provision for (benefit from) income
taxes................................ (3.3) 4.5 4.8 6.9 5.9 4.5 4.7
------ ------ ------ ------ ------ ------ ------
Net income............................. 19.9% 5.3% 5.9% 9.8% 6.2% 4.9% 10.1%
====== ====== ====== ====== ====== ====== ======
</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."

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.

23
<PAGE> 25

Cost of goods sold as a percentage of net sales increased to 64.5% 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 53.5%.

Selling and distribution expenses as a percentage of net sales increased to
24.7% 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 8.6% 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 quarters ended June 30, 1996 and September 30, 1996, the Company
incurred approximately $1.6 million or 2.1% of net sales and $1.1 million or
1.3% of net sales, respectively, in merger costs, consisting of legal,
accounting and other professional fees relating to the acquisitions of
WizardWorks, FormGen and Humongous.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents and short-term investments of approximately
$20.9 million. Cash used for the nine months ended September 30, 1996 amounted
to approximately $68.1 million as compared to cash provided of approximately
$9.0 million for the nine months ended September 30, 1995. This decrease in cash
and cash equivalents and short-term investments during the nine months ended
September 30, 1996 was used to fund royalty advances of $33.1 million,
investments of $9.5 million, property and equipment of $3.5 million and the
repurchase of warrants for $1.9 million, with the remainder, net of cash
generated from operations, used for working capital requirements to support the
Company's growth. Working capital, funded by available cash and internally
generated funds, grew during the period ended September 30, 1996 to
approximately $107.6 million. Accounts receivable approached seasonally high
levels with sales in the third quarter of 1996 occurring late in the quarter,
while sales in the comparable quarter of the prior year occurred earlier in the
quarter, resulting in earlier collections. Inventory increased $31.8 million
during the period ended September 30, 1996 as compared to the comparable period
of the prior year primarily to fund the rapid sales growth. When adjusting for
the one time introduction of Microsoft(R) Windows(R) 95 in the third quarter of
1995, net sales for the third quarter of 1996 increased approximately 71% when
compared to the third quarter of 1995 and inventory increased accordingly.
Royalty advances of $57.4 million as of September 30, 1996 represents advances
to over 90 developers for various products which are expected to be developed
through the year 2001. 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. Accounts payable at September 30, 1996 was only 5% higher than
accounts payable at September 30, 1995.

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

RECENT DEVELOPMENTS

24
<PAGE> 26

releases, even those in the "mega-hit" category; and unanticipated delays in the
shipment of certain of the Company's software titles which were scheduled to
reach the market in the quarter. The Company stated that analysis of recent
sales data through Thanksgiving weekend indicated that the specialty retail
channel, which comprises a majority of industry sales, is showing an onset of
weakness on a scale that is widespread and unexpected and that going into 1997
it is taking a conservative view of the domestic PC market.

25
<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

26
<PAGE> 28

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.

27
<PAGE> 29

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. That
operation was expanded in November 1996 when the Company acquired the business
of Warner Interactive Europe, a subsidiary of Warner Music Group. Recently, GTIS
successfully launched Doom for PlayStation in Europe and in Japan. 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 3.8 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);

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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.

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 GameWizards, 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. 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 November 1996, the Company invested in convertible preferred stock of
Off World Entertainment, Inc. (also known as "OddWorld Inhabitants" or
"OddWorld"), which is convertible into 50% of the common equity. 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 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 3.8 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 the U.S. and Europe.

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 GameWizards, 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 Europe and, in Spring
1996, in Japan. 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.

In November 1996, the Company acquired the business of Warner Interactive
Europe, a European subsidiary of Warner Music Group. The acquisition established
direct GTIS operations in France and Germany, as well as Australia. As part of
the transaction, the Company also acquired an internal product development team
based in Manchester, England.

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 2,245 Wal-Mart stores and
approximately 739 Target stores and supplies value-priced software under
specially designed fixture-based programs to approximately 2,149 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

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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 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."

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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 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.

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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 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 June 1997. 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

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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.

The Company also 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.

In addition, in connection with the Company's recent acquisition of the
business of Warner Interactive Europe, the Company has assumed the leases for
offices in London and Manchester, England, Hamburg, Germany and Paris, France.
Such leases will expire in December 2009, March 2000, March 1998 and December
2003, respectively.

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.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The executive officers and directors of the Company, their respective ages
as of November 15, 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 42 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) 41 Director
Alvin N. Teller 52 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

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Chief Financial Officer of the Company. From November 1993 to June 1994, Mr.
Rubin was an independent 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 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.

37
<PAGE> 39

Alvin N. Teller has served as a Director of the Company since October 31,
1996, and his term of office expires in 1997. Mr. Teller has served as
Co-Chairman, Chief Executive Officer, President and Director of Alliance
Entertainment Corp., a producer and distributor of recorded music and music- and
entertainment-related products ("Alliance"), since August 1996. From July 1996,
Mr. Teller served as Chairman and Chief Executive Officer of Red Ant
Entertainment, a startup music industry enterprise, until it was acquired by
Alliance in August 1996. Prior thereto, Mr. Teller served as Chairman and Chief
Executive Officer of MCA Music Entertainment Group, a producer and distributor
of recorded music and music-related products, from September 1989 to November
1995.

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.

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

38
<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) -- (2) -- 4,260(3)
1993 175,384 -- 9,000 -- --
Harry M. Rubin............................. 1995 250,000(4) 60,000(6) 20,000(2) 179,829 --
Executive Vice President and General 1994 169,461 25,000 -- -- --
Manager -- International Division and
Business Affairs (5)
Harry Steck................................ 1995 220,000(7) 69,000 -- 152,215 --
Vice President of Operations 1994 60,000 -- -- -- --
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.

39
<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.

40
<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

41
<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

42
<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 and as amended on October 31,
1996 (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 5,486,349 shares of Common Stock is reserved for issuance upon
the exercise of options granted as of November 15, 1996 under the 1995 Plan, at
a weighted average exercise price of $11.31 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.

43
<PAGE> 45

PRINCIPAL STOCKHOLDERS

The following table sets forth information, as of November 15, 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, and (iii) 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.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
FIVE PERCENT STOCKHOLDERS, -----------------------
DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT(1)
- --------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Joseph J. Cayre(2)................................................... 14,029,388 21.2%
Jack J. Cayre(3)..................................................... 3,693,085 5.6
Stanley Cayre(4)..................................................... 8,943,923 13.5
Kenneth Cayre(5)..................................................... 8,925,135 13.5
Ronald Chaimowitz(6)................................................. 960,832 1.4
General Atlantic Partners, LLC(7)
3 Pickwick Plaza, Greenwich, CT 06830.............................. 6,924,525 10.4
Steven A. Denning(8)................................................. 6,924,525 10.4
William E. Ford(9)................................................... 6,924,525 10.4
Jordan A. Levy(10)................................................... 33,500 *
Alvin N. Teller(11).................................................. 2,500 *
Harry M. Rubin(12)................................................... 78,729 *
Harry Steck(13)...................................................... 64,215 *
Charles F. Bond(14).................................................. 2,015,900 3.0
Various trusts for the benefit of the children of Joseph J. Cayre
16 East 40th Street, New York, NY 10016............................ 7,259,388 10.9
Various trusts for the benefit of the children of Stanley Cayre
16 East 40th Street, New York, NY 10016............................ 4,983,670 7.5
Various trusts for the benefit of the children of Kenneth and Lillian
Cayre
16 East 40th Street, New York, NY 10016............................ 7,119,688 10.7
All executive officers and directors as a group (15 persons)(15)..... 45,800,582 68.4
</TABLE>

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

* Less than 1%

(1) Based on 66,307,064 shares of the Company's Common Stock outstanding as of
November 15, 1996.

(2) Includes 7,259,388 shares in the aggregate held in various trusts for the
benefit of Joseph Cayre's children, for which trusts his wife serves as
trustee. 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.

(3) Does not include 105,000 shares subject to options not exercisable within
60 days. Includes 105,000 shares held by Jack Cayre in a grantor retained
annuity trust and 63,000 shares subject to options exercisable within 60
days. See "Management -- Executive Compensation."

(4) Includes 4,983,670 shares in the aggregate held in various trusts for the
benefit of Stanley Cayre's children, for which trusts his wife serves as
trustee. Also includes 20,000 shares held by a charitable foundation, for
which foundation Stanley Cayre and his wife serve as trustees. Stanley
Cayre disclaims beneficial ownership of the shares held by such trusts and
such foundation. Also includes 640,000 shares held by Stanley Cayre in a
grantor retained annuity trust.

(5) Includes 7,119,688 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. Kenneth Cayre disclaims beneficial

44
<PAGE> 46

ownership of the shares held by such trusts. Also includes 230,000 shares
held by Kenneth Cayre in a grantor retained annuity trust.

(6) Does not include 648,750 shares subject to options not exercisable within
60 days. Includes 72,000 shares held in a trust for the benefit of his
daughter, for which trust Ronald Chaimowitz's wife serves as trustee.
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 256,250 shares subject to
options exercisable within 60 days. See "Management -- Executive
Compensation."

(7) 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.

(8) 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.

(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. 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.

(10) Does not include 25,000 shares subject to options not exercisable within 60
days. Includes 25,000 shares subject to options exercisable within 60 days.

(11) Does not include 30,000 shares subject to options not exercisable within 60
days.

(12) Does not include 99,000 shares subject to options not exercisable within 60
days. Represents 78,729 shares subject to options exercisable within 60
days. See "Management -- Executive Compensation."

(13) Does not include 18,000 shares subject to options not exercisable within 60
days. Includes 18,000 shares subject to options exercisable within 60 days.
See "Management -- Executive Compensation." Mr. Steck is no longer an
executive officer of the Company.

(14) Does not include 4,500 shares subject to options not exercisable within 60
days. 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. See
"Management -- Executive Compensation."

(15) Does not include an aggregate of 1,224,750 shares subject to options not
exercisable within 60 days held by the executive officers and directors of
the Company. Includes an aggregate of 606,979 shares subject to options
exercisable within 60 days held by the executive officers and directors
(see also notes 3, 6 and 10 through 14). Also includes 763,200 shares held
by Mr. Bond subject to escrow (see note 14 above) and 2,565 shares of
restricted stock owned by Richard Burns, Senior Vice President of Sales,

but excludes the shares held by Mr. Steck (see note 13 above).

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<PAGE> 47

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.

Steven A. Denning and William E. 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, 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 Joseph J. Cayre,
(ii) one individual designated by Kenneth Cayre and (iii) one individual
designated by 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> 48

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 J. 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 nine months ended September 30, 1996, the Company paid
approximately $415,000 and $500,000, 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 Joseph J. Cayre and Jack J. Cayre. The lease expires in 2020.
During the year ended December 31, 1995 and the nine months ended September 30,
1996, the Company paid approximately $336,000 and $267,000, 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 nine months
ended September 30, 1996, the Company paid approximately $4,770,000 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.

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<PAGE> 49

REPS AGREEMENT

In servicing its mass merchant accounts, the Company uses field
representatives supplied by REPS, a company owned by Joseph J. Cayre, Stanley
Cayre 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 nine months ended September 30, 1996, the Company paid
approximately $1,978,000 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 nine months ended September 30, 1996, the Company's aggregate air travel
fees paid to Taughannock were approximately $357,000 and $219,000, respectively.
The Company made no payments to Eastway during the year ended December 31, 1995.
During the nine months ended September 30, 1996, the Company paid approximately
$152,000 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.

TRANSACTIONS WITH SOFTBANK SERVICES GROUP

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 some of 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 September 30, 1996, the
Company had charged to operations approximately $71,000 in fees to Upgrade.
Jordan A. Levy is the President and the Co-Chief Executive Officer of Upgrade.

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<PAGE> 50

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
66,307,064 shares were outstanding as of November 15, 1996, and 5,000,000 shares
of Preferred Stock, $.01 par value per share, of which no shares were
outstanding as of November 15, 1996.

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> 51

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> 52

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.

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<PAGE> 53

SHARES ELIGIBLE FOR FUTURE SALE

As of November 15, 1996, the Company had outstanding 66,307,064 shares of
Common Stock. Of these shares, excluding the Shares registered hereby,
12,076,496 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,
36,233,113 outstanding shares of Common Stock are eligible for resale in the
public market, subject to certain volume and other restrictions under Rule 144.

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 November
15, 1996, options to purchase 5,486,349 shares of Common Stock were outstanding,
of which approximately 1,040,000 option shares were exercisable as of November
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 48,480,000 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 Securities Act, and holders of
approximately 2,750,000 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. 1,459,911 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."

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<PAGE> 54

SELLING STOCKHOLDERS

The following table provides certain information with respect to the Shares
held by each Selling Stockholder, which information has been furnished to the
Company by the Selling Stockholders and other sources and which information the
Company has not verified. Each Selling Stockholder is hereby offering all of the
shares of Common Stock held by such Selling Stockholder, but ten percent of the
shares held by such Selling Stockholder is held in escrow, and may not be sold,
transferred, pledged or assigned by such Selling Stockholder until July 9, 1997.
The Shares offered by this Prospectus may be offered from time to time in whole
or in part by the persons named below or by their transferees. See "Plan of
Distribution."

