SPECTRUM HOLOBYTE INC, PRE 14A, 1997-07-11

SPECTRUM HOLOBYTE INC
PRE 14A, 1997-07-11
PREPACKAGED SOFTWARE

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

SPECTRUM HOLOBYTE, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]

PRELIMINARY COPY

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 18, 1997

TO OUR STOCKHOLDERS:

You are cordially invited to attend the Annual Meeting of Stockholders of
Spectrum HoloByte, Inc. (the "Company") to be held at the Waterfront Plaza
Hotel, Jack London Square, Ten Washington Street, Oakland, California, 94607, at
9:30 a.m., local time, on September 18, 1997 for the following purposes:

1. To elect directors to serve for the ensuing year or until their
successors are elected;

2. To approve an amendment to the Company's 1994 Stock Option Plan to
increase the number of shares of Common Stock for issuance thereunder by
600,000 shares to 5,064,321 shares;

3. To approve and ratify an amendment to the Company's Employee Stock
Purchase Plan for the purpose of increasing the number of shares reserved
for issuance thereunder by 200,000 shares to 600,000 shares;

4. To amend the Company's Certificate of Incorporation to change the
Company's name from Spectrum HoloByte, Inc. to MicroProse, Inc.;

5. To ratify the selection of Coopers & Lybrand, LLP, as independent public
accountants for the Company for the fiscal year ending March 29, 1998;
and

6. To act upon such other business as may properly come before the meeting
or at any adjournment or postponement thereof.

The Board of Directors has fixed the close of business on July 21, 1997 as
the record date for determining those stockholders who will be entitled to vote
at the meeting. The stock transfer books will not be closed between the record
date and the date of the meeting.

Representation of at least a majority of all of the Company's outstanding
shares on the record date is required to constitute a quorum. Accordingly, it is
important that your shares be represented at the meeting. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. You may revoke your proxy at any
time prior to the time it is voted. If you attend the Annual Meeting and vote by
ballot, your proxy will be revoked automatically and only your vote at the
Annual Meeting will be counted.

Sincerely,

[SIG]

Stephen M. Race

CHIEF EXECUTIVE OFFICER

Alameda, California

August 1, 1997
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STOCKHOLDERS SHOULD READ THE ENTIRE PROXY STATEMENT
CAREFULLY PRIOR TO RETURNING THEIR PROXIES
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS OF
SPECTRUM HOLOBYTE, INC.
TO BE HELD SEPTEMBER 18, 1997

This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Spectrum HoloByte, Inc. ("Spectrum HoloByte" or the
"Company") of proxies to be voted at the Annual Meeting of Stockholders, which
will be held at 9:30 a.m., local time, on September 18, 1997 at the Waterfront
Plaza Hotel, Jack London Square, Ten Washington Street, Oakland, California,
94607, or at any adjournments or postponements thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting of Stockholders. This Proxy
Statement and the proxy card were first mailed to stockholders on or about
August 1, 1997.

VOTING RIGHTS AND SOLICITATION

The close of business on July 21, 1997 was the record date for stockholders
entitled to notice of and to vote at the Annual Meeting. As of that date,
Spectrum HoloByte had 28,327,557 shares of Common Stock, $.001 par value per
share (the "Common Stock") issued and outstanding, 4,000,000 shares of Series A
Preferred Stock issued and outstanding and 16,045 shares of Series B-1 Preferred
Stock issued and outstanding. All of the shares of the Company's Common Stock
outstanding on the record date are entitled to vote at the Annual Meeting and
stockholders of record entitled to vote at the meeting will have one (1) vote
for each share so held on the matters to be voted upon. The 4,000,000 shares of
Series A Preferred Stock outstanding on the record date, which are convertible
into an aggregate of 196,078 shares of Common Stock and the 16,045 shares of
Series B-1 Preferred Stock, which are convertible into an aggregate of 16,045
shares of Common Stock, are all entitled to vote at the Annual Meeting on an as-
converted to Common Stock basis.

Shares of the Company's Common Stock represented by proxies in the
accompanying form that are properly executed and returned to Spectrum HoloByte
will be voted at the Annual Meeting of Stockholders in accordance with the
stockholders' instructions contained therein. In the absence of contrary
instructions, shares represented by such proxies will be voted FOR the election
of each of the directors as described herein under "Proposal 1 -- Election of
Directors," FOR the amendment to the Company's 1994 Stock Option Plan as
described herein under "Proposal 2 -- Amendment to the 1994 Stock Option Plan,"
FOR the amendment to the Company's Employee Stock Purchase Plan as described
herein under "Proposal 3 -- Amendment to the Employee Stock Purchase Plan," FOR
the amendment to the Company's Certificate of Incorporation as described herein
under "Proposal 4 -- Amendment to the Certificate of Incorporation to change the
name of the Company," and FOR ratification of the selection of accountants as
described herein under "Proposal 5 -- Ratification of Selection of Independent
Public Accountants." Management does not know of any matters to be presented at
this Annual Meeting other than those set forth in this Proxy Statement and in
the Notice accompanying this Proxy Statement. If other matters should properly
come before the meeting, the proxy holders will vote on such matters in
accordance with their best judgment. Any stockholder has the right to revoke his
or her proxy at any time before it is voted. Abstentions and broker non-votes
are each included in the determination of the number of shares present for
quorum purposes. Abstentions are counted in tabulations of the votes cast on
proposals presented to stockholders, whereas broker non-votes are not counted
for purposes of determining whether a proposal has been approved.

The entire cost of soliciting proxies will be borne by Spectrum HoloByte.
Proxies will be solicited principally through the use of the mails, but, if
deemed desirable, may be solicited personally or by telephone, telegraph or
special letter by officers and regular Spectrum HoloByte employees for no addi-

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tional compensation. In addition, the Company may engage a proxy solicitation
service to aid in the solicitation of proxies, for which the Company would pay
customary fees not to exceed $10,000, plus expenses. Arrangements may also be
made with brokerage houses and other custodians, nominees and fiduciaries to
send proxies and proxy material to the beneficial owners of the Company's Common
Stock, and such persons may be reimbursed for their expenses.

STOCKHOLDER PROPOSALS

Stockholder proposals intended to be considered at the 1998 Annual Meeting
of Stockholders must be received by no later than April 2, 1998. The proposal
must be mailed to the Company's principal executive offices, 2490 Mariner Square
Loop, Suite 100, Alameda, California 94501, Attention: General Counsel, Legal
Department. Such proposals may be included in next year's proxy statement if
they comply with certain rules and regulations promulgated by the Securities and
Exchange Commission.

MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL 1:
ELECTION OF DIRECTORS

The nominees for the Board of Directors (the "Board") are set forth below.
The proxy holders intend to vote all proxies received by them in the
accompanying form for the nominees for directors listed below. In the event any
nominee is unable or declines to serve as a director at the time of the Annual
Meeting, the proxies will be voted for any nominee who shall be designated by
the present Board of Directors to fill the vacancy. In the event additional
persons are nominated for election as directors, the proxy holders intend to
vote all proxies received by them for the nominees listed below. As of the date
of this Proxy Statement, the Board of Directors is not aware of any nominee who
is unable or will decline to serve as a director.

NOMINEES TO BOARD OF DIRECTORS

<TABLE>
<CAPTION>
NAME DIRECTOR SINCE AGE
- ------------------- --------------- ---

<S> <C> <C>
Gilman G. Louie 1993 37

David C. Costine 1990 56

Vinod Khosla 1993 42

Stephen M. Race 1995 47

Keith Schaefer 1993 48
</TABLE>

GILMAN G. LOUIE has served as Chairman of the Board of Directors of the
Company since December 14, 1993, the effective date of the merger (the "Merger
Date") between Spectrum HoloByte, Inc., a California corporation (which for the
purposes of this section shall be referred to as "Spectrum HoloByte") and
MicroProse, Inc. (the Company prior to the Merger Date, also referred to in this
section as "MicroProse") (the "Merger"). Mr. Louie also served as Chief
Executive Officer of the Company from May 1, 1995 to August 15, 1995. Prior to
the Merger, Mr. Louie served as Chairman of the Board of Spectrum HoloByte since
its inception in September 1992. He has served as a director of the Company
since June 1993. In 1983, Mr. Louie became President and Chairman of the Board
of Nexa Corporation, a company specializing in developing software for the
microcomputer, which merged with another company to form Sphere, Inc. in 1986.
Mr. Louie then served as Chief Executive Officer and Chairman of the Board for
Sphere, Inc., where he designed the FALCON-Registered Trademark- computer game.
Mr. Louie holds a Bachelor's degree in Business Administration from San
Francisco State University where he graduated magna cum laude.

DAVID C. COSTINE has served as a director of the Company since November
1990. Since 1987, Mr. Costine has been President of Costine Management Co. Since
1988, he has been a General Partner of

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Costine Associates, L.P., which is the General Partner of Corporate Venture
Partners, L.P., a venture capital fund that is a stockholder of the Company.
From 1982 to 1987, he served as General Partner of Venturtech Associates, L.P.,
the General Partner of Venturtech II, L.P., a venture capital fund. He currently
serves on the Board of Directors of Yes! Entertainment and two private
companies. Mr. Costine has a Bachelor's degree in Mechanical Engineering from
Cornell University and an M.B.A. from Harvard University.

VINOD KHOSLA has been a director of the Company since the Merger Date and of
Spectrum HoloByte since its inception in September 1992. He has been a General
Partner at Kleiner Perkins Caufield & Byers, a venture capital firm, since
November 1987. Mr. Khosla was a co-founder of Daisy Systems, Inc., a computer
aided engineering company, and President and co-founder of Sun Microsystems, a
computer technology company. He currently serves on the Board of Directors of
PictureTel, the 3DO Company, Excite, Inc., and several private companies. Mr.
Khosla holds a Bachelor of Technology in Electrical Engineering from the Indian
Institute of Technology in New Delhi, a Master's Degree in Biomedical
Engineering from Carnegie Mellon University and an M.B.A. from the Stanford
University Graduate School of Business.

STEPHEN M. RACE has been a director and the Chief Executive Officer of the
Company since August 1995. From May 1994 until August 1995, Mr. Race served as
president of Sony Computer Entertainment of America. Prior to joining Sony
Computer Entertainment of America, Mr. Race directed his own consulting practice
and served as a consultant to a variety of computer software and hardware
companies from July 1991 until May 1994. He also served as General Manager,
Athletic Footwear for Reebok International Ltd. from November 1990 to June 1991
and as Chairman and Chief Executive Officer of Homestar International from April
1987 to October 1990. Mr. Race has a B.S. in economics and an M.S. in Energy and
Power Management from the University of Pennsylvania and an M.B.A. from the
Wharton Graduate School of Finance and Commerce.

KEITH SCHAEFER has been a director of the Company since the Merger Date and
of Spectrum HoloByte since March 1993. He is currently President and Chief
Executive Officer of Cybernautics, Inc., a privately held on-line services and
interactive television company. From October 1992 until June 1994, Mr. Schaefer
served as President of Paramount Communications Technology Group, Inc., a global
entertainment and communications company. Prior to joining Paramount
Communications Technology Group, Inc., Mr. Schaefer was President and Chief
Executive Officer of Computer Curriculum Corporation, a Paramount Communications
Company. From January 1991 to July 1991, he was President and Chief Executive
Officer of WOW, Inc. He has a B.A. from the University of Pittsburgh and
attended the University of California, Los Angeles Graduate School of Business.

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

BOARD MEETINGS AND COMMITTEES

During the fiscal year ended March 30, 1997, the Board of Directors of the
Company held a total of eight meetings. During this period, each director
attended or participated in at least 75% of the aggregate of (i) the total
number of meetings of the Board that were held while they were members and (ii)
the total number of meetings held by all committees of the Board of which they
were members.

The Company has an Audit Committee and a Compensation Committee of the Board
of Directors. There is no nominating committee or committee performing the
functions of such committee.

The Audit Committee meets with the Company's financial management and its
independent accountants at various times during each year and reviews internal
control conditions, audit plans and results, and financial reporting procedures.
This Committee, consisting of Messrs. Costine and Schaefer, held two meetings
during fiscal 1997. Currently, the Committee consists of Messrs. Costine and
Schaefer.

The Compensation Committee reviews and makes recommendations with respect to
matters related to the hiring, employment and compensation of the Company's
officers and employees. This Committee, consisting of Messrs. Schaefer and
Khosla, held eight meetings during fiscal 1997. In April 1997,

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Mr. Khosla resigned from the Compensation Committee and was replaced by Mr.
Costine. Currently, the Committee consists of Messrs. Schaefer and Costine.

DIRECTOR REMUNERATION

Members of the Board are reimbursed for all out-of-pocket costs incurred in
connection with their attendance at Board and committee meetings. Although the
Board of Directors may fix the compensation of directors and committee members
and may pay a salary or a fixed sum for each meeting attended, no such cash
compensation is currently paid to the directors. Under a self-administering
automatic option grant program in effect under the Company's 1994 Stock Option
Plan, an individual who first becomes a non-employee member of the Board will
receive an automatic one-time option grant for 10,000 shares of the Company's
Common Stock upon commencement of Board service, and each individual with six or
more months of Board service will receive an automatic option grant for an
additional 2,500 shares at each Annual Stockholders Meeting at which he or she
continues to serve as a non-employee Board member.