Ms. Shelley M. Day and Mr. Ronald D. Gilbert are President and Creative
Director, respectively, of Humongous, a wholly-owned subsidiary of the Company.
The Shares were originally issued as consideration to the Selling Stockholders
in connection with the acquisition by the Company of Humongous (the
"Acquisition"). In connection with the Acquisition, the Company agreed to
register the Shares under the Securities Act. Prior to the Acquisition, Hummer
Winblad Venture Partners, L.P., Hummer Winblad Venture Partners II, L.P. and
Hummer Winblad Technology Fund II, L.P., as a group, and Random House, Inc. each
appointed a member to the Board of Directors of Humongous.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
PRIOR TO THE OFFERING
-----------------------
NUMBER OF PERCENT SHARES THAT
NAME SHARES OF CLASS(1) MAY BE OFFERED
- ----------------------------------------------------------- ---------- ----------- --------------
<S> <C> <C> <C>
Shelley M. Day............................................. 1,134,294 1.7 1,134,294
Ronald D. Gilbert.......................................... 1,134,294 1.7 1,134,294
Wayne Smith................................................ 113,429 * 113,429
Dev Madan.................................................. 9,452 * 9,452
Megan Folsom............................................... 284 * 284
Susan Klamert.............................................. 827 * 827
Michelle Cooper............................................ 591 * 591
Hummer Winblad Venture Partners, L.P....................... 283,573 * 283,573
Hummer Winblad Venture Partners II, L.P.................... 272,230 * 272,230
Hummer Winblad Technology Fund II, L.P..................... 11,343 * 11,343
Random House, Inc.......................................... 498,058 * 498,058
</TABLE>

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

* Less than 1%

(1) Based on 66,307,064 shares of the Company's Common Stock outstanding as of
November 15, 1996.

PLAN OF DISTRIBUTION

The Company will not receive any of the proceeds from the sale by the
Selling Stockholders of the Shares offered hereby. Pursuant to the registration
of the Shares hereunder, the Selling Stockholders may choose to sell all or any
of the Shares from time to time in the over-the-counter market or otherwise at
prices and on terms then prevailing at the time of sale, at prices related to
the then-current market price or in negotiated transactions. Brokers or dealers
involved in the sale may receive commissions or discounts from the Selling
Stockholders in amounts to be negotiated (and, if such broker-dealer acts as
agent for the purchaser of such Shares, from such purchaser).

The Company has agreed with the Selling Stockholders to keep the
Registration Statement, of which this Prospectus constitutes a part, effective
until the earlier of June 30, 1998 or the last day of the minimum holding period
relating to the Shares required by Rule 144(d)(1) under the Securities Act.

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<PAGE> 55

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
25,857 shares of Common Stock.

EXPERTS

The Consolidated Financial Statements and schedule of the Company for the
years ended December 31, 1993, December 31, 1994 and December 31, 1995, and the
nine months ended September 30, 1995 and 1996, 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 herein 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.

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.

54
<PAGE> 56

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
Report of Independent Public Accountants..................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and September
30, 1996.................................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993,
1994 and 1995, and the nine months ended September 30, 1995 and 1996...... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995, and the nine months ended September 30, 1995 and 1996...... F-5
Consolidated Statement of Stockholders' Equity for the years ended December
31, 1993, 1994 and 1995, and the nine months ended September 30, 1996..... F-6
Notes to the Consolidated Financial Statements............................... F-7 to F-18
WIZARDWORKS GROUP
Reports of Independent Auditors.............................................. F-19
Combined Balance Sheets as of March 31, 1995 and 1996........................ F-20
Combined Statements of Income and Retained Earnings for the years ended March
31, 1995 and 1996......................................................... F-21
Combined Statements of Cash Flows for the years ended March 31, 1995 and
1996...................................................................... F-22
Notes to Combined Financial Statements....................................... F-23 to F-29
SLASH CORPORATION
Reports of Independent Public Accountants.................................... F-30 to F-31
Balance Sheets as of December 31, 1993 and 1994.............................. F-32
Statements of Operations for the years ended December 31, 1993 and 1994 and
for the period ended June 22, 1995........................................ F-33
Statements of Cash Flows for the years ended December 31, 1993 and 1994 and
for the period ended June 22, 1995........................................ F-34
Notes to Financial Statements................................................ F-35 to F-37
FINANCIAL STATEMENT SCHEDULE
For the Three Years Ended December 31, 1995
Schedule II -- Valuation and Qualifying Accounts............................. F-38
</TABLE>

F-1
<PAGE> 57

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of 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
September 30, 1996 and December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for the nine
months ended September 30, 1995 and 1996 and 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 6.5% in 1995 and 5.4% and 9.4% in 1994, respectively, and
25.9% and 8.5% of total net sales in 1993 and for the nine months ended
September 30, 1995, respectively, of the related consolidated totals. The
financial statements of WizardWorks Group for the years ended March 31, 1996,
1995 and 1994 were audited by other auditors whose reports have been furnished
to us and our opinion, in so far as it relates to the amounts included in the
December 31, 1995, 1994 and 1993 and the September 30, 1995 consolidated
financial statements for that entity is based in part upon the reports of 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 also 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 reports of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports 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
September 30, 1996 and December 31, 1995 and 1994 and the results of their
operations and cash flows for the nine months ended September 30, 1996 and 1995
and 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 of
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

November 11, 1996 (except with respect to the acquisition discussed in Note 17,
as to which the date is November 19, 1996.)

F-2
<PAGE> 58

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,496 $ 84,069 $ 16,016
Short-term investments.................................. -- 9,625 4,895
Receivables, net........................................ 46,292 84,810 95,594
Inventories, net........................................ 11,719 49,145 63,057
Royalty advances........................................ 5,820 29,577 57,357
Deferred income taxes................................... 1,178 14,014 13,543
Prepaid expenses and other current assets............... 1,059 1,996 7,079
------- -------- --------
Total current assets................................. 70,564 273,236 257,541
Property and equipment, net............................. 1,607 6,087 8,079
Investments............................................. -- -- 9,521
Goodwill, net........................................... -- 21,286 20,466
Other assets............................................ 161 1,032 2,119
------- -------- --------
Total assets......................................... $72,332 $301,641 $ 297,726
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $29,469 $ 87,518 $ 68,655
Accrued liabilities..................................... 21,674 45,306 40,179
Royalties payable....................................... 11,886 23,509 29,354
Note payable to related party........................... 6,000 -- --
Deferred income......................................... 635 4,091 5,481
Income taxes payable.................................... 2,450 4,696 4,673
Current portion of long-term liabilities................ 1,084 1,413 1,324
Due to related party.................................... 1,546 955 245
------- -------- --------
Total current liabilities............................ 74,744 167,488 149,911
Other long-term liabilities............................. 1,225 8,113 5,332
------- -------- --------
Total liabilities.................................... 75,969 175,601 155,243
------- -------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par, 150,000,000 shares authorized,
66,304,499 shares issued and outstanding............. -- 661 663
Additional paid-in capital.............................. 5,521 117,919 117,811
Retained earnings (deficit)............................. (9,158) 7,460 24,009
------- -------- --------
Total stockholders' equity (deficit)................. (3,637) 126,040 142,483
------- -------- --------
Total liabilities and stockholders' equity
(deficit).......................................... $72,332 $301,641 $ 297,726
======= ======== ========
</TABLE>

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

F-3
<PAGE> 59

GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................ $19,448 $101,826 $234,461 $130,401 $230,475
Cost of goods sold ($406, $717,
$3,558, $788 and $4,686 to a
related party for the periods
presented, respectively)........... 7,682 54,449 138,662 77,832 130,232
Selling and distribution expenses
($570, $7,234, $3,129, $2,664 and
$2,757 to a related party for the
periods presented, respectively)... 6,224 16,104 41,740 23,542 51,063
General and administrative expenses
($180, $2,284, $654, $543 and $553
to a related party for the periods
presented, respectively)........... 4,912 10,539 21,768 13,876 21,089
Merger costs......................... -- -- -- -- 2,694
------- -------- -------- -------- --------
Operating income................... 630 20,734 32,291 15,151 25,397
Interest and other income, net....... 18 41 795 535 2,827
------- -------- -------- -------- --------
Income before income taxes......... 648 20,775 33,086 15,686 28,224
Provision for income taxes........... 70 2,427 10,482 3,316 11,599
------- -------- -------- -------- --------
Net income......................... $ 578 $ 18,348 $ 22,604 $ 12,370 $ 16,625
======= ======== ======== ======== ========
Pro forma adjustment to income tax
provision (unaudited).............. 7,098 4,616 4,569
-------- -------- --------
Pro forma net income (unaudited)..... $ 11,250 $ 17,988 $ 7,801
======== ======== ========
Net income per share................. $ 0.24
Weighted average shares
outstanding........................ 68,903
</TABLE>

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

F-4
<PAGE> 60

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................... $ 578 $ 18,348 $ 22,604 $ 12,370 $ 16,625
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 238 289 1,494 986 2,089
Deferred income taxes.............................. (44) (1,133) (11,660) (8,910) 471
Deferred income.................................... 39 596 11,090 1,492 (1,119)
Changes in operating assets and liabilities:
Receivables, net................................. (5,584) (39,241) (35,983) (22,481) (10,784)
Inventories, net................................. (1,291) (9,675) (30,473) (12,549) (13,912)
Royalty advances................................. (256) (5,436) (23,590) (12,390) (27,780)
Prepaid expenses and other current assets........ (1,044) 134 (832) (929) (5,083)
Accounts payable................................. 2,838 25,590 49,821 27,700 (18,862)
Accrued liabilities.............................. 3,468 17,748 23,630 11,220 (5,126)
Royalties payable................................ 1,043 10,842 11,219 974 5,844
Due to related party, net........................ (352) 1,546 (591) (1,460) (710)
Income taxes payable............................. 82 2,313 2,246 4,462 1,173
Other............................................ (36) (137) (784) (176) (904)
------- -------- -------- -------
Net cash provided by (used in) operating
activities.................................. (321) 21,784 18,191 309 (58,078)
------- -------- -------- -------
INVESTING ACTIVITIES:
Purchases of investments............................. -- -- -- -- (9,521)
Purchases of property and equipment.................. (488) (1,303) (5,275) (4,334) (3,518)
Purchases (sales) of short-term investments, net..... -- -- (9,625) -- 4,730
Purchase of Slash Corporation, net of cash acquired
of approximately $516.............................. -- -- 218 218 --
------- -------- -------- -------
Net cash used in investing activities......... (488) (1,303) (14,682) (4,116) (8,309)
------- -------- -------- -------
FINANCING ACTIVITIES:
Repurchase of warrants............................... -- -- -- -- (1,935)
Proceeds from exercise of stock options.............. -- -- -- -- 632
Issuance of common stock............................. -- -- 77,935 -- --
Issuance of preferred stock and warrants............. -- 5,182 15,017 15,015 --
Proceeds from issuance of note to a related party.... -- 6,000 -- 15,056 --
Repayment of notes................................... -- -- (10,471) (10,471) --
Distributions to stockholders........................ -- (28,390) (6,000) (6,000) --
Long-term liabilities................................ 2,869 (980) (417) (779) (363)
------- -------- -------- -------
Net cash provided by (used in) financing
activities.................................. 2,869 (18,188) 76,064 12,821 (1,666)
------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents... 2,060 2,293 79,573 9,014 (68,053)
Cash and cash equivalents -- beginning of year......... 143 2,203 4,496 4,496 84,069
------- -------- -------- -------
Cash and cash equivalents -- end of period............. $ 2,203 $ 4,496 $ 84,069 $ 13,510 $ 16,016
======= ======== ======== =======
</TABLE>

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

F-5
<PAGE> 61

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, 1993....................... $ -- $ 380 $ 305 $ 685
Net income..................................... -- -- 578 578
Currency translation adjustment................ -- -- (15) (15)
---- -------- -------- --------
Balance, December 31, 1993..................... -- 380 868 1,248
Proceeds from sales of preferred stock......... -- 5,182 -- 5,182
Net income..................................... -- -- 18,348 18,348
Distributions.................................. -- (41) (28,350) (28,391)
Currency translation adjustment................ -- -- (24) (24)
---- -------- -------- --------
Balance, December 31, 1994..................... -- 5,521 (9,158) (3,637)
Increase in par value of stock................. 468 (468) -- --
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..................................... -- -- 22,604 22,604
Distributions.................................. -- -- (6,000) (6,000)
Currency translation adjustment................ -- -- 14 14
---- -------- -------- --------
Balance, December 31, 1995..................... 661 117,919 7,460 126,040
Exercise of stock options...................... 2 630 -- 632
Tax benefit relating to exercise of stock
options...................................... -- 1,197 -- 1,197
Repurchase of warrants......................... -- (1,935) -- (1,935)
Net income..................................... -- -- 16,625 16,625
Currency translation adjustment................ -- -- 9 9
Unrealized loss on securities.................. -- -- (85) (85)
---- -------- -------- --------
Balance, September 30, 1996.................... $663 $ 117,811 $ 24,009 $142,483
==== ======== ======== ========
</TABLE>

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

F-6
<PAGE> 62

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"), all of the outstanding common stock of
Candel, Inc., the parent company of FormGen Corp. ("FormGen"), and all of the
outstanding common stock of Humongous Entertainment, Inc. ("Humongous").

WizardWorks, FormGen and Humongous (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.

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, FormGen and Humongous. 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.

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-7
<PAGE> 63

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 and for the nine months ended September 30, 1995
and 1996 was approximately $567, $290 and $819, respectively and zero for the
years ended December 31, 1993 and 1994.

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.

Research and Development Costs

Research and development costs related to the designing, developing and
testing of new software products are charged to expense as incurred.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1993, 1994 and 1995 and the nine months ended September
30, 1995 and 1996 amounted to $3,106, $2,675, $14,387, $6,908 and $13,855,
respectively.

F-8
<PAGE> 64

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)
Reclassifications

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

Net Income Per Share

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.

Use of Estimates

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

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 issued............................................................. 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>

F-9
<PAGE> 65

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 (CONTINUED)
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>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1995
------------- ------------
<S> <C> <C>
Net sales......................................................... $ 149,791 $253,851
Operating income.................................................. 16,591 33,731
Net income........................................................ 8,442 18,628
Pro forma net income per share.................................... 0.14 0.30
Pro forma weighted average shares outstanding..................... 59,552 61,082
</TABLE>

The primary pro forma adjustments for the nine months ended September 30,
1995 and the year ended December 31, 1995 are the additional taxes that would
have been provided had Slash been a C corporation for the relevant periods of
approximately $845 for both periods presented, the elimination of sales between
the Company and Slash of approximately $2,135 for both periods presented and the
recording of the amortization of goodwill of approximately $525 for both periods
presented.

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.

NOTE 3 -- RECEIVABLES, NET

Receivables consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
<S> <C> <C> <C>
Trade accounts receivable.................................. $45,024 $86,518 $94,982
Royalties receivable....................................... 1,384 136 3,875
Other receivables.......................................... 119 -- --
------- ------- -------
46,527 86,654 98,857
Less: allowance for doubtful accounts...................... 235 1,844 3,263
------- ------- -------
$46,292 $84,810 $95,594
======= ======= =======
</TABLE>

NOTE 4 -- INVENTORIES, NET

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
<S> <C> <C> <C>
Finished goods............................................. $10,456 $45,078 $59,878
Raw Materials.............................................. 1,263 4,067 3,179
------- ------- -------
$11,719 $49,145 $63,057
======= ======= =======
</TABLE>

F-10
<PAGE> 66

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

NOTE 5 -- INVESTMENTS

In June 1996, the Company purchased for approximately $2,400 in cash a 9.9%
investment in, and entered into a multi-titled publishing agreement with Mirage,
a U.K. developer of entertainment software.

In November 1996, the Company invested approximately $6,800 in convertible
preferred stock of Off World Entertainment, Inc., a developer of entertainment
software, which is convertible into 50% of the common equity.

NOTE 6 -- PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Computer equipment........................................... $ 526 $1,990 $ 3,607
Furniture and fixtures....................................... 204 2,059 3,055
Machinery and equipment...................................... 990 2,312 2,700
Leasehold improvements....................................... 445 1,212 1,362
------ ------ ------
2,165 7,573 10,724
Less: accumulated depreciation............................... 558 1,486 2,645
------ ------ ------
$1,607 $6,087 $ 8,079
====== ====== ======
</TABLE>

Depreciation expense for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 30, 1995 and 1996 amounted to approximately
$92, $289, $1,065, $696 and $1,269, respectively.

NOTE 7 -- ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
<S> <C> <C> <C>
Sales return reserve....................................... $18,523 $37,567 $30,172
Other...................................................... 3,151 7,739 10,007
------- ------- -------
$21,674 $45,306 $40,179
======= ======= =======
</TABLE>

F-11
<PAGE> 67

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

NOTE 8 -- INCOME TAXES

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------------
1993 1994 1995 1995 1996
------ ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Federal:
Current................................ $ -- $ 181 $16,199 $ 8,894 $11,096
Deferred............................... -- 452 (5,607) (3,426) (2,709)
------ ------- ------- ------- -------
-- 633 10,592 5,468 8,387
------ ------- ------- ------- -------
State and local:
Current................................ 135 2,689 3,773 2,143 2,247
Deferred............................... (44) (955) (812) (398) (448)
------ ------- ------- ------- -------
91 1,734 2,961 1,745 1,799
------ ------- ------- ------- -------
Foreign
Current................................ (21) 60 449 (377) 1,413
------ ------- ------- ------- -------
Provision for income taxes............... $ 70 $ 2,427 14,002 6,836 11,599
------ ------- ------- ------- -------
Benefit arising from change in tax
status................................. -- -- (3,520) (3,520) --
------ ------- ------- ------- -------
$ 70 $ 2,427 $10,482 $ 3,316 $11,599
====== ======= ======= ======= =======
Pro forma adjustment to income taxes
(unaudited)............................ 7,098 4,616 4,569
------- ------- -------
Pro forma provision for income taxes
(unaudited)............................ $ 9,525 $15,098 $ 7,885
======= ======= =======
</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.

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>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1994 1995 1995 1996
------ ------- ------ -------
<S> <C> <C> <C> <C>
Provision computed at Federal statutory rate.......... $7,271 $11,580 $5,490 $ 9,878
Increase (decrease) in provision resulting from:
State and local taxes, net of Federal tax benefit... 1,662 2,647 1,698 1,881
Foreign tax benefit................................. -- (150) (16) (117)
Other, net............................................ 592 1,021 713 (43)
------ ------- -------
Pro forma provision for income taxes (unaudited)...... $9,525 $15,098 $7,885
====== ======= ======= -------
Provision for income taxes............................ $11,599
=======
Effective income tax rate............................. 46% 46% 50% 41%

</TABLE>

F-12
<PAGE> 68

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

NOTE 8 -- INCOME TAXES (CONTINUED)

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
and the nine months ended September 30, 1996 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1994 1995 1996
------ ------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Inventory valuation......................................... $ 369 $ 5,342 $ 6,516
Deferred income............................................. 77 4,425 2,730
Sales return reserve........................................ 682 2,037 3,312
Tax loss carryforwards...................................... 990 1,255 1,255
Other....................................................... 53 2,278 2,796
------ ------- -------
2,171 15,337 16,609
------ ------- -------
Deferred tax liabilities:
Section 481 (a) adjustment.................................. -- -- (1,760)
Depreciation................................................ (3) (17) --
------ ------- -------
(3) (17) (1,760)
------ ------- -------
Valuation allowance......................................... (990) (1,306) (1,306)
Net deferred tax asset...................................... $1,178 $14,014 $13,543
====== ======= =======
</TABLE>

As of September 30, 1996, one of the Company's subsidiaries had a net
operating loss carryforward of approximately $2,915 for tax purposes expiring on
the years 2007 through 2011.

NOTE 9 -- STOCKHOLDERS' EQUITY

Capital Stock consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- --------- -------------
<S> <C> <C> <C>
Preferred Stock:
Par value per share..................................... $ -- $ 0.01 $ 0.01
Shares authorized....................................... -- 5,000 5,000
Shares issued........................................... -- -- --
Common Stock:
Par value per share..................................... $ 0.01 $ 0.01 $ 0.01
Shares authorized....................................... 49,440 150,000 150,000
Shares issued........................................... 48,000 66,146 66,304
</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 February 28, 1995, the Company's stockholders sold 10.5% of their then
outstanding shares in the Company to an 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

F-13
<PAGE> 69

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

NOTE 9 -- STOCKHOLDERS' EQUITY (CONTINUED)

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 $15,000 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.

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

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

Under the stock option plans, options may be granted to purchase shares of
the Company's common stock at not less than the fair market value at the date of
the grant, and are exercisable for a period of ten years from that date. Stock
option transactions are as follows:

<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
------ ----------------
<S> <C> <C>
Outstanding at December 31, 1994................................... -- $ --
Granted.......................................................... 4,463 0.46 - 14.00
Exercised........................................................ 8 0.47
Cancelled........................................................ -- --
----- ---------------
Outstanding at December 31, 1995................................... 4,455 0.47 - 14.00
Granted.......................................................... 1,251 0.18 - 23.50
Exercised........................................................ 159 0.18 - 9.38
Cancelled........................................................ 105 12.00 - 19.25
----- ---------------
Outstanding at September 30, 1996.................................. 5,442 $ 0.18 - $23.50
===== ===============
</TABLE>

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 July 19, 1996, the Company repurchased
approximately 211 of these warrants amounting to $1,936.

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 approximately 1,033 shares of the Company's common
stock.

On July 9, 1996, the Company acquired all of the outstanding common stock
of Humongous in exchange for approximately 3,458 shares of the Company's common
stock.

F-14
<PAGE> 70

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

NOTE 10 -- 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. The 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, were based 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. The total amount charged to
operations for manufacturing services for the nine months ended September 30,
1996 amounted to $4,686.

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 total amount charged to operations for
these services amounted to approximately $2,353 for the nine months ended
September 30, 1996.

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, Chairman of the Board of
Directors of the Company, and one plane from KCS Aviation Corp., a company owned
by Kenneth Cayre, a Director of the Company. 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 and as available basis. During the year ended December 31,
1995 and the nine months ended September 30, 1996 the Company's aggregate air
travel fees paid to Taughannock were approximately $357 and $219, respectively.
The Company made no payments to Eastway during the year ended December 31, 1995.
During the nine months ended September 30, 1996, the Company paid approximately
$152 to Eastway. There were no payments to Eastway or Taughannock during the
years ended December 31, 1993 or 1994.

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 Ronald Chaimowitz,
President of the Company, in the principal amount of $209. Such loan bore
interest at the rate of 4.5% per annum and has been repaid.

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

F-15
<PAGE> 71

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

NOTE 10 -- RELATED PARTY TRANSACTIONS (CONTINUED)

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

The Company has extended loans to the former stockholders of Formgen and a
former employee of the Company in the aggregate amount of $2,245. Such loans
bear interest at rates ranging from 6% to 8.25% per annum and become due and
payable on dates ranging from January 8, 1997 to December 1, 1997.

Transactions with SOFTBANK Services Group

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 some of 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 September 30, 1996, the
Company has charged to operations approximately $71 in fees to Upgrade. Jordan
A. Levy, a Director of the Company, is the President and the Co-Chief Executive
Officer of Upgrade.

See Notes 9 and 11 for information concerning other related party
transactions.

NOTE 11 -- 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-remaining........................................................... $ 862
1997..................................................................... 3,200
1998..................................................................... 2,585
1999..................................................................... 2,002
2000..................................................................... 1,171
Thereafter............................................................... 7,592
-------
$17,412
=======
</TABLE>

Total rent expense charged to operations for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1995 and 1996
amounted to approximately $226, $444, $1,824, $1,252 and $2,248, respectively.
Of the total rent expense charged to operations, approximately $0, $100, $751,
$520 and $767 was paid to the Company's related party during the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1995
and 1996, respectively.

NOTE 12 -- COMMITMENTS AND CONTINGENCIES

The Company had an unused letter of credit at December 31, 1994 and 1995
amounting to approximately $6,800 and $26,700, respectively, which was secured
by certain assets of the Company. The letter of credit expired during the nine
months ended September 30, 1996.

F-16
<PAGE> 72

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

NOTE 13 -- 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..................................................... $16,075
1997..................................................... 37,351
1998..................................................... 723
1999..................................................... --
2000..................................................... --
Thereafter............................................... 5,000
-------
$59,149
=======
</TABLE>

NOTE 14 -- 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 50%, 61%, 52%, 61% and 44% of net sales
to a single customer in the years ended December 31, 1993, 1994 and 1995 and the
nine months ended September 30, 1995 and 1996, respectively.

Accounts receivable due from this significant customer aggregated 76%, 48%
and 44% of accounts receivable at December 31, 1994 and 1995 and September 30,
1996, 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 15 -- SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------- ------ ------
<S> <C> <C> <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 7,242 9,360
Cash paid for interest............................... -- 31 669 442 660
</TABLE>

F-17
<PAGE> 73

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

NOTE 16 -- 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................................... $34,894 $31,752 $ 63,755 $ 104,060
Operating income............................ 5,668 2,954 6,529 17,140
Net income.................................. 6,931 1,682 3,757 10,234
Net income per share........................ $ 0.17
Weighted average shares outstanding......... 61,082
</TABLE>

Summarized quarterly financial data for the nine months ended September 30,
1996 are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30
-------- ------- ------------
<S> <C> <C> <C>
Net sales................................................ $70,757 $73,526 $ 86,192
Operating income......................................... 7,211 5,999 12,187
Net income............................................... 4,393 3,502 8,730
Net income per share..................................... $ 0.07 $ 0.05 $ 0.13
Weighted average shares outstanding...................... 66,145 66,145 69,217
</TABLE>

NOTE 17 -- SUBSEQUENT EVENT

In November 1996, the Company acquired 100% of the business of Warner
Interactive Entertainment Europe for approximately $6,000 in cash.

F-18
<PAGE> 74

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.

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

In our opinion, the 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-19
<PAGE> 75

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-20
<PAGE> 76

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-21
<PAGE> 77

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-22
<PAGE> 78

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-23
<PAGE> 79

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-24
<PAGE> 80

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-25
<PAGE> 81

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-26
<PAGE> 82

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-27
<PAGE> 83

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-28
<PAGE> 84

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-29
<PAGE> 85

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-30
<PAGE> 86

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.

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

In our opinion the 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-31
<PAGE> 87

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-32
<PAGE> 88

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-33
<PAGE> 89

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-34
<PAGE> 90

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-35
<PAGE> 91

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-36
<PAGE> 92

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-37
<PAGE> 93

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
====== ====== ====== ======
December 31, 1993......................... $-- $ 30 $-- $ 30
====== ====== ====== ======
Reserve for obsolescence:
Years ended:
December 31, 1995......................... $1,561 $5,505 $-- $ 7,066
====== ====== ====== ======
December 31, 1994......................... $ 315 $1,246 $-- $ 1,561
====== ====== ====== ======
December 31, 1993......................... $-- $ 315 $-- $ 315
====== ====== ====== ======
</TABLE>

F-38
<PAGE> 94

[GT INTERACTIVE SOFTWARE LOGO]

<PAGE> 95

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
Accounting fees and expenses................................................... 50,000
Legal fees and expenses........................................................ 50,000
Printing and engraving expenses................................................ 120,000
Miscellaneous expenses......................................................... 21,969
----------
Total........................................................................ $ 350,000
==========
</TABLE>

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 agreement
entered into with the Company, the Selling Stockholders have agreed to indemnify
directors and officers of the Company against certain liabilities, including
liabilities under the Securities Act.