The exercise price of such options may not be less than the fair market
value per share of the Company's Common Stock (as determined by the closing
price reported by Nasdaq on the date of grant) and the term of such options may
not exceed ten years.

Automatic option grants become exercisable for 12% of the option shares upon
completion of six months of Board service from the date of grant, and for the
balance of the option shares in a series of 44 equal successive monthly
installments thereafter, provided the director remains a member of the Board
through such date. However, full and immediate vesting will occur upon certain
mergers involving the Company or a sale, transfer or other disposition of all or
substantially all of the Company's assets (a "Corporate Transaction") and upon
certain types of "hostile take-overs". Also, each automatic option grant will be
automatically canceled upon the occurrence of certain Corporate Transactions not
approved by the Board of Directors (a "Hostile Take-Over") whether or not the
option is otherwise at the time exercisable for such shares. In return, the
optionee will be entitled to a cash distribution from the Company in an amount
equal to the excess of (i) the greater of (a) the fair market value per share on
the date of cancellation, as determined in accordance with the valuation
provisions of the Option Plan, or (b) the highest reported price per share paid
by the acquiring entity in effecting the Hostile Take-Over over (ii) the
aggregate exercise price payable for such shares.

Upon cessation of Board service, the options held by the director will
remain exercisable for six months. Should the optionee die while holding one or
more options, then those options may subsequently be exercised by the personal
representative of the optionee's estate or by the persons to whom such options
are transferred by the optionee's will or by the laws of inheritance within
twelve months of the director's death.

In accordance with the provisions of the Option Plan, Messrs. Costine,
Khosla, and Schaefer were each granted options for 10,000 shares of the
Company's Common Stock at an exercise price of $9.75 per share on December 16,
1993 and options for 2,500 shares of the Company's Common Stock at an exercise
price of $13.25 on September 21, 1994, options for 2,500 shares of the Company's
Common Stock at an exercise price of $11.25 on October 5, 1995, and options for
2,500 shares of the Company's Common Stock at an exercise price of $6.125 on
September 18, 1996.

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors recommends that the stockholders vote FOR the
election of each of the above nominees.

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PROPOSAL 2:
AMENDMENT TO THE 1994 STOCK OPTION PLAN

INTRODUCTION

The stockholders are being asked to vote on a proposal to amend the
Company's 1994 Stock Option Plan ("Option Plan"). The Option Plan was adopted by
the Company's Board of Directors to be effective as of May 5, 1994 and approved
by the stockholders on September 21, 1994, and a total of 2,964,321 shares of
Common Stock were initially reserved for issuance thereunder. In July 1995, the
Board amended the Option Plan to increase the number of shares reserved for
issuance thereunder by 1,500,000 shares to an aggregate of 4,464,321 shares, and
the amendment was approved by the stockholders on October 5, 1995. The Option
Plan was amended by the Board on July 9, 1997 to increase the number of shares
of Common Stock authorized for issuance thereunder by 600,000 shares to
5,064,321 shares in the aggregate. The Option Plan is the successor to the 1991
Employee Stock Option Plan ("1991 Option Plan"), and all outstanding stock
options under the 1991 Option Plan have been incorporated into the Option Plan.

The Board believes the proposed amendment is in the best interests of the
Company and its stockholders for a number of reasons. First, the Board believes
that option grants serve to incentivize current employees and to align their
interests with those of the Company's stockholders. Second, the Board believes
that option grants are an important element of the Company's strategy to attract
and retain qualified employees. Competition for qualified employees in the
entertainment software market is extremely intense, and due to the rapid growth
of many successful companies in this sector, such competition is increasing. The
Board believes that in order to remain competitive with other entertainment
software companies with regard to its long term incentive plans, the Company
must continue to offer stock options. Without the proposed amendment, the
Company may deplete the options available for grant within the next year.

The terms and provisions of the Option Plan are summarized below. The
summary, however, does not purport to be a complete description of the Option
Plan. Copies of the actual plan document may be obtained by any stockholder upon
written request to the Secretary of the Company at the corporate offices in
Alameda, California.

PLAN STRUCTURE; ELIGIBILITY

The Option Plan is comprised of two (2) parts: a discretionary option grant
program and an automatic option grant program. Under the discretionary option
grant program, options may be granted to employees (including officers),
consultants and other independent contractors of the Company or subsidiaries who
contribute to the management, growth and financial success of the Company or
subsidiaries. Under the automatic grant program, options are automatically
granted to the non-employee members of the Board.

As of July 21, 1997, approximately employees (including executive
officers) and consultants and independent contractors, were eligible to
participate in the Option Plan and three (3) non-employee Board members were
eligible for automatic option grants.

ADMINISTRATION

The Option Plan is currently administered by the Compensation Committee
appointed by the Board (the "Committee"). Administration of the Option Plan with
respect to officers subject to Section 16 of the Securities Exchange Act of 1934
(the "Exchange Act") shall be by members who are "disinterested persons" as that
term is defined in Rule 16b-3 under that Act to the extent necessary to satisfy
such rule.

The Committee has the exclusive authority, subject to the provisions of the
Option Plan, to determine the eligible individuals who are to receive
discretionary options under the Option Plan, the number of shares to be covered
by each granted option, the date or dates on which the option is to become
exercisable and the maximum term for which the option is to remain outstanding.
The Committee also has

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the authority to determine whether the granted option is to be an incentive
stock option under the Federal tax laws and to establish rules and regulations
for proper plan administration. The automatic grant program is
self-administering.

ISSUABLE SHARES

The aggregate number of shares available for issuance under the Option Plan
may not exceed 5,064,321. The pool of shares reserved under the Option Plan
consists of (i) the number of shares that remained available for issuance under
the 1991 Option Plan, including the shares subject to outstanding options
incorporated into the Option Plan and any other shares that were otherwise
available for future option grants under the 1991 Option Plan as of May 5, 1994
plus (ii) an additional 3,000,000 shares authorized by the Board for issuance
under this Option Plan and previously approved by the Company's stockholders and
(iii) an increase of 600,000 shares, which is the subject of this Proposal 2.
This amount is subject to adjustment from time to time in the event of certain
changes in the Company's capital structure. To the extent any of the
incorporated options are subsequently exercised, the number of shares issued
under those options will reduce, on a share-for-share basis, the number of
shares available for issuance under the Option Plan. In no event may any one
officer acquire shares of Common Stock under the Option Plan in excess of 35% of
the total share reserve available for issuance under the Option Plan. The
foregoing limitation shall not be applicable to options granted on or before
December 31, 1993. The stockholders have previously approved the Option Plan and
a share reserve of 4,464,321 shares.

Should any option under the Option Plan expire or terminate prior to
exercise or surrender in full (including any options incorporated from the 1991
Option Plan), the shares subject to the portion of the option not so exercised
or surrendered will be available for subsequent option grants. Shares subject to
any option surrendered in accordance with the option surrender provisions of the
Option Plan and all share issuances under the Option Plan, whether or not the
shares are subsequently repurchased by the Company pursuant to its repurchase
rights under the Option Plan, will reduce on a share-for-share basis the number
of shares available for subsequent option grants.

OPTION PRICE AND EXERCISABILITY

The exercise price of options issued under the Option Plan will be
determined by the Committee, but may not be less than the fair market value of
the Common Stock on the grant date, and the maximum period during which any
option may remain outstanding may not exceed ten (10) years.

Options issued under the Option Plan may become exercisable in cumulative
increments over a period of months or years as determined by the Committee. The
option price may be paid in cash or in shares of Common Stock valued at fair
market value on the exercise date. Outstanding options may also be exercised
through a same-day sale program, pursuant to which a designated brokerage firm
is to effect an immediate sale of the shares purchased under the option and pay
over to the Company, out of the sales proceeds available on the settlement date,
sufficient funds to cover the option price for the purchased shares plus all
applicable withholding taxes.

The Committee may also assist any optionee (including an officer) in the
exercise of outstanding options under the discretionary option grant program by
authorizing a loan from the Company or permitting the optionee to pay the option
price in installments over a period of years. The terms and conditions of any
such loan or installment payment will be established by the Committee in its
sole discretion, but in no event may the maximum credit extended to the optionee
exceed the aggregate option price payable for the purchased shares (less the par
value) plus any Federal, state or local income taxes or Federal employment taxes
incurred by the optionee in connection with the option exercise.

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VALUATION

For purposes of establishing the option price and for all other valuation
purposes under the Option Plan, the fair market value per share of Common Stock
on any relevant date will be the closing selling price per share on such date,
as reported on the Nasdaq National Market ("NNM"). If there is no reported
selling price for such date, then the closing selling price for the last
previous date for which such quotation exists will be determinative of fair
market value.

On July 21, 1997, the fair market value of the Common Stock was $
per share.

TERMINATION OF SERVICE

Outstanding options under the Option Plan will terminate unless exercised,
with respect to any shares for which such options are exercisable at the time of
the optionee's cessation of service with the Company, within three months
following such cessation of service (twelve months in the case of cessation of
service due to permanent disability). Under no circumstances, however, may any
such option remain exercisable after the specified expiration date of the option
term.

Should the optionee die while in service or in the 3 month period following
his cessation of service, then the optionee's outstanding options may
subsequently be exercised by the personal representative of the optionee's
estate or by the persons to whom such options are transferred by the optionee's
will or by the laws of inheritance within twelve months following such
optionee's cessation of service.

During the applicable exercise period following the optionee's cessation of
service, the option may not be exercised for more than the number of option
shares for which the option is exercisable at the time of such cessation of
service. However, the Committee will have the discretionary authority to
accelerate in whole or in part the vesting of any outstanding options held by
the optionee and may exercise this discretion at any time while the option
remains outstanding.

For purposes of the Option Plan, the optionee will be deemed to be in the
service of the Company for so long as such individual renders periodic services
to the Company or any parent or subsidiary, whether as an employee, a member of
the Board of Directors or an independent consultant or advisor.

REPURCHASE RIGHTS

The shares of Common Stock purchased upon the exercise of options may be
subject to repurchase by the Company. Unvested shares of Common Stock acquired
under the discretionary grant program will be subject to repurchase by the
Company, at the original option price paid per share, upon the optionee's
cessation of service. The Committee has complete discretion in establishing the
vesting schedule for any unvested shares issued under the discretionary grant
program and may cancel the Company's outstanding repurchase rights with respect
to one or more unvested shares held by the optionee at the time of his or her
cessation of service. All shares subject to the Company's repurchase rights
under the discretionary grant program will immediately vest upon a Corporate
Transaction (as defined below), except to the extent the repurchase rights are
to be assigned to the successor entity or parent thereof.

STOCKHOLDER RIGHTS AND ASSIGNABILITY OF OPTIONS

No optionee is to have any stockholder rights with respect to the option
shares until such individual has exercised the option and paid the option price.
Options are not assignable or transferable other than by will or by the laws of
inheritance and the option may be exercised only by the optionee.

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CORPORATE TRANSACTIONS

In the event of any of the following stockholder-approved transactions to
which the Company is a party (a "Corporate Transaction"):

(a) a merger or consolidation in which securities possessing more than 50%
of the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held those
securities immediately prior to such transaction, or

(b) the sale, transfer or other disposition of all or substantially all of
the Company's assets in complete liquidation or dissolution of the Company,

the exercisability of each outstanding option under the discretionary grant
program will automatically accelerate unless the option is either assumed by the
successor corporation (or its parent corporation) in such Corporate Transaction
or is otherwise replaced with a comparable option to purchase shares of the
capital stock of the successor corporation or parent thereof. To the extent not
assumed or exercised, each outstanding option will terminate and cease to be
outstanding upon consummation of the Corporate Transaction.

Each outstanding option that is assumed or is otherwise to continue in
effect after a merger or business combination will be appropriately adjusted to
apply and pertain to the number and class of securities that would have been
issuable, in connection with such merger or business combination, to an actual
holder of the same number of shares of Common Stock as are subject to such
option immediately prior to such merger or business combination.

LIMITED STOCK APPRECIATION RIGHTS

In the discretion of the Committee, each officer of the Company subject to
the short-swing profit restrictions of the Federal securities laws may be
granted limited stock appreciation rights as part of any stock option grants
made to such officer under the Option Plan. Any option with such a limited stock
appreciation right in effect for at least six (6) months shall automatically be
canceled upon the occurrence of a Hostile Take-Over (defined below). In return,
the optionee will be entitled to a cash distribution from the Company in an
amount equal to the excess of (i) the Take-Over Price (defined below) of the
shares of Common Stock subject to the canceled option (whether or not the option
is otherwise at the time exercisable for such shares) over (ii) the aggregate
exercise price payable for such shares.

For purposes of such limited stock appreciation right, the following
definitions will be in effect.