II-1
<PAGE> 96

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 warrants 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 warrants 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 warrants, 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
warrants 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 warrants 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 warrants 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; (xiv) in August 1996, to
Epic Megagames, Inc., of warrants to purchase 37,500 shares of Common Stock at
an exercise price of $20.00 per share, in connection with a licensing
arrangement; and (xv) in October 1996, to Midway Home Entertainment Inc., the
assignee of the warrants originally issued to WMS Industries Inc., an aggregate
of 24,754 shares of Common Stock, upon a cashless exercise of 71,429 warrants.
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 Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995. Exhibit 4.1 and
Exhibits 10.2 through 10.20 below are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Registrant's
Registration Statement on Form S-1 filed on October 20, 1995, and all amendments
thereto (Registration No. 33-98448).

II-2
<PAGE> 97

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among the Registrant, GT Acquisition
Sub, Inc., WizardWorks Group, Inc. and the Stockholders of WizardWorks Group, Inc.
dated June 24, 1996.
2.2 Escrow Agreement by and among the Registrant, Paul D. Rinde, as the Stockholder
Representative of WizardWorks 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 (as amended on October 31, 1996).
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 (as amended on October 31, 1996).
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 Registrant 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 Registrant'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
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
</TABLE>

II-3
<PAGE> 98

<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 Registrant'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 Registrant'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 Registrant'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 Plymouth 2200, LLP, dated September 6,
1996 (incorporated herein by reference to Exhibit 10.1 filed as part of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
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 (contained in the opinion 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 years ended December 31, 1993, 1994 and 1995.
</TABLE>

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

** Previously filed.

(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.

II-4
<PAGE> 99

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 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:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration
Statement; (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement;

(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment 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;

(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.

II-5
<PAGE> 100

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 December 6, 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 December 6, 1996
- -------------------------------------
Joseph J. Cayre
/s/ ANDREW GREGOR Senior Vice President, Finance and December 6, 1996
- ------------------------------------- Administration, and Chief Financial
Andrew Gregor Officer (Principal Financial and
Accounting Officer)
/s/ RONALD CHAIMOWITZ President, Chief Executive Officer December 6, 1996
- ------------------------------------- and Director
Ronald Chaimowitz
/s/ JACK J. CAYRE Executive Vice President, Director December 6, 1996
- -------------------------------------
Jack J. Cayre
/s/ KENNETH CAYRE Director December 6, 1996
- -------------------------------------
Kenneth Cayre
/s/ STANLEY CAYRE Director December 6, 1996
- -------------------------------------
Stanley Cayre
/s/ STEVEN A. DENNING Director December 6, 1996
- -------------------------------------
Steven A. Denning
</TABLE>

<PAGE> 101

<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------- ------------------------------------ ------------------
<C> <S> <C>
/s/ WILLIAM E. FORD Director December 6, 1996
- -------------------------------------
William E. Ford
/s/ JORDAN A. LEVY Director December 6, 1996
- -------------------------------------
Jordan A. Levy
/s/ ALVIN N. TELLER Director December 6, 1996
- -------------------------------------
Alvin N. Teller
</TABLE>

<PAGE> 102

EXHIBIT INDEX

(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 Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995. Exhibit 4.1,
and Exhibits 10.2 through 10.20 below are incorporated herein by reference to
the exhibit with the corresponding number filed as part of the Registrant's
Registration Statement on Form S-1 filed on October 20, 1995, and all amendments
thereto (Registration No. 33-98448).

<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
</TABLE>

<TABLE>
<C> <S> <C>
2.1 Agreement and Plan of Reorganization by and among the Registrant, GT
Acquisition Sub, Inc., WizardWorks Group, Inc. and the Stockholders of
WizardWorks Group, Inc. dated June 24, 1996.
2.2 Escrow Agreement by and among the Registrant, Paul D. Rinde, as the
Stockholder Representative of WizardWorks 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 (as amended on October 31, 1996).
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 (as amended on October 31, 1996).
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.
</TABLE>

<PAGE> 103

<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
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 Registrant 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
Registrant'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 Registrant'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 Registrant'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
Registrant'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
Registrant'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 Plymouth 2200, LLP, dated
September 6, 1996 (incorporated herein by reference to Exhibit 10.1
filed as part of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 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 (contained in the opinion
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 years ended December 31, 1993, 1994 and
1995.
</TABLE>

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

* Filed herewith.

** Previously filed.

<PAGE> 1

EXHIBIT 3.2
AMENDED AND RESTATED

BY-LAWS

GT INTERACTIVE SOFTWARE CORP.

(AS AMENDED ON OCTOBER 31, 1996)

ARTICLE I

STOCKHOLDERS

SECTION 1. Annual Meeting. The annual meeting of stockholders shall be
held at the hour, date and place within or without the United States which is
fixed by the Board of Directors or an officer designated by the Board of
Directors, which time, date and place may subsequently be changed at any time by
vote of the Board of Directors. If no annual meeting has been held for a period
of thirteen months after the Corporation's last annual meeting of stockholders,
a special meeting in lieu thereof may be held if called as provided in these
By-Laws, and such special meeting shall have, for the purposes of these By-Laws
or otherwise, all the force and effect of an annual meeting. Any and all
references hereafter in these By-Laws to an annual meeting or annual meetings
also shall be deemed to refer to any special meeting(s) in lieu thereof.

SECTION 2. Matters to be Considered at Annual Meetings. At any annual
meeting of stockholders or any special meeting in lieu of annual meeting of
stockholders (the "Annual Meeting"), only such business shall be conducted, and
only such proposals shall be acted upon as shall have been properly brought
before such Annual Meeting. To be considered as properly brought before an
Annual Meeting, business must be: (a) specified in the notice of meeting, (b)
otherwise properly brought before the meeting by, or at the direction of, the
Board of Directors, or (c) otherwise properly brought before the meeting by any
holder of record (both as of the time notice of such proposal is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of capital stock of the Corporation entitled to vote
at such Annual Meeting on such business who complies with the requirements set
forth in this Section 2.

In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder of record of any
shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (i) give timely notice as required by this Section 2 to the
Secretary of the Corporation, and (ii) be present at such meeting, either in
person or by a representative. For the first Annual Meeting following the
initial public offering of common stock of the Corporation, a stockholder's
notice shall be timely if delivered to, or mailed to and received by, the
Corporation at its principal executive office not later than the close of
business on the later of (A) the 75th day prior to the scheduled date of such
Annual Meeting or (B) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation. For all subsequent Annual Meetings, a stockholder's notice shall be
timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not less than 75 days nor more than 120 days prior to
the anniversary date of the immediately preceding Annual Meeting (the
"Anniversary Date"); provided, however, that in the event the Annual Meeting is
scheduled to be held on a date more than 30 days before the Anniversary Date or
more than 60 days after the Anniversary Date, a stockholder's notice shall be
timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not later than the close of business on the later of
(A) the 75th day prior to the scheduled date of such Annual Meeting, or (B) the
15th day following the day on which public announcement of the date of such
Annual Meeting is first made by the Corporation.

For purposes of these By-Laws, "public announcement" shall mean: (i)
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service, (ii) a report or other document filed
publicly with the Securities and Exchange Commission (including, without
limitation, a Form 8-K), or (iii) a letter or report sent to stockholders of
record of the Corporation at the close of business on the day of the mailing of
such letter or report.
<PAGE> 2

A stockholder's notice to the Secretary shall set forth as to each matter
proposed to be brought before an Annual Meeting: (i) a brief description of the
business the stockholder desires to bring before such Annual Meeting and the
reasons for conducting such business at such Annual Meeting, (ii) the name and
address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing such business, (iii) the class and number of shares of the
Corporation's capital stock beneficially owned by the stockholder proposing such
business, (iv) the names and addresses of the beneficial owners, if any, of any
capital stock of the Corporation registered in such stockholder's name on such
books, and the class and number of shares of the Corporation's capital stock
beneficially owned by such beneficial owners, (v) the names and addresses of
other stockholders known by the stockholder proposing such business to support
such proposal, and the class and number of shares of the Corporation's capital
stock beneficially owned by such other stockholders, and (vi) any material
interest of the stockholder proposing to bring such business before such meeting
(or any other stockholders known to be supporting such proposal) in such
proposal.

If the Board of Directors or a designated committee thereof determines that
any stockholder proposal was not made in a timely fashion in accordance with the
provisions of this Section 2 or that the information provided in a stockholder's
notice does not satisfy the information requirements of this Section 2 in any
material respect, such proposal shall not be presented for action at the Annual
Meeting in question. If neither the Board of Directors nor such committee makes
a determination as to the validity of any stockholder proposal in the manner set
forth above, the presiding officer of the Annual Meeting shall determine whether
the stockholder proposal was made in accordance with the terms of this Section
2. If the presiding officer determines that any stockholder proposal was not
made in a timely fashion in accordance with the provisions of this Section 2 or
that the information provided in a stockholder's notice does not satisfy the
information requirements of this Section 2 in any material respect, such
proposal shall not be presented for action at the Annual Meeting in question. If
the Board of Directors, a designated committee thereof or the presiding officer
determines that a stockholder proposal was made in accordance with the
requirements of this Section 2, the presiding officer shall so declare at the
Annual Meeting and ballots shall be provided for use at the meeting with respect
to such proposal.

Notwithstanding the foregoing provisions of these By-Laws, a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder with respect to the matters set forth in this By-Law, and nothing in
this By-Law shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the Corporation's proxy statement, or the
Corporation's right to refuse inclusion thereof, pursuant to Rule 14a-8 under
the Exchange Act.

SECTION 3. Special Meetings. Except as otherwise required by law and
subject to the rights, if any, of the holders of any one or more series of
preferred stock, special meetings of the stockholders of the Corporation may be
called only by the Chairman of the Board, the President of the Corporation or
the Board of Directors pursuant to a resolution approved by the affirmative vote
of a majority of the Directors then in office.

SECTION 4. Matters to be Considered at Special Meetings. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.

SECTION 5. Notice of Meetings; Adjournments. A written notice of all
Annual Meetings stating the hour, date and place of such Annual Meetings shall
be given by the Secretary (or other person authorized by these By-Laws or by
law) not less than 10 days nor more than 60 days before the Annual Meeting, to
each stockholder entitled to vote thereat and to each stockholder who, by law or
under the Amended and Restated Certificate of Incorporation of the Corporation
("Certificate of Incorporation") or under these By-Laws, is entitled to such
notice, by delivering such notice to him or by mailing it, postage prepaid,
addressed to such stockholder at the address of such stockholder as it appears
on the Corporation's stock transfer books. Such notice shall be deemed to be
delivered when hand delivered to such address or deposited in the mail so
addressed, with postage prepaid.

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Notice of all special meetings of stockholders shall be given in the same
manner as provided for Annual Meetings, except that the written notice of all
special meetings shall state the purpose or purposes for which the meeting has
been called.

Notice of an Annual Meeting or special meeting of stockholders need not be
given to a stockholder if a written waiver of notice is signed before or after
such meeting by such stockholder or if such stockholder attends such meeting,
unless such attendance was for the express purpose of objecting at the beginning
of the meeting to the transaction of any business because the meeting was not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any Annual Meeting or special meeting of stockholders need be
specified in any written waiver of notice.

The Board of Directors may postpone and reschedule any previously scheduled
Annual Meeting or special meeting of stockholders and any record date with
respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 2 of this
Article I or Section 3 of Article II of these By-Laws or otherwise. In no event
shall the public announcement of an adjournment, postponement or rescheduling of
any previously scheduled meeting of stockholders commence a new time period for
the giving of a stockholder's notice under Section 2 of this Article I or
Section 3 of Article II of these By-Laws.

When any meeting is convened, the presiding officer may adjourn the meeting
if (a) no quorum is present for the transaction of business, (b) the Board of
Directors determines that adjournment is necessary or appropriate to enable the
stockholders to consider fully information which the Board of Directors
determines has not been made sufficiently or timely available to stockholders,
or (c) the Board of Directors determines that adjournment is otherwise in the
best interests of the Corporation. When any Annual Meeting or special meeting of
stockholders is adjourned to another hour, date or place, notice need not be
given of the adjourned meeting other than an announcement at the meeting at
which the adjournment is taken of the hour, date and place to which the meeting
is adjourned, provided, however, that if the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote thereat and each stockholder who, by law or under the
Corporation's Amended and Restated Certificate of Incorporation or these
By-Laws, is entitled to such notice.

SECTION 6. Quorum. The holders of shares of voting stock representing a
majority of the voting power of the outstanding shares of voting stock issued,
outstanding and entitled to vote at a meeting of stockholders, represented in
person or by proxy at such meeting, shall constitute a quorum; but if less than
a quorum is present at a meeting, the holders of voting stock representing a
majority of the voting power present at the meeting or the presiding officer may
adjourn the meeting from time to time, and the meeting may be held as adjourned
without further notice, except as provided in Section 5 of this Article I. At
such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
noticed. The stockholders present at a duly constituted meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.

SECTION 7. Voting and Proxies. Stockholders shall have one vote for each
share of stock entitled to vote owned by them of record according to the books
of the Corporation, unless otherwise provided by law or by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy, but
no proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. Proxies shall be filed with the
Secretary of the meeting before being voted. Except as otherwise limited therein
or as otherwise provided by law, proxies shall entitle the persons authorized
thereby to vote at any adjournment of such meeting. A proxy with respect to
stock held in the name of two or more persons shall be valid if executed by or
on behalf of any one of them unless at or prior to the exercise of the proxy the
Corporation receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a stockholder shall
be deemed valid, and the burden of proving invalidity shall rest on the
challenger.

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SECTION 8. Action at Meeting. When a quorum is present, any matter before
any meeting of stockholders shall be decided by the vote of a majority of the
voting power of shares of voting stock, present in person or represented by
proxy at such meeting and entitled to vote on such matter, except where a larger
vote is required by law, by the Certificate of Incorporation or by these
By-Laws. Any election by stockholders shall be determined by a plurality of the
votes cast, except where a larger vote is required by law, by the Certificate of
Incorporation or by these By-Laws. The Corporation shall not directly or
indirectly vote any shares of its own stock; provided, however, that the
Corporation may vote shares which it holds in a fiduciary capacity to the extent
permitted by law.

SECTION 9. Stockholder Lists. The Secretary (or the Corporation's transfer
agent or other person authorized by these By-Laws or by law) shall prepare and
make, at least 10 days before every Annual Meeting or special meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the hour, date and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.

SECTION 10. Presiding Officer. The Chairman of the Board or, in his
absence, such other officer as shall be designated by the Board of Directors
shall preside at all Annual Meetings or special meetings of stockholders and
shall have the power, among other things, to adjourn such meeting at any time
and from time to time, subject to Sections 5 and 6 of this Article I. The order
of business and all other matters of procedure at any meeting of the
stockholders shall be determined by the presiding officer.

SECTION 11. Voting Procedures and Inspectors of Elections. The Corporation
shall, in advance of, or at, any meeting of stockholders, appoint one or more
inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the presiding officer shall appoint one or more
inspectors to act at the meeting. Any inspector may, but need not, be an
officer, employee or agent of the Corporation. Each inspector, before entering
upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall perform such duties as are
required by the General Corporation Law of the State of Delaware, as amended
from time to time, including the counting of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of the duties of the inspectors. The presiding
officer may review all determinations made by the inspector(s), and in so doing
the presiding officer shall be entitled to exercise his or her sole judgment and
discretion and he or she shall not be bound by any determinations made by the
inspector(s). All determinations by the inspector(s) and, if applicable, the
presiding officer shall be subject to further review by any court of competent
jurisdiction.

ARTICLE II

DIRECTORS

SECTION 1. Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate of Incorporation or required by law.

SECTION 2. Number and Terms. The number of Directors of the Corporation
shall not be less than 4 nor more than 12 (plus such number of Directors, if
any, who may be elected by the holders of any series of preferred stock), and
subject to such limits shall be fixed by resolution duly adopted from time to
time by the Board of Directors.

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The Directors, other than those who may be elected by the holders of any
series of preferred stock, shall be classified, with respect to the term for
which they severally hold office, into three classes, as nearly equal in number
as possible. One class of Directors shall be initially elected for a term
expiring at the Annual Meeting to be held in 1996, another class shall be
initially elected for a term expiring at the Annual Meeting to be held in 1997,
and another class shall be initially elected for a term expiring at the Annual
Meeting to be held in 1998. Members of each class shall hold office until their
successors are duly elected and qualified or until their earlier death,
disqualification, resignation or removal. At each succeeding Annual Meeting, the
successors of the class of Directors whose term expires at that meeting shall be
elected by a plurality vote of all votes cast at such meeting to hold office for
a term expiring at the Annual Meeting held in the third year following the year
of their election.

SECTION 3. Director Nominations. Nominations of candidates for election as
Directors of the Corporation at any Annual Meeting may be made only (a) by, or
at the direction of, the Board of Directors or (b) by any holder of record (both
as of the time notice of such nomination is given by the stockholder as set
forth below and as of the record date for the Annual Meeting in question) of any
shares of the capital stock of the Corporation entitled to vote for the election
of Directors at such Annual Meeting who complies with the timing, informational
and other requirements set forth in this Section 3. Any stockholder who seeks to
make such a nomination or his representative must be present in person at the
Annual Meeting. Only persons nominated in accordance with the procedures set
forth in this Section 3 shall be eligible for election as Directors at an Annual
Meeting.

Nominations, other than those made by, or at the direction of, the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation as set forth in this Section 3. For the first Annual Meeting
following the initial public offering of the common stock of the Corporation, a
stockholder's notice shall be timely if delivered to, or mailed to and received
by, the Corporation at its principal executive office not later than the close
of business on the later of (A) the 75th day prior to the scheduled date of such
Annual Meeting or (B) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation. For all subsequent Annual Meetings, a stockholder's notice shall be
timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not less than 75 days nor more than 120 days prior to
the Anniversary Date; provided, however, that in the event the Annual Meeting is
scheduled to be held on a date more than 30 days before the Anniversary Date or
more than 60 days after the Anniversary Date, a stockholder's notice shall be
timely if delivered to, or mailed and received by, the Corporation at its
principal executive office not later than the close of business on the later of
(i) the 75th day prior to the scheduled date of such Annual Meeting or (ii) the
15th day following the day on which public announcement of the date of such
Annual Meeting is first made by the Corporation.

A stockholder's notice to the Secretary shall set forth as to each person
whom the stockholder proposes to nominate for election or re-election as a
Director: (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation's capital stock which are
beneficially owned by such person on the date of such stockholder notice, (iv)
the consent of each nominee to serve as a Director if elected, and (v) such
information concerning such person as is required to be disclosed concerning a
nominee for election as Director of the Corporation pursuant to the rules and
regulations under the Exchange Act. A stockholder's notice to the Secretary
shall further set forth as to the stockholder giving such notice: (i) the name
and address, as they appear on the Corporation's stock transfer books, of such
stockholder and of the beneficial owners (if any) of the Corporation's capital
stock registered in such stockholder's name and the name and address of other
stockholders known by such stockholder to be supporting such nominee(s), (ii)
the class and number of shares of the Corporation's capital stock which are held
of record, beneficially owned or represented by proxy by such stockholder and by
any other stockholders known by such stockholder to be supporting such
nominee(s) on the record date for the Annual Meeting in question (if such date
shall then have been made publicly available) and on the date of such
stockholder's notice, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such

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person or persons) pursuant to which the nomination or nominations are to be
made by such stockholder or in connection therewith.

If the Board of Directors or a designated committee thereof determines that
any stockholder nomination was not timely made in accordance with the terms of
this Section 3 or that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 3 in any material
respect, then such nomination shall not be considered at the Annual Meeting in
question. If neither the Board of Directors nor such committee makes a
determination as to whether a nomination was made in accordance with the
provisions of this Section 3, the presiding officer of the Annual Meeting shall
determine whether a nomination was made in accordance with such provisions. If
the presiding officer determines that any stockholder nomination was not timely
made in accordance with the terms of this Section 3 or that the information
provided in a stockholder's notice does not satisfy the informational
requirements of this Section 3 in any material respect, then such nomination
shall not be considered at the Annual Meeting in question. If the Board of
Directors, a designated committee thereof or the presiding officer determines
that a nomination was made in accordance with the terms of this Section 3, the
presiding officer shall so declare at the Annual Meeting and such nominee shall
be eligible for election at the meeting.

No person shall be elected by the stockholders as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. Election of Directors at the Annual Meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or the presiding
officer at such Annual Meeting. If written ballots are to be used, ballots
bearing the names of all the persons who have been nominated for election as
Directors at the Annual Meeting in accordance with the procedures set forth in
this Section shall be provided for use at the Annual Meeting.

SECTION 4. Qualification. No Director need be a stockholder of the
Corporation.

SECTION 5. Vacancies. Except as otherwise fixed pursuant to the provisions
of Article IV of the Certificate of Incorporation relating to the rights of the
holders of any one or more series of preferred stock to elect Directors, any and
all vacancies occurring on the Board of Directors, including, without
limitation, any vacancy created by reason of an increase in the number of
Directors, or resulting from death, resignation, disqualification, removal or
other causes, may be filled by the affirmative vote of a majority of the
remaining Directors then in office, even if such remaining Directors constitute
less than a quorum of the Board of Directors, or if such vacancy is not so
filled by the remaining Directors, by the stockholders of the Corporation. Any
Director appointed or elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of Directors in
which the new directorship was created or the vacancy occurred and until such
Director's successor shall have been duly elected and qualified or until his or
her earlier death, disqualification, resignation or removal. When the number of
Directors is increased or decreased, the Board of Directors shall determine the
class or classes to which the increased or decreased number of Directors shall
be apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director unless such Director is removed
as permitted in the Certificate of Incorporation. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.

SECTION 6. Removal. Directors may be removed from office in the manner
provided in the Certificate of Incorporation.

SECTION 7. Resignation. A Director may resign at any time by giving
written notice to the Chairman of the Board, the President or the Secretary. A
resignation shall be effective upon receipt, unless the resignation otherwise
provides.

SECTION 8. Regular Meetings. The regular annual meeting of the Board of
Directors shall be held, without notice other than this By-Law, on the same date
and at the same place as the Annual Meeting following the close of such meeting
of stockholders. Other regular meetings of the Board of Directors may be held at
such hour, date and place as the Board of Directors may by resolution from time
to time determine without notice other than such resolution.

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SECTION 9. Special Meetings. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
Directors then in office, the Chairman of the Board or the President. The person
calling any such special meeting of the Board of Directors may fix the hour,
date and place thereof.

SECTION 10. Notice of Meetings. Notice of the hour, date and place of all
special meetings of the Board of Directors shall be given to each Director by
the Secretary or the person calling such meeting, or in case of the death,
absence, incapacity or refusal of such person, by the President or such other
officer as shall be designated by the Board of Directors. Notice of any special
meeting of the Board of Directors shall be given to each Director in person, by
telephone, or by telex, telecopy telegram, or other written form of electronic
communication, sent to his business or home address, at least 24 hours in
advance of the meeting, or by written notice sent by next-day delivery courier
service to his business or home address, at least 48 hours in advance of the
meeting. Such notice shall be deemed to be delivered when hand delivered to such
address, read to such Director by telephone, deposited in the mail so addressed,
with postage thereon prepaid if mailed, dispatched or transmitted if telexed or
telecopied, or when delivered to the telegraph company if sent by telegram.

When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.

A written waiver of notice signed before or after a meeting by a Director
and filed with the records of the meeting shall be deemed to be equivalent to
notice of the meeting. The attendance of a Director at a meeting shall
constitute a waiver of notice of such meeting, except where a Director attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because such meeting is not lawfully called or
convened. Except as otherwise required by law, by the Certificate of
Incorporation or by these By-Laws, neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.

SECTION 11. Quorum. At any meeting of the Board of Directors, a majority
of the Directors then in office (but in no event less than one-third of the
total number of Directors) shall constitute a quorum for the transaction of
business, but if less than a quorum is present at a meeting, a majority of the
Directors present may adjourn the meeting from time to time, and the meeting may
be held as adjourned without further notice, except as provided in Section 10 of
this Article II. Any business which might have been transacted at the meeting as
originally noticed may be transacted at such adjourned meeting at which a quorum
is present.

SECTION 12. Action at Meeting. At any meeting of the Board of Directors at
which a quorum is present, a majority of the Directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Certificate of Incorporation or by these By-Laws.

SECTION 13. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.

SECTION 14. Manner of Participation. Directors may participate in meetings
of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all Directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-Laws.

SECTION 15. Committees. The Board of Directors, by vote of a majority of
the Directors then in office, may elect from its number, one or more committees,
including but not limited to, an Executive Committee, a Compensation Committee,
and an Audit Committee, and may delegate thereto some or all of its powers
except those which by law, by the Certificate of Incorporation or by these
By-Laws may not be delegated. Except as the Board of Directors may otherwise
determine, any such committee may make rules for

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the conduct of its business, but unless otherwise provided by the Board of
Directors or in such rules, its business shall be conducted so far as possible
in the same manner as is provided by these By-Laws for the Board of Directors.
All members of such committees shall hold such offices at the pleasure of the
Board of Directors. The Board of Directors may abolish any such committee at any
time. Any committee to which the Board of Directors delegates any of its powers
or duties shall keep records of its meetings and shall report its action to the
Board of Directors. The Board of Directors shall have power to rescind any
action of any committee, to the extent permitted by law, but no such rescission
shall have retroactive effect.

SECTION 16. Compensation of Directors. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Directors then in office provided that Directors who are serving the Corporation
as employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as Directors of the
Corporation.

ARTICLE III

OFFICERS

SECTION 1. Enumeration. The officers of the Corporation shall consist of a
Chairman of the Board, a President and Chief Executive Officer, a Chief
Financial Officer, a Secretary and such other officers, including, without
limitation, a Treasurer and one or more Vice-Presidents (including Executive
Vice Presidents or Senior Vice Presidents), Assistant Vice Presidents, Assistant
Treasurers and Assistant Secretaries, as the Board of Directors may determine.

SECTION 2. Election. At the regular annual meeting of the Board following
the annual meeting of stockholders, the Board of Directors shall elect the
Chairman of the Board, the President and Chief Executive Officer, the Chief
Financial Officer, the Treasurer and the Secretary. Other officers may be
elected by the Board of Directors at such regular annual meeting of the Board of
Directors or at any other regular or special meeting.

SECTION 3. Qualification. No officer need be a stockholder or a Director.
Any person may occupy more than one office at the Corporation at any time. Any
officer may be required by the Board of Directors to give bond for the faithful
performance of his duties in such amount and with such sureties as the Board of
Directors may determine.

SECTION 4. Tenure. Except as otherwise provided by the Certificate of
Incorporation or by these By-Laws, each of the officers of the Corporation shall
hold office until the regular annual meeting of the Board of Directors following
the next Annual Meeting and until his successor is elected and qualified or
until his earlier death, disqualification, resignation or removal.