HOSTILE TAKE-OVER: (i) the acquisition by any person or related group of persons
(other than the Company or its affiliates) of securities possessing more than
50% of the combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer that the Board does not recommend the
Company's stockholders to accept and (ii) more than 50% of the securities so
acquired in such tender or exchange offer are accepted from holders other than
officers and directors of the Company who are subject to the short-swing profit
restrictions of the Federal securities laws.

TAKE-OVER PRICE: the greater of (i) the fair market value per share on the date
of cancellation, as determined in accordance with the valuation provisions of
the Option Plan described above, or (ii) the highest reported price per share
paid by the acquiring entity in effecting the Hostile Take-Over.

SPECIAL TAX WITHHOLDING ELECTION

The Committee may in its discretion provide one or more option holders under
the discretionary option grant program with the election to have the Company
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of their options, a portion of such shares with an aggregate fair market value
equal to the designated percentage (up to 100%) of the Federal, state and local
income and employment tax liability incurred by such option holder in connection
with the exercise of such option. Any election so made will be subject to the
approval of the Committee. One or more option holders may also

8
<PAGE>
be granted the alternative right, subject to Committee approval, to deliver
previously-issued shares of Common Stock in satisfaction of such tax liability.

CHANGES IN CAPITALIZATION

In the event any change is made to the Common Stock issuable under the
Option Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares, or other change in corporate
structure effected without the Company's receipt of consideration, appropriate
adjustments will be made to (i) the maximum number and/or class of securities
issuable under the Option Plan, (ii) the number and/or class of securities and
price per share in effect under each outstanding option (including all option
grants incorporated from the 1991 Option Plan), (iii) the number of shares to be
made the subject of subsequent automatic option grants, and (iv) the maximum
number and/or class of shares issuable to any one person under the Option Plan.

Option grants under the Option Plan will not affect the right of the Company
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.

NON-EMPLOYEE DIRECTOR AUTOMATIC GRANT PROGRAM

The automatic grant program was approved by the Board in December 1993 as
part of the 1991 Option Plan, was approved by the stockholders at the 1994
Annual Meeting and was subsequently incorporated into the Option Plan. The
automatic option grant program under the Option Plan authorizes the grant of
non-statutory options to purchase shares of Common Stock to non-employee members
of the Board. Each non-employee Board member who was serving as a non-employee
Board member on December 16, 1993 was automatically granted, on that date,
options to purchase 10,000 shares of Common Stock. Each non-employee Board
member who first becomes a non-employee Board member at any time after December
16, 1993 shall automatically be granted at the time of such initial election or
appointment, provided they have not otherwise been in the prior employ of the
Company (or any parent or subsidiary), an option to purchase 10,000 shares of
Common Stock. At each Annual Meeting of Stockholders beginning with the 1994
Annual Meeting, each individual who is at the time serving as a non-employee
Board member will automatically be granted options to purchase 2,500 shares of
Common Stock on the date of the Annual Meeting, provided he or she has served as
a non-employee Board member for at least six months prior to the date of the
meeting.

The option price per share for each automatic grant will be the fair market
value per share of Common Stock on the date of grant, and the option price for
purchased shares will be payable in cash or shares of Common Stock or through a
cashless exercise procedure.

Automatic option grants become exercisable for 12% of the option shares upon
completion of six months of Board service, and for the balance of the option
shares in a series of 44 equal successive monthly installments thereafter,
provided the director remains a member of the Board through such date. However,
full and immediate vesting will occur upon a Corporate Transaction (as such term
is defined in the section above entitled "Corporate Transactions"). Also, each
automatic option grant will be automatically cancelled upon the occurrence of a
Hostile Take-Over (as such term is defined in the section above entitled
"Limited Stock Appreciation Rights"), whether or not the option is otherwise at
the time exercisable for such shares. In return the optionee will be entitled to
a cash distribution from the Company in an amount equal to the excess of (i) the
Take-Over Price (as such term is defined in the section above entitled "Limited
Stock Appreciation Rights") of the shares of Common Stock subject to the
surrendered option over (ii) the aggregate exercise price payable for such
shares.

9
<PAGE>
AMENDMENT AND TERMINATION OF THE OPTION PLAN

The Board may amend or modify the Option Plan in any or all respects
whatsoever; provided, however, that no such amendment may adversely affect the
rights of outstanding option holders without their consent, and the Board may
not, without the approval of the Company's stockholders: (i) materially increase
the maximum number of shares issuable under the Option Plan or the number of
shares for which automatic grants may be made to non-employee Board members,
except in the event of certain changes to the Company's capital structure as
indicated above; (ii) materially modify the eligibility requirements for option
grants; or (iii) otherwise materially increase the benefits accruing to
participants under the Option Plan. Amendments to the automatic option grant
program and automatic options may not be effected at intervals more frequent
than once every six months.

The Board may terminate the Option Plan at any time, and the Option Plan
will in all events terminate not later than May 4, 2004. Any options outstanding
at the time of such plan termination will continue to remain outstanding and
exercisable in accordance with the terms and provisions of the instruments
evidencing those grants. The Option Plan will, however, automatically terminate
on the date all shares available for issuance are issued or cancelled.

FEDERAL TAX CONSEQUENCES

Options granted under the Option Plan may be either incentive stock options,
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options, which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as described
below:

INCENTIVE OPTIONS. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. However, the difference between the fair market
value of the purchased shares and the exercise price is generally included as
alternative minimum taxable income for purposes of the alternative minimum tax.
The optionee will recognize taxable income in the year in which the purchased
shares are sold or otherwise made the subject of disposition. For Federal tax
purposes, dispositions are divided into two categories: (i) qualifying and (ii)
disqualifying. The optionee will make a qualifying disposition of the purchased
shares if the sale or other disposition of such shares is made after the
optionee has held the shares for more than two (2) years after the grant date of
the option and more than one (1) year after the exercise date. If the optionee
fails to satisfy either of these two minimum holding periods prior to the sale
or other disposition of the purchased shares, then a disqualifying disposition
will result.

Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying disposition
of the shares, then the excess of (i) the fair market value of those shares on
the exercise date over (ii) the exercise price paid for the shares will be
taxable as ordinary income. Any additional gain recognized upon the disposition
will be a capital gain.

If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the exercise date over (ii) the exercise price
paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.

NON-STATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.