SECTION 5. Resignation. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.

SECTION 6. Removal. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the Directors then in office.

SECTION 7. Absence or Disability. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.

SECTION 8. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.

SECTION 9. Chairman of the Board. The Chairman of the Board shall preside
at all meetings of the Board of Directors and of the stockholders at which he
shall be present and exercise and perform such powers and duties as generally
pertain to his office as well as such powers and duties as may be from time to
time assigned to him by the Board of Directors or prescribed by the By-Laws.

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SECTION 10. President and Chief Executive Officer. Unless otherwise
provided by the Board of Directors or the Certificate of Incorporation, the
President and Chief Executive Officer of the Corporation shall, subject to the
direction of the Board of Directors, manage the affairs of the Corporation's
business and have general supervision and control of the Corporation's
day-to-day business activities. In the absence of the Chairman of the Board, the
President and Chief Executive Officer shall preside, when present, at all
meetings of stockholders and of the Board of Directors. The President and Chief
Executive Officer shall have such other powers and perform such other duties as
the Board of Directors may from time to time designate.

SECTION 11. Chief Financial Officer. Unless otherwise provided by the
Board of Directors or the Certificate of Incorporation, the Chief Financial
Officer of the Corporation shall, subject to the direction of the Board of
Directors, have general charge of the financial affairs of the Corporation and
shall cause to be kept accurate books of account.

SECTION 12. Vice Presidents and Assistant Vice Presidents. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the President and Chief Executive Officer
may from time to time designate.

SECTION 13. Treasurer and Assistant Treasurers; Controller. The Treasurer
shall, subject to the direction of the Board of Directors and except as the
Board of Directors or the President and Chief Executive Officer may otherwise
provide, assist the Chief Financial Officer with the financial affairs of the
Corporation and the books of account. The Treasurer shall have custody of all
funds, securities, and valuable documents of the Corporation. He or she shall
have such other duties and powers as may be designated from time to time by the
Board of Directors or the President and Chief Executive Officer.

Any Controller or Assistant Treasurer shall have such powers and perform
such duties as the Board of Directors or the President and Chief Executive
Officer may from time to time designate.

SECTION 14. Secretary and Assistant Secretaries. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his absence from any such meeting, a temporary secretary chosen at the meeting
shall record the proceedings thereof. The Secretary shall have charge of the
stock ledger (which may, however, be kept by any transfer or other agent of the
Corporation). The Secretary shall have custody of the seal of the Corporation,
and the Secretary, or an Assistant Secretary, shall have authority to affix it
to any instrument requiring it, and, when so affixed, the seal may be attested
by his or her signature or that of an Assistant Secretary. The Secretary shall
have such other duties and powers as may be designated from time to time by the
Board of Directors or the President and Chief Executive Officer. In the absence
of the Secretary, any Assistant Secretary or any officer designated by the Board
of Directors may perform his duties and responsibilities.

Any Assistant Secretary shall have such powers and perform such duties as
the Board of Directors or the President and Chief Executive Officer may from
time to time designate.

SECTION 15. Other Powers and Duties. Subject to these By-Laws and to such
limitations and restrictions as the Board of Directors may from time to time
prescribe, the officers of the Corporation shall each have such powers and
duties as generally pertain to their respective offices, as well as such powers
and duties as from time to time may be conferred by the Board of Directors or
the President and Chief Executive Officer.

ARTICLE IV

CAPITAL STOCK

SECTION 1. Certificates of Stock. Each stockholder shall be entitled to a
certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board or the President and Chief Executive Officer
or a Vice President and by the Treasurer or the Secretary or an Assistant
Secretary. The corporate seal and the

9
<PAGE> 10

signatures by Corporation officers, the transfer agent or the registrar may be
facsimiles. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed on such certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the time of its issue. Every
certificate for shares of stock which are subject to any restriction on transfer
and every certificate issued when the Corporation is authorized to issue more
than one class or series of stock shall contain such legend with respect thereto
as is required by law.

SECTION 2. Transfers. Subject to any restrictions on transfer and unless
otherwise provided by the Board of Directors, shares of stock may be transferred
only on the books of the Corporation by the surrender to the Corporation or its
transfer agent of the certificate theretofore properly endorsed or accompanied
by a written assignment or power of attorney properly executed, with transfer
stamps (if necessary) affixed, and with such proof of the authenticity of
signature as the Corporation or its transfer agent may reasonably require.

SECTION 3. Record Holders. Except as may otherwise be required by law, by
the Certificate of Incorporation or by these By-Laws, the Corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the Corporation in accordance with the requirements of these By-Laws.

It shall be the duty of each stockholder to notify the Corporation of his
or her post office address and any changes thereto.

SECTION 4. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payments of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (1) in the case of
determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless otherwise required by law, not be more than sixty nor less than
ten days before the date of such meeting, and (2) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (1) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which the meeting is held, and (2)
the record date for determining stockholders for any other purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto.

ARTICLE V

INDEMNIFICATION

Indemnification. The Corporation shall to the fullest extent permitted by
Delaware law, as in effect from time to time (but, in the case of any amendment
of the Delaware General Corporation Law, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), indemnify each
person who is or was a director or officer of the Corporation or of any of its
wholly-owned subsidiaries who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding, or was
or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a director, officer, employee or agent of the
Corporation or of any of its subsidiaries, or is or was at any time serving, at
the request of the Corporation, any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity,
against all expense, liability and loss (including, but not limited to,
attorneys' fees, judgments, fines, excise taxes or penalties with respect to any
employee benefit plan or otherwise, and amounts paid or to be paid in
settlement) incurred or suffered by such director or officer in connection with
such proceeding; provided,

10
<PAGE> 11

however, that, except as provided in Paragraph (e) of Article Seventh of the
Certificate of Incorporation of the Corporation, the Corporation shall not be
obligated to indemnify any person under this Article in connection with a
proceeding (or part thereof) if such proceeding (or part thereof) was not
authorized by the Board of Directors of the Corporation and was initiated by
such person against (i) the Corporation or any of its subsidiaries, (ii) any
person who is or was a director, officer, employee or agent of the Corporation
or any of its subsidiaries and/or (iii) any person or entity which is or was
controlled, controlled by, or under common control with the Corporation or has
or had business relations with the Corporation or any of its subsidiaries.

Subject to the Certificate of Incorporation, expenses incurred by a
Director or officer of the Corporation in defending a civil or criminal action,
suit or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such Director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Corporation. Such expenses incurred by other employees or agents of the
Corporation may be so paid upon such terms and conditions, if any, as the Board
of Directors deems appropriate.

For purposes of this Article V, the term "Corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed by the Corporation in a consolidation
or merger; the term "other enterprise" shall include any corporation,
partnership, joint venture, limited liability company, trust or employee benefit
plan; service "at the request of the Corporation" shall include service as a
Director, officer or employee of the Corporation which imposes duties on, or
involves service by, such Director, officer or employee with respect to an
employee benefit plan, its participants or beneficiaries; any excise taxes
assessed on a person with respect to an employee benefit plan shall be deemed to
be indemnifiable expenses; and action by a person with respect to any employee
benefit plan which such person reasonably believes to be in the interest of the
participants and beneficiaries of such plan shall be deemed to be action in or
not opposed to the best interests of the Corporation.

ARTICLE VI

MISCELLANEOUS PROVISIONS

SECTION 1. Fiscal Year. Except as otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of
December of each year.

SECTION 2. Seal. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.

SECTION 3. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without Board of Directors
action may be executed on behalf of the Corporation by the Chairman of the
Board, the President and Chief Executive Officer, the Chief Financial Officer,
any Executive Vice President, or any other officer, employee or agent of the
Corporation as the Board of Directors may authorize.

SECTION 4. Voting of Securities. Unless the Board of Directors otherwise
provides, the Chairman of the Board, the President and Chief Executive Officer
or the Chief Financial Officer may waive notice of and act on behalf of the
Corporation, or appoint another person or persons to act as proxy or attorney in
fact for the Corporation with or without discretionary power and/or power of
substitution, at any meeting of securityholders or holders of any interest in
any corporation or other enterprise or organization, any of whose securities or
other interests therein are held by the Corporation.

SECTION 5. Resident Agent. The Board of Directors may appoint a resident
agent upon whom legal process may be served in any action or proceeding against
the Corporation.

SECTION 6. Corporate Records. The original or attested copies of the
Certificate of Incorporation, By-Laws and records of all meetings of the
incorporators, stockholders and the Board of Directors and the stock transfer
books, which shall contain the names of all stockholders, their record addresses
and the amount of stock held by each, may be kept outside the State of Delaware
and shall be kept at the principal office of the

11
<PAGE> 12

Corporation, at the office of its counsel or at an office of its transfer agent
or at such other place or places as may be designated from time to time by the
Board of Directors.

SECTION 7. Certificate of Incorporation. All references in these By-Laws
to the Certificate of Incorporation shall be deemed to refer to the Amended and
Restated Certificate of Incorporation of the Corporation, as amended, or amended
and restated, and in effect from time to time (including all certificates and
other instruments which are filed with the Secretary of State of the State of
Delaware pursuant to the provisions of the Delaware General Corporation Law and
which have the effect of amending or supplementing in some respect the
Certificate of Incorporation of the Corporation).

SECTION 8. Amendment of By-Laws.

(a) Amendment by Directors. Except as provided otherwise by law, these
By-Laws may be amended or repealed or new By-Laws (not inconsistent with any
provision of law or the Certificate of Incorporation) may be adopted, by the
affirmative vote of a majority of the Directors then in office.

(b) Amendment by Stockholders. These By-Laws may be amended or repealed at
any annual meeting of stockholders, or special meeting of stockholders called
for such purpose, by the affirmative vote of at least sixty percent (60%) of the
total votes eligible to be cast on such amendment or repeal by holders of voting
stock, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.

<PAGE> 1

EXHIBIT 5.1

December 6, 1996

Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: GT Interactive Software Corp. Registration
Statement on Form S-1

Ladies and Gentlemen:

We have acted as counsel to GT Interactive Software Corp., a Delaware
corporation (the "Company"), in connection with the preparation and filing of
the above-captioned Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
covering 3,458,375 shares of common stock, par value $.01 per share, of the
Company to be sold by the selling stockholders named in the Registration
Statement (the "Shares").

As such counsel, we have examined such corporate records, certificates and
other documents and such questions of law as we have considered necessary or
appropriate for the purposes of this opinion. In rendering this opinion, we have
(a) assumed (i) the genuineness of all signatures on all documents examined by
us, (ii) the authenticity of all documents submitted to us as originals, and
(iii) the conformity to original documents of all documents submitted to us as
photostatic or conformed copies and the authenticity of the originals of such
copies; and (b) relied on (i) certificates of public officials and (ii) as to
matters of fact, statements and certificates of officers of the Company.

We are attorneys admitted to the Bar of the State of New York, and we
express no opinion as to the laws of any other jurisdiction other than the laws
of the United States of America and the General Corporation Law of the State of
Delaware.

Based upon the foregoing, we are of the opinion that the Shares have been
validly authorized and issued, and are fully-paid and non-assessable shares of
common stock of the Company.

We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
prospectus forming a part of the Registration Statement. In giving such consent
we do not thereby concede that we are within the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations promulgated thereunder.

Very truly yours,

KRAMER, LEVIN, NAFTALIS & FRANKEL

<PAGE> 1

EXHIBIT 10.1

GT INTERACTIVE SOFTWARE CORP.

1995 STOCK INCENTIVE PLAN

(AS AMENDED ON OCTOBER 31, 1996)
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I
GENERAL
1.1 Purpose......................................................................... 1
1.2 Administration.................................................................. 1
1.3 Persons Eligible for Awards..................................................... 1
1.4 Types of Awards Under Plan...................................................... 1
1.5 Shares Available for Awards..................................................... 2
1.6 Adjustments Upon Changes in Capitalization or Merger............................ 2
1.7 Definitions of Certain Terms.................................................... 3
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards.................................................... 4
2.2 Grant of Stock Options and Stock Appreciation Rights............................ 4
2.3 Exercise of Options and Stock Appreciation Rights............................... 5
2.4 Termination of Employment; Death................................................ 6
2.5 Grant of Restricted Stock....................................................... 6
2.6 Grant of Performance Shares..................................................... 7
2.7 Tax Withholding................................................................. 7
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards................................... 7
3.2 Restrictions.................................................................... 8
3.3 Nonassignability................................................................ 8
3.4 Requirement of Notification of Election Under Section 83(b) of the Code......... 8
3.5 Requirement of Notification Upon Disqualifying Disposition Under Section 421(b)
of the Code..................................................................... 8
3.6 Right of Discharge Reserved..................................................... 9
3.7 Nature of Payments.............................................................. 9
3.8 Non-Uniform Determinations...................................................... 9
3.9 Other Payments or Awards........................................................ 9
3.10 Section Headings................................................................ 9
3.11 Effective Date and Term of Plan................................................. 9
3.12 Governing Law................................................................... 9
</TABLE>

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<PAGE> 3

ARTICLE I

GENERAL

1.1 Purpose

The purpose of the GT Interactive Software Corp. 1995 Stock Incentive Plan
(the "Plan") is to provide for directors, employees and prospective employees
(including officers) of, and consultants and former consultants to, GT
Interactive Software Corp. (the "Company") and its subsidiaries an incentive (a)
to enter into and remain in the service of the Company, (b) to enhance the
long-term performance of the Company, and (c) to acquire a proprietary interest
in the success of the Company.

1.2 Administration

1.2.1 Subject to Section 1.2.6, the Plan shall be administered by the
Compensation Committee (the "Committee") of the board of directors of the
Company (the "Board"), which shall consist of not less than two directors. The
members of the Committee shall be appointed by, and serve at the pleasure of,
the Board. To the extent required for transactions under the Plan to qualify for
the exemptions available under Rule 16b-3 ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934 (the "1934 Act"), all actions relating to awards
to persons subject to Section 16 of the 1934 Act shall be taken by the Board
unless each person who serves on the Committee satisfies the definition of
"non-employee director" set forth in paragraph (b)(3) of Rule 16b-3.

1.2.2 The Committee shall have the authority (a) to exercise all of the
powers granted to it under the Plan, (b) to construe, interpret and implement
the Plan and any Plan Agreements executed pursuant to Section 2.1, (c) to
prescribe, amend and rescind rules and regulations relating to the Plan,
including rules governing its own operations, (d) to make all determinations
necessary or advisable in administering the Plan, (e) to correct any defect,
supply any omission and reconcile any inconsistency in the Plan, and (f) to
amend the Plan to reflect changes in applicable law.

1.2.3 Actions of the Committee shall be taken by the vote of a majority of
its members. Any action may be taken by a written instrument signed by a
majority of the Committee members, and action so taken shall be fully as
effective as if it had been taken by a vote at a meeting.

1.2.4 The determination of the Committee on all matters relating to the
Plan or any Plan Agreement shall be final, binding and conclusive.

1.2.5 No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
thereunder.

1.2.6 Notwithstanding anything to the contrary contained herein: (a) until
the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board; and (b) the Board may, in its sole discretion, at any
time and from time to time, grant awards under the Plan or resolve to administer
the Plan. In any of the foregoing events, the term "Committee" as used herein
shall be deemed to mean the Board.

1.3 Persons Eligible for Awards

Awards under the Plan may be made to such officers, directors, and
executive, administrative, technical or professional employees of the Company
and its subsidiaries, including prospective employees conditioned on their
becoming employed, and to such current and former consultants to the Company and
its subsidiaries (collectively, "key persons") as the Committee shall in its
sole discretion select.

1.4 Types of Awards Under Plan

Awards may be made under the Plan in the form of (a) incentive stock
options, (b) nonqualified stock options, (c) stock appreciation rights, (d)
restricted stock, and (e) performance shares, all as more fully set forth in
Article II. The term "award" means any of the foregoing. No incentive stock
option may be granted to a person who is not an employee of the Company on the
date of grant.
<PAGE> 4

1.5 Shares Available for Awards

1.5.1 The total number of shares of common stock of the Company, par value
$.01 per share ("Common Stock"), which may be transferred in satisfaction of
awards granted pursuant to the Plan shall not exceed 7,800,000 shares, adjusted
as provided in Section 1.6. Shares available under the Plan may be authorized
but unissued Common Stock or authorized and issued Common Stock held in the
Company's treasury or acquired by the Company for the purposes of the Plan. The
Committee may direct that any stock certificate evidencing shares issued
pursuant to the Plan shall bear a legend setting forth such restrictions on
transferability as may apply to such shares pursuant to the Plan.

1.5.2 Except as provided in this Section 1.5 and in Section 2.2.6, there
shall be no limit on the number or the value of the shares of Common Stock that
may be transferred to any individual under the Plan.

1.6 Adjustments Upon Changes in Capitalization or Merger

1.6.1 Subject to any required action by the shareholders of the Company,
the number of shares of Common Stock covered by each outstanding award, the
number of shares of Common Stock which have been authorized for awards under
this Plan pursuant to Section 1.5.1, and the price per share of Common Stock
covered by each such outstanding award shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an award.

1.6.2 In the event of the proposed dissolution or liquidation of the
Company, all outstanding awards will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. The Committee may, in the exercise of its sole discretion in such
instances, accelerate the date on which any award becomes exercisable or fully
vested and/or declare that any award shall terminate as of a specified date.

1.6.3 In the event of a merger or consolidation ("Merger") of the Company
with or into any other corporation or entity ("Corporation"), outstanding awards
shall be assumed or an equivalent option or right shall be substituted by such
successor Corporation or a parent or subsidiary of such successor Corporation,
unless the Committee determines, in the exercise of its sole discretion, to
accelerate the date on which an award becomes exercisable or fully vested. In
the absence of an assumption or substitution of awards, awards shall, to the
extent not exercised, terminate as of the date of the closing of the Merger. For
the purposes of this Section 1.6.3, an award shall be considered assumed if, for
every share of Common Stock subject thereto immediately prior to the merger, the
grantee has the right, following the Merger, to acquire the consideration
received in the merger transaction by holders of shares of Common Stock (and if
holders were offered a choice of consideration, the type of consideration chosen
by the holders of a majority of the outstanding shares); provided, however, that
if such consideration received in the Merger was not solely common stock of the
successor Corporation or its parent, the Committee may, with the consent of the
successor Corporation and the participant, provide for the consideration to be
acquired pursuant to the award, for each share of Common Stock subject thereto,
to be solely common stock of the successor Corporation or its parent equal in
fair market value to the per share consideration received by holders of Common
Stock in the Merger. For purposes hereof, the term "Merger" shall include any
transaction in which another corporation acquires all of the issued and
outstanding Common Stock of the Company.

2
<PAGE> 5

1.7 Definitions of Certain Terms

1.7.1 The "Fair Market Value" of a share of Common Stock on any day shall
be determined as follows.

(a) If the principal market for the Common Stock (the "Market") is a
national securities exchange or the NASDAQ National Market, the last sale
price or, if no reported sales take place on the applicable date, the
average of the high bid and low asked price of Common Stock as reported for
such Market on such date or, if no such quotation is made on such date, on
the next preceding day on which there were quotations, provided that such
quotations shall have been made within the ten (10) business days preceding
the applicable date;

(b) If the Market is the NASDAQ National List, the NASDAQ Supplemental
List or another market, the average of the high bid and low asked price for
Common Stock on the applicable date, or, if no such quotations shall have
been made on such date, on the next preceding day on which there were
quotations, provided that such quotations shall have been made within the
ten (10) business days preceding the applicable date; or,

(c) In the event that neither paragraph (a) nor (b) shall apply, the
Fair Market Value of a share of Common Stock on any day shall be determined
in good faith by the Committee.

1.7.2 The term "incentive stock option" means an option that is intended to
qualify for special federal income tax treatment pursuant to sections 421 and
422 of the Internal Revenue Code of 1986 (the "Code") or a successor provision
thereof, and which is so designated in the applicable Plan Agreement. Any option
that is not specifically designated as an incentive stock option shall under no
circumstances be considered an incentive stock option. Any option that is not an
incentive stock option is referred to herein as a "nonqualified stock option."

1.7.3 The term "employment" means, in the case of a grantee of an award
under the Plan who is not an employee of the Company, the grantee's association
with the Company as a consultant or otherwise.

1.7.4 A grantee shall be deemed to have a "termination of employment" when
he is no longer employed (as an employee, adviser or consultant) by the Company
or any of its subsidiaries or by a corporation assuming awards in a transaction
to which section 425(a) of the Code applies. The Committee may in its discretion
determine (a) whether any leave of absence constitutes a termination of
employment for purposes of the Plan, (b) the impact, if any, of any such leave
of absence on awards theretofore made under the Plan, and (c) when a change in a
nonemployee's association with the Company constitutes a termination of
employment for purposes of the Plan. Such determinations of the Committee shall
be final, binding and conclusive.

1.7.5 The term "cause," when used in connection with termination of a
grantee's employment, shall have the meaning set forth in any then-effective
employment agreement between the grantee and the Company or a subsidiary
thereof. In the absence of such an employment agreement, "Cause" means: (a)
conviction of any crime (whether or not involving the Company) constituting a
felony in the jurisdiction involved; (b) engaging in any substantiated act
involving moral turpitude; (c) engaging in any act which, in each case,
subjects, or if generally known would subject, the Company to public ridicule or
embarrassment; (d) serious neglect or misconduct in the performance of the
grantee's duties for the Company or a subsidiary or willful or repeated failure
or refusal to perform such duties; in each case as determined by the Committee,
which determination shall be final, binding and conclusive.

3
<PAGE> 6

ARTICLE II

AWARDS UNDER THE PLAN

2.1 Agreements Evidencing Awards

Each award granted under the Plan shall be evidenced by a written agreement
("Plan Agreement") which shall contain such provisions as the Committee may in
its sole discretion deem necessary or desirable. By accepting an award pursuant
to the Plan, a grantee thereby agrees that the award shall be subject to all of
the terms and provisions of the Plan and the applicable Plan Agreement.

2.2 Grant of Stock Options and Stock Appreciation Rights

2.2.1 The Committee may grant incentive stock options and nonqualified
stock options (collectively, "options") to purchase shares of Common Stock from
the Company, to such key persons, and in such amounts and subject to such terms
and conditions, as the Committee shall determine in its sole discretion, subject
to the provisions of the Plan.

2.2.2 The Committee may grant stock appreciation rights to such key
persons, and in such amounts and subject to such terms and conditions, as the
Committee shall determine in its sole discretion, subject to the provisions of
the Plan. Stock appreciation rights may be granted in connection with all or any
part of, or independently of, any option granted under the Plan. A stock
appreciation right granted in connection with a nonqualified stock option may be
granted at or after the time of grant of such option. A stock appreciation right
granted in connection with an incentive stock option may be granted only at the
time of grant of such option.

2.2.3 The grantee of a stock appreciation right shall have the right,
subject to the terms of the Plan and the applicable Plan Agreement, to receive
from the Company an amount equal to (a) the excess of the Fair Market Value of a
share of Common Stock on the date of exercise of the stock appreciation right
over (b) the Fair Market Value of a share of Common Stock on the date of grant
(or over the option exercise price if the stock appreciation right is granted in
connection with an option), multiplied by (c) the number of shares with respect
to which the stock appreciation right is exercised. Payment upon exercise of a
stock appreciation right shall be in cash or in shares of Common Stock (valued
at their Fair Market Value on the date of exercise of the stock appreciation
right) or both, all as the Committee shall determine in its sole discretion.
Upon the exercise of a stock appreciation right granted in connection with an
option, the number of shares subject to the option shall be reduced by the
number of shares with respect to which the stock appreciation right is
exercised. Upon the exercise of an option in connection with which a stock
appreciation right has been granted, the number of shares subject to the stock
appreciation right shall be reduced by the number of shares with respect to
which the option is exercised.

2.2.4 Each Plan Agreement with respect to an option shall set forth the
amount (the "option exercise price") payable by the grantee to the Company upon
exercise of the option evidenced thereby. The option exercise price per share
shall be determined by the Committee in its sole discretion; provided, however,
that the option exercise price of an incentive stock option shall be at least
100% of the Fair Market Value of a share of Common Stock on the date the option
is granted, and provided further that in no event shall the option exercise
price be less than the par value of a share of Common Stock.

2.2.5 Each Plan Agreement with respect to an option or stock appreciation
right shall set forth the periods during which the award evidenced thereby shall
be exercisable, whether in whole or in part. Such periods shall be determined by
the Committee in its sole discretion; provided, however, that no incentive stock
option (or a stock appreciation right granted in connection with an incentive
stock option) shall be exercisable more than 10 years after the date of grant,
and provided further that except as and to the extent that the Committee may
otherwise provide, no option or stock appreciation right shall be exercisable
prior to the first anniversary of the date of grant.

2.2.6 To the extent that the aggregate Fair Market Value (determined as of
the time the option is granted) of the stock with respect to which incentive
stock options are first exercisable by any employee

4
<PAGE> 7

during any calendar year shall exceed $100,000, or such higher amount as may be
permitted from time to time under section 422 of the Code, such options shall be
treated as nonqualified stock options.

2.2.7 Notwithstanding the provisions of Sections 2.2.4 and 2.2.5, an
incentive stock option may not be granted under the Plan to an individual who,
at the time the option is granted, owns stock possessing more than 10% of the
total combined voting power of all classes of stock of his employer corporation
or of its parent or subsidiary corporations (as such ownership may be determined
for purposes of section 422(b)(6) of the Code) unless (a) at the time such
incentive stock option is granted the option exercise price is at least 110% of
the Fair Market Value of the shares subject thereto and (b) the incentive stock
option by its terms is not exercisable after the expiration of 5 years from the
date it is granted.

2.3 Exercise of Options and Stock Appreciation Rights

Subject to the provisions of this Article II, each option or stock
appreciation right granted under the Plan shall be exercisable as follows:

2.3.1 Unless the applicable Plan Agreement otherwise provides, an option or
stock appreciation right shall be exercisable in five substantially equal
installments, the first of which shall become exercisable on the first
anniversary of the date of grant and the remaining four of which shall become
exercisable, respectively, on the second, third, fourth and fifth anniversaries
of the date of grant.

2.3.2 Unless the applicable Plan Agreement otherwise provides, once an
installment becomes exercisable, it shall remain exercisable until expiration,
cancellation or termination of the award.

2.3.3 Unless the applicable Plan Agreement otherwise provides, an option or
stock appreciation right may be exercised from time to time as to all or part of
the shares as to which such award is then exercisable. A stock appreciation
right granted in connection with an option may be exercised at any time when,
and to the same extent that, the related option may be exercised.

2.3.4 An option or stock appreciation right shall be exercised by the
filing of a written notice with the Company, on such form and in such manner as
the Committee shall in its sole discretion prescribe. In the case of a grantee
of a stock appreciation right whose transactions in Common Stock are subject to
Section 16(b) of the 1934 Act, an election to exercise the stock appreciation
right in whole or in part shall, to the extent required to conform to applicable
interpretations of Rule 16b-3, be subject to the approval of the Committee in
its sole discretion, occur no sooner than six months after the grant thereof,
and be made irrevocably at least six months prior to such exercise unless both
the election and the exercise are made in a single "window period" of 10
business days beginning on the third day following release of the Company's
quarterly or annual summary statement of sales and earnings.