10
<PAGE>
Special provisions of the Internal Revenue Code apply to the acquisition of
unvested shares of Common Stock under a non-statutory option. These special
provisions may be summarized as follows:

(a) If the shares acquired upon exercise of the non-statutory option are
subject to repurchase by the Company at the original exercise price in the event
of the optionee's termination of service prior to vesting in such shares, then
the optionee will not recognize any taxable income at the time of exercise but
will have to report as ordinary income, as and when the Company's repurchase
right lapses, an amount equal to the excess of (i) the fair market value of the
shares on the date the Company's repurchase right lapses with respect to those
shares over (ii) the exercise price paid for the shares.

(b) The optionee may, however, elect under Section 83(b) of the Internal
Revenue Code to include as ordinary income in the year of exercise of the
non-statutory option an amount equal to the excess of (i) the fair market value
of the purchased shares on the exercise date (determined as if the shares were
not subject to the Company's repurchase right) over (ii) the exercise price paid
for such shares. If the Section 83(b) election is made, the optionee will not
recognize any additional income as and when the Company's repurchase right
lapses.

The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee.

The Company anticipates that the deductions attributable to the compensation
income arising from most exercises of options under the Option Plan will not be
subject to the annual $1 million limit per covered individual on the
deductibility of compensation paid to certain executive officers of the Company.

STOCK APPRECIATION RIGHTS. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.

PARACHUTE PAYMENTS. If the exercisability of an option or stock
appreciation right is accelerated as a result of a change of control, all or a
portion of the value of the option or stock appreciation right at that time may
be a parachute payment for purposes of the excess parachute provisions of the
Internal Revenue Code. Those provisions generally provide that if parachute
payments exceed three times an employee's average compensation for the five (5)
tax years preceding the change of control, the company loses its deduction and
the recipient is subject to a 20% excise tax for the amount of the parachute
payments in excess of one times such average compensation.

ACCOUNTING TREATMENT

Option grants at 100% of fair market value will not result in any charge to
the Company's earnings. The number of outstanding options may be a factor in
determining the Company's earnings per share.

11
<PAGE>
AMENDED PLAN BENEFITS

The following table sets forth certain information regarding the options
granted under the Option Plan as of July 21, 1997, together with the options
expected to be granted under the Automatic Option Grant Program on the date of
the 1997 Annual Meeting.

OPTION GRANTS

<TABLE>
<CAPTION>
OPTIONS
GRANTED
(NUMBER OF
NAME AND POSITION SHARES)
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Stephen M. Race, Director and Chief Executive Officer 500,000

Gilman Louie, Chairman 200,000

Tim Christian, Managing Director, Europe\Asia Pacific 60,000

Gregory S. Kennedy, Senior Vice President, Business and Legal Affairs and Secretary 110,000

Jeffery J. Forestier, Senior Vice President, Sales 100,000

All current executive officers as a group (9 persons) 1,246,000

David C. Costine, Director 20,000

Vinod Khosla, Director 20,000

Keith Schaefer, Director 30,000(1)

All current directors (other than executive officers) as a group (3 persons) 70,000

All other employees as a group 3,429,166
</TABLE>

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

(1) In July 1996, Mr. Schaefer received an option to purchase 10,000 shares of
the Company's Common Stock as compensation for consulting services he
performed.

STOCKHOLDER APPROVAL

The affirmative vote of a majority of the outstanding shares of the
Company's voting Common Stock present or represented and entitled to vote at the
1997 Annual Meeting is required for approval of the amendment to the Option
Plan. If such stockholder approval is not obtained, then the amendment to the
Option Plan will not become effective, and all outstanding options granted on
the basis of the 600,000 share increase will terminate without ever becoming
exercisable for any of the option shares.

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors recommends that the stockholders vote FOR the
approval of the amendments to the Option Plan.

PROPOSAL 3:
AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN

In July 1997, the Board approved an amendment to the Employee Stock Purchase
Plan (the "Purchase Plan") to increase the number of shares reserved for
issuance thereunder from 400,000 to 600,000 shares of Common Stock.

The continued success of the Company and its stockholders depends upon the
ability to attract and retain highly qualified and competent employees. The
Purchase Plan enhances that ability and provides additional incentive to such
personnel to advance the interests of the Company and its stockholders.

12
<PAGE>
Certain material features of the Purchase Plan, as amended, are outlined
below.

GENERAL

The Purchase Plan is administered by the Compensation Committee, which is
comprised of at least two non-employee members of the Board appointed by, and
serving at the discretion of, the Board. No member of the Compensation Committee
is eligible to participate in the Purchase Plan. The compensation Committee has
full authority to adopt administrative rules and procedures and to interpret the
provisions of the Purchase Plan. All costs and expenses incurred in plan
administration will be paid by the Company without charge to participants.

PURPOSE

The purpose of the Purchase Plan is to provide employees of the Company and
its majority-owned subsidiaries which have been designated by the Board with an
opportunity to purchase Common Stock of the Company through accumulated payroll
deductions.

SECURITIES SUBJECT TO THE PURCHASE PLAN

Assuming approval of this Proposal No. 3, the Maximum number of shares of
Common Stock that may be sold to participants over the term of the Purchase plan
may not exceed 600,000 shares. To prevent dilution or enlargement of participant
rights under the Purchase Plan, appropriate adjustments will be made to (i) the
class and maximum number of shares purchasable under the Purchase Plan, (ii) the
class and maximum number of shares purchasable per participant under any
outstanding purchase right, and (iii) the class and number of shares purchasable
and the price per share payable under all outstanding purchase rights, in the
event that any change is made to the Company's outstanding Common Stock (whether
by reason of any stock dividend, stock split, combination of shares,
recapitalization, or other similar change in corporate structure effected
without receipt of consideration).

ELIGIBILITY AND PARTICIPATION

Any individual who is customarily employed by the Company or a participating
corporate affiliate, for more than 20 hours per week and more than five months
per calendar year is eligible to participate in the Purchase Plan. An Eligible
employee may commence participation on the first day of the first purchase
period after completion of thirty (30) days of employment with the Company or
any corporate affiliate. As of July 21, 1997, there were employees
eligible to participate in the Purchase Plan, of whom were
participating.

PURCHASE PERIODS AND PURCHASE PRICE

The Purchase Plan will be implemented in series of purchase periods, each to
be of a duration of approximately six months as determined by the Compensation
Committee prior to the commencement date of each purchase period. Purchase
periods begin, at the Compensation Committee's discretion, on or about the first
business day of September and March each year. Accordingly, two separate
purchase periods shall commence in each year during which the Purchase Plan
remains in existence.

The purchase price of the Common Stock under the Purchase Plan will be equal
to the lesser of (i) 85% of the fair market value per share of Common Stock on
the first day of the purchase period or (ii) 85% of the fair market value per
share of Common Stock on the date on which the purchase right is exercised. The
fair market value of the Common Stock on any relevant date will be the closing
selling price per share on such date as reported on the NNM.

PURCHASE RIGHTS

Each participant will have a separate purchase right for each purchase
period in which he or she participates. The purchase right will be granted on
the first day of the purchase period and will be

13
<PAGE>
automatically exercised on the last date of each purchase period. Each
participant may, through authorized payroll deductions, apply from 1% to 10% of
his or her base pay during the relevant purchase period to the purchase of
Common Stock under the Purchase Plan. Base pay includes the participant's
regular basic earnings and commissions, but excludes bonuses, overtime, shift
differentials and other pay differentials. On the last day of each purchase
period, the payroll deductions of each participant will be automatically applied
to the purchase of whole shares of Common Stock at the purchase price in effect
for such purchase date. Any amount remaining in the participant's account after
such exercise shall be held for the purchase of stock on the next semiannual
purchase date.

The Purchase Plan imposes certain limitations upon a participant's rights to
acquire Common Stock, including the following limitations:

(1) purchase rights may not be granted to any individual who owns stock
(including stock purchasable under any outstanding purchase rights)
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or any of its affiliate;

(2) purchase rights granted to a participant may not permit such
individual to purchase Common Stock with a value in excess of $25,000
(valued at the time each purchase right is granted) during any one calendar
year; and

(3) the maximum number of shares purchasable by the participant on any
purchase date may not exceed 2,000 shares.

The purchase right of a participant will terminate upon the participant's
termination of employment or the participant's election to withdraw from the
Purchase Plan. Any payroll deductions that the participant may have made with
respect to the terminated purchase right will be refunded, unless the
participant requests that amounts collected be applied to the purchase of shares
at the end of the purchase period. In addition, the Company has specifically
reserved the right, exercisable in the sole discretion of the Compensation
Committee, to terminate the Purchase Plan immediately following any semiannual
purchase date occurring after such action is authorized. If such right is
exercised by the Company, then the Purchase Plan will terminate in its entirety
and no further purchase rights will be granted or exercised thereunder.

No participant will have any stockholder rights with respect to the shares
covered by his or her purchase rights until the shares are actually purchased on
the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase. No purchase rights will be assignable or transferable by the
participant except by will or by the laws of descent and distribution. During
the lifetime of the participant, the purchase rights are exercisable only by the
participant.

PARTICIPATION IN THE PURCHASE PLAN

Participation in the Purchase Plan is voluntary and is dependent on each
eligible employee's election to participate and his or her determination as to
the level of payroll deductions. Accordingly, future purchases under the
Purchase Plan are not determinable. Non-employee directors are not eligible to
participate in the Purchase Plan. No purchases have been made under the Purchase
Plan since its amendment by the Board. However, purchases were made under the
Purchase Plan prior to such amendment. The following table sets forth certain
information regarding shares purchased under the Purchase Plan for each of the
named executive officers, for all current executive officers as a group, for all

14
<PAGE>
nominees for election as a director, for all current directors who are not
executive officers as a group and for all other employees who participated in
the Purchase Plan as a group:

AMENDED PLAN BENEFITS
EMPLOYEE STOCK PURCHASE PLAN

<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME OF INDIVIDUAL OR IDENTITY OF GROUP AND POSITION PURCHASED(#)
- ------------------------------------------------------------------------------- -------------
<S> <C>
Stephen M. Race,
Director and Chief Executive Officer 3,385

Gilman Louie,
Chairman --

Tim Christian,
Managing Director, Europe\Asia Pacific 3,710

Gregory S. Kennedy
Senior Vice President, Business and Legal Affairs and Secretary 1,133

Jeffery J. Forestier
Senior Vice President, Sales --

All current executive officers as a group (9 persons) 10,938

David C. Costine, Director --

Vinod Khosla, Director --

Keith Schaefer, Director --

All current directors (other than executive officers) as a group (3 persons) --

All other employees as a group 194,916
</TABLE>

MERGER OR LIQUIDATION OF COMPANY

In the event the Company or its stockholders enter into an agreement to
dispose of all or substantially all of the assets or outstanding capital stock
of the Company by means of a sale, merger or reorganization in which the Company
will not be the surviving corporation, or a reverse merger in which the Company
is the surviving corporation but more than fifty percent (50%) of the
outstanding stock is transferred to the acquirer, or in the event the Company is
liquidated, then all outstanding purchase rights will, in connection with the
consummation of such sale, merger, reorganization or liquidation, be exercised
immediately prior to such sale, merger, reorganization or liquidation by
applying all payroll deductions previously collected from participants during
the purchase period to the purchase of whole shares of Common Stock.

AMENDMENT AND TERMINATION

The Purchase Plan will terminate upon the earlier of December 31, 2003 or
the date on which all shares available for issuance thereunder are sold pursuant
to exercised purchase rights. However, the Board may from time to time alter,
amend, suspend or discontinue the provision of the Purchase Plan. Without
stockholder approval, the Board may not: (i) increase the number of shares
issuable under the Purchase Plan, (ii) alter the purchase price formula so as to
reduce the purchase price, (iii) materially increase the benefits accruing to
participants or (iv) materially modify the requirements for eligibility to
participate in the Purchase Plan.

FEDERAL TAX CONSEQUENCES

The Purchase Plan is intended to be an "employee stock purchase plan" within
the meaning of Section 423 of the Internal Revenue Code. Under a plan which so
qualifies, no taxable income will be

15
<PAGE>
reportable by a participant, and no deductions will be allowable to the Company,
by reason of the grant or exercise of the purchase rights issued thereunder. A
participant will, however, recognize taxable income in the year in which the
purchased shares are sold or otherwise made the subject of disposition. If the
participant makes a disqualifying disposition of the purchased shares, then the
Company will be entitled to an income tax deduction, for the taxable year in
which such disposition occurs, equal to the amount by which the fair market
value of such shares on the date of purchase exceeded the purchase price, and
the participant will be required to satisfy the employment and income tax
withholding requirements applicable to such income. In no other instance will
the Company be allowed a deduction with respect to the participant's disposition
of the purchased shares. A sale or other disposition of the purchased shares
will be a disqualifying disposition if made within two years after the start of
the purchase period in which such shares were acquired and within one year after
the shares are purchased. Any additional gain recognized upon the disposition of
the shares will be a capital gain, which will be long-term if the shares have
been held for more than one year following the date of purchase under the
Purchase Plan.

REQUIRED VOTE

The affirmative vote of a majority of the Votes Cast will be required to
approve the amendment of the Purchase Plan.

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors recommends a vote FOR the approval and ratification
of the amendment to the employee stock purchase plan.

PROPOSAL 4:
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY

The stockholders are being asked to vote on a proposal to change the name of
the Company from Spectrum HoloByte, Inc. to MicroProse, Inc. by amending the
Company's Certificate of Incorporation. No other change to the Company's
Certificate of Incorporation, other than to change the Company's name as
recorded by the Delaware Secretary of State and to change the name under which
the Company transacts business and trades on the Nasdaq National Market, is
contemplated. The Company's new name will be effective upon the filing of an
Amended and Restated Certificate of Incorporation with the Delaware Secretary of
State.

The Board believes that for the following reasons the proposed name change
is in the best interest of the Company and its stockholders. In 1993, Spectrum
HoloByte, Inc. merged with MicroProse, Inc. The combined company, Spectrum
HoloByte, Inc., continued to market its products under both the Spectrum
HoloByte-Registered Trademark- and the MicroProse-Registered Trademark- labels.
In the 1997 fiscal year, the Company decided to consolidate its marketing
efforts under the MicroProse label. In order to take full advantage of the name
recognition created by the Company's recent marketing efforts and to avoid
confusion in both the financial and consumer markets, the Board has decided to
change the name of the Company from Spectrum HoloByte, Inc. to MicroProse, Inc.

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors recommends that the stockholders vote FOR the
approval of the amendment to the Company's Certificate of Incorporation to
change the name of the Company to MicroProse, Inc.

PROPOSAL 5:
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS

The firm of Coopers & Lybrand, LLP served as independent public accountants
for the Company for the fiscal year ended March 30, 1997. The Board of Directors
desires the firm to continue in this capacity

16
<PAGE>
for the current fiscal year. Accordingly, a resolution will be presented at the
meeting by the Board of Directors to ratify the selection of Coopers & Lybrand,
LLP as independent public accountants to audit the accounts and records of the
Company for the fiscal year ending March 29, 1998, and to perform other
appropriate services. In the event that stockholders fail to ratify the
selection of Coopers & Lybrand, LLP, the Board of Directors would reconsider
such selection. Even if its selection is ratified, the Board in its discretion
may direct the appointment of a different independent auditing firm at any time
during the year if the Board believes that such a change would be in the best
interest of the Company and its stockholders.

A representative of Coopers & Lybrand, LLP will be present at the Annual
Meeting to respond to appropriate questions and to make a statement if such
representative desires to do so.

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors recommends that the stockholders vote FOR the
ratification of the selection of Coopers & Lybrand, LLP to serve as the
Company's independent public accountants for the fiscal year ending March 29,
1998.

OWNERSHIP OF SECURITIES

COMMON STOCK -- MANAGEMENT AND DIRECTORS

The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of July 21,
1997 by each director, the "Named Executive Officers" as shown in the Summary
Compensation Table in the "Executive Compensation" section below, and all
current directors and executive officers as a group. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned, subject to community property laws, where
applicable. The address for each Director and Officer is that of the Company.

<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED(1)
- ----------------------------------------------------------------------------- ----------- -----------------
<S> <C> <C>
David C. Costine, Director(2) 295,625 1.0%
Vinod Khosla, Director(3) 372,839 1.3%
Keith Schaefer, Director(4) 23,700 *
Stephen M. Race, Director and Chief Executive Officer(5) 262,433 *
Gilman G. Louie, Chairman(6) 617,645 2.2%
Tim Christian, Managing Director Europe\Asia Pacific(7) 36,488 *
Gregory S. Kennedy,Senior Vice President, Business and Legal Affairs and
Secretary(8) 68,272 *
Jeffery J. Forestier, Senior Vice President, Sales(9) 33,784 *
All current directors and executive officers as a group (12 persons)(10) 1,775,384 6.1%
</TABLE>

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

* Less than one percent of the outstanding Common Stock.

(1) Percentage of beneficial ownership is calculated assuming 28,327,557 shares
of Common Stock were outstanding on July 21, 1997. This percentage also
includes Common Stock of which such individual or entity has the right to
acquire beneficial ownership within sixty (60) days of July 21, 1997,
including but not limited to the exercise of an option; however, such Common
Stock shall not be deemed outstanding for the purpose of computing the
percentage owned by any other individual or entity. Such calculation is
required by General Rule 13d-3(d)(1)(i) under the Securities Exchange Act of
1934.

(2) Includes 12,500 shares of Common Stock purchasable under stock options that
are currently exercisable or that will become exercisable within sixty (60)
days of July 21, 1997. Also includes 192,847 shares

17
<PAGE>
of Common Stock and a warrant to purchase 90,278 shares of Common Stock held
by Corporate Venture Partners, L.P. Mr. Costine is a principal of Corporate
Venture Partners, L.P. Mr. Costine disclaims beneficial ownership of the
listed securities not held by him personally, except to the extent of his
pecuniary interest therein.

(3) Includes 12,500 shares of Common Stock purchasable under stock options that
are currently exercisable or that will become exercisable within sixty (60)
days of July 21, 1997. Also includes 238,369 shares of Common Stock held by
Kleiner Perkins Caufield & Byers VI; 100,000 shares of Common Stock held by
Mr. Khosla's wife; and 5,787 shares of Common Stock held by an irrevocable
trust for Mr. Khosla and his wife. Mr. Khosla is a partner of KPCB VI
Associates, which is the general partner of the foregoing venture fund. Mr.
Khosla disclaims beneficial ownership of the securities held directly by
KPCB VI, his spouse Neeru Khosla and the Vinod and Neeru Khosla 1992
irrevocable trust, except to the extent of any indirect pecuniary interest
therein.

(4) Includes 22,500 shares of Common Stock purchasable under stock options that
are currently exercisable or that will become exercisable within sixty (60)
days of July 21, 1997.

(5) Includes 259,048 shares of Common Stock purchasable under stock options
that are currently exercisable or that will become exercisable within sixty
(60) days of July 21, 1997.

(6) Includes 78,333 shares of Common Stock purchasable under stock options that
are currently exercisable or that will become exercisable within sixty (60)
days of July 21, 1997.

(7) Includes 32,778 shares of Common Stock purchasable under stock options that
are currently exercisable or that will become exercisable within sixty (60)
days of July 21, 1997.

(8) Includes 67,471 shares of Common Stock purchasable under stock options that
are currently exercisable or that will become exercisable within sixty (60)
days of July 21, 1997.

(9) Includes 33,334 shares of Common Stock purchasable under stock options that
are currently exercisable or that will become exercisable within sixty (60)
days of July 21, 1997.

(10) Includes