2.3.5 Any written notice of exercise of an option shall be accompanied by
payment for the shares being purchased. Such payment shall be made: (a) by
certified or official bank check (or the equivalent thereof acceptable to the
Company) for the full option exercise price; or (b) with the consent of the
Committee, by delivery of shares of Common Stock acquired at least six months
prior to the option exercise date and having a Fair Market Value (determined as
of the exercise date) equal to all or part of the option exercise price and a
certified or official bank check (or the equivalent thereof acceptable to the
Company) for any remaining portion of the full option exercise price; or (c) at
the discretion of the Committee and to the extent permitted by law, by such
other provision as the Committee may from time to time prescribe.

2.3.6 Promptly after receiving payment of the full option exercise price,
or after receiving notice of the exercise of a stock appreciation right for
which payment will be made partly or entirely in shares, the Company shall,
subject to the provisions of Section 3.2, deliver to the grantee or to such
other person as may then have the right to exercise the award, a certificate or
certificates for the shares of Common Stock for which the award has been
exercised. If the method of payment employed upon option exercise so requires,
and if applicable law permits, an optionee may direct the Company to deliver the
certificate(s) to the optionee's stockbroker.

5
<PAGE> 8

2.3.7 No grantee of an option or stock appreciation right (or other person
having the right to exercise such award) shall have any of the rights of a
stockholder of the Company with respect to shares subject to such award until
the issuance of a stock certificate to such person for such shares. Except as
otherwise provided in Section 1.5.2, no adjustment shall be made for dividends,
distributions or other rights (whether ordinary or extraordinary, and whether in
cash, securities or other property) for which the record date is prior to the
date such stock certificate is issued.

2.4 Termination of Employment; Death

2.4.1 Except to the extent otherwise provided in Section 2.4.2 or 2.4.3 or
in the applicable Plan Agreement, all options and stock appreciation rights not
theretofore exercised shall terminate upon termination of the grantee's
employment for any reason (including death).

2.4.2 If a grantee's employment terminates for any reason other than death
or dismissal for cause, then except as otherwise provided in the applicable Plan
Agreement, the grantee may exercise any outstanding option or stock appreciation
right on the following terms and conditions: (a) exercise may be made only to
the extent that the grantee was entitled to exercise the award on the date of
employment termination; and (b) exercise must occur within three months after
employment terminates, except that the three-month period shall be increased to
one year if the termination is by reason of disability, but in no event after
the expiration date of the award as set forth in the Plan Agreement. In the case
of an incentive stock option, the term "disability" for purposes of the
preceding sentence shall have the meaning given to it by section 422(c)(7) of
the Code.

2.4.3 If a grantee dies while employed by the Company or any subsidiary, or
after employment termination but during the period in which the grantee's awards
are exercisable pursuant to Section 2.4.2, then except as otherwise provided in
the applicable Plan Agreement, any outstanding option or stock appreciation
right shall be exercisable on the following terms and conditions: (a) exercise
may be made only to the extent that the grantee was entitled to exercise the
award on the date of death; and (b) exercise must occur by the earlier of the
first anniversary of the grantee's death or the expiration date of the award.
Any such exercise of an award following a grantee's death shall be made only by
the grantee's executor or administrator, unless the grantee's will specifically
disposes of such award, in which case such exercise shall be made only by the
recipient of such specific disposition. If a grantee's personal representative
or the recipient of a specific disposition under the grantee's will shall be
entitled to exercise any award pursuant to the preceding sentence, such
representative or recipient shall be bound by all the terms and conditions of
the Plan and the applicable Plan Agreement which would have applied to the
grantee including, without limitation, the provisions of Sections 3.2 and 3.7
hereof.

2.5 Grant of Restricted Stock

2.5.1 The Committee may grant restricted shares of Common Stock to such key
persons, in such amounts, and subject to such terms and conditions as the
Committee shall determine in its sole discretion, subject to the provisions of
the Plan. Restricted stock awards may be made independently of or in connection
with any other award under the Plan. A grantee of a restricted stock award shall
have no rights with respect to such award unless such grantee accepts the award
within such period as the Committee shall specify by executing a Plan Agreement
in such form as the Committee shall determine and, if the Committee shall so
require, makes payment to the Company by certified or official bank check (or
the equivalent thereof acceptable to the Company) in such amount as the
Committee may determine.

2.5.2 Promptly after a grantee accepts a restricted stock award, the
Company shall issue in the grantee's name a certificate or certificates for the
shares of Common Stock covered by the award. Upon the issuance of such
certificate(s), the grantee shall have the rights of a stockholder with respect
to the restricted stock, subject to the nontransferability restrictions and
Company repurchase rights described in Sections 2.5.4 and 2.5.5, and subject
also to such other restrictions and conditions as the Committee may in its
discretion impose.

6
<PAGE> 9

2.5.3 Unless the Committee shall otherwise determine, any certificate
issued evidencing shares of restricted stock shall remain in the possession of
the Company until such shares are free of any restrictions specified in the
applicable Plan Agreement.

2.5.4 Shares of restricted stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except as specifically provided
in this Plan or the applicable Plan Agreement. The Committee at the time of
grant shall specify the date or dates (which may depend upon or be related to
the attainment of performance goals and other conditions) on which the
nontransferability of the restricted stock shall lapse.

2.5.5 During the 120 days following termination of the grantee's employment
for any reason, the Company shall have the right to require the return of any
shares to which restrictions on transferability apply, in exchange for which the
Company shall repay to the grantee (or the grantee's estate) any amount paid by
the grantee for such shares.

2.6 Grant of Performance Shares

2.6.1 The Committee may grant performance share awards to such key persons,
and in such amounts and subject to such terms and conditions, as the Committee
shall in its sole discretion determine, subject to the provisions of the Plan.
Such an award shall entitle the grantee to acquire shares of Common Stock, or to
be paid the value thereof in cash, as the Committee shall determine, if
specified performance goals are met. Performance shares may be awarded
independently of or in connection with any other award under the Plan. A grantee
shall have no rights with respect to a performance share award unless such
grantee accepts the award by executing a Plan Agreement at such time and in such
form as the Committee shall determine.

2.6.2 The grantee of a performance share award will have the rights of a
shareholder only as to shares for which a certificate has been issued pursuant
to the award and not with respect to any other shares subject to the award.

2.6.3 Except as may otherwise be provided by the Committee at any time
prior to termination of employment, the rights of a grantee of a performance
share award shall automatically terminate upon the grantee's termination of
employment for any reason.

2.7 Tax Withholding

2.7.1 As a condition to the receipt of any shares of Common Stock pursuant
to any award or the lifting of restrictions on any award, or in connection with
any other event that gives rise to a federal or other governmental tax
withholding obligation on the part of the Company relating to an award, the
Company shall be entitled to require that the grantee remit to the Company an
amount sufficient in the opinion of the Company to satisfy such withholding
obligation.

2.7.2 Unless otherwise specified in the applicable Plan Agreement, with the
consent of the Committee, the grantee may satisfy the withholding obligation
imposed under Section 2.7.1 by electing to have the Company withhold from
delivery pursuant to the award shares of Common Stock having a Fair Market Value
equal to the amount of tax to be withheld. For this purpose, Fair Market Value
shall be determined as of the date on which the amount of tax to be withheld is
determined (and any fractional share amount shall be settled in cash).

ARTICLE III

MISCELLANEOUS

3.1 Amendment of the Plan; Modification of Awards

3.1.1 The Board may from time to time suspend, discontinue, revise or amend
the Plan in any respect whatsoever, except that no such amendment shall
materially impair any rights or materially increase any obligations under any
award theretofore made under the Plan without the consent of the grantee (or,
after the grantee's death, the person having the right to exercise the award).
For purposes of this Section 3.1, any action

7
<PAGE> 10

of the Board or the Committee that alters or affects the tax treatment of any
award shall not be considered to materially impair any rights of any grantee.

3.1.2 Shareholder approval shall be required with respect to any amendment
which: (a) increases the aggregate number of shares which may be issued pursuant
to incentive stock options or changes the class of employees eligible to receive
such options; or (b) materially increases the benefits under the Plan to persons
whose transactions in Common Stock are subject to Section 16(b) of the 1934 Act,
materially increases the number of shares which may be issued to such persons,
or materially modifies the eligibility requirements affecting such persons.

3.1.3 The Committee may amend any outstanding Plan Agreement, including,
without limitation, by amendment which would (a) accelerate the time or times at
which the award becomes unrestricted or may be exercised, or (b) waive or amend
any goals, restrictions or conditions set forth in the Agreement, or (c) extend
the scheduled expiration date of the award. However, any such amendment (other
than an amendment pursuant to Section 1.6.3) that materially impairs the rights
or materially increases the obligations of a grantee under an outstanding award
shall be made only with the consent of the grantee (or, upon the grantee's
death, the person having the right to exercise the award).

3.2 Restrictions

3.2.1 If the Committee shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other action
thereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the full satisfaction of
the Committee.

3.2.2 The term "Consent" as used herein with respect to any Plan Action
means (a) any and all listings, registrations or qualifications in respect
thereof upon any securities exchange or under any federal, state or local law,
rule or regulation, (b) any and all written agreements and representations by
the grantee with respect to the disposition of shares, or with respect to any
other matter, which the Committee shall deem necessary or desirable to comply
with the terms of any such listing, registration or qualification or to obtain
an exemption from the requirement that any such listing, qualification or
registration be made and (c) any and all consents, clearances and approvals in
respect of a Plan Action by any governmental or other regulatory bodies.

3.3 Nonassignability

To the extent necessary to comply with section 422 of the Code and with
applicable interpretations of Rule 16b-3, no award or right granted to any
person under the Plan shall be assignable or transferable other than by will or
by the laws of descent and distribution, and all such awards and rights shall be
exercisable during the life of the grantee only by the grantee or the grantee's
legal representative.

3.4 Requirement of Notification of Election Under Section 83(b) of the Code

If any grantee shall, in connection with the acquisition of shares of
Common Stock under the Plan, make the election permitted under section 83(b) of
the Code (i.e., an election to include in gross income in the year of transfer
the amounts specified in section 83(b)), such grantee shall notify the Company
of such election within 10 days of filing notice of the election with the
Internal Revenue Service, in addition to any filing and notification required
pursuant to regulations issued under the authority of Code section 83(b).

3.5 Requirement of Notification Upon Disqualifying Disposition Under Section
421(b) of the Code

Each Plan Agreement with respect to an incentive stock option shall require
the grantee to notify the Company of any disposition of shares of Common Stock
issued pursuant to the exercise of such option under the circumstances described
in section 421(b) of the Code (relating to certain disqualifying dispositions),
within 10 days of such disposition.

8
<PAGE> 11

3.6 Right of Discharge Reserved

Nothing in the Plan or in any Plan Agreement shall confer upon any grantee
the right to continue in the employ of the Company or affect any right which the
Company may have to terminate such employment.

3.7 Nature of Payments

3.7.1 Any and all grants of awards and issuances of shares of Common Stock
under the Plan shall be in consideration of services performed for the Company
by the grantee.

3.7.2 All such grants and issuances shall constitute a special incentive
payment to the grantee and shall not be taken into account in computing the
amount of salary or compensation of the grantee for the purpose of determining
any benefits under any pension, retirement, profit-sharing, bonus, life
insurance or other benefit plan of the Company or under any agreement between
the Company and the grantee, unless such plan or agreement specifically provides
otherwise.

3.8 Non-Uniform Determinations

The Committee's determinations under the Plan need not be uniform and may
be made by it selectively among persons who receive, or are eligible to receive,
awards under the Plan (whether or not such persons are similarly situated).
Without limiting the generality of the foregoing, the Committee shall be
entitled, among other things, to make non-uniform and selective determinations,
and to enter into non-uniform and selective Plan agreements, as to (a) the
persons to receive awards under the Plan, (b) the terms and provisions of awards
under the Plan, and (c) the treatment of leaves of absence pursuant to Section
1.7.4.

3.9 Other Payments or Awards

Nothing contained in the Plan shall be deemed in any way to limit or
restrict the Company from making any award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.

3.10 Section Headings

The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of the sections.

3.11 Effective Date and Term of Plan

3.11.1 The Plan was adopted by the Board on February 24, 1995, subject to
approval by the Company's shareholders. All awards under the Plan prior to such
shareholder approval are subject in their entirety to such approval.

3.11.2 Unless sooner terminated by the Board, the provisions of the Plan
respecting the grant of incentive stock options shall terminate on February 23,
2005 and no incentive stock option awards shall thereafter be made under the
Plan. All such awards made under the Plan prior to such date shall remain in
effect until such awards have been satisfied or terminated in accordance with
the terms and provisions of the Plan and the applicable Plan Agreements.

3.12 Governing Law

All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of New York, without giving
effect to principles of conflict of laws.

<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

December 6, 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 financial
statements of Slash Corporation included in the Registration Statement Form S-1
and related Prospectus of GT Interactive Software Corporation for the
registration of shares of its Common Stock.

EIDE HELMEKE PLLP

December 5, 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

December 6, 1996

<PAGE> 1

EXHIBIT 23.4

CONSENT OF ERNST & YOUNG LLP

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 of WizardWorks Group, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-14441) and related Prospectus of GT
Interactive Software Corp. for the registration of 3,458,375 shares of its
Common Stock.

ERNST & YOUNG LLP

Minneapolis, Minnesota

December 4, 1996

<ARTICLE> 5

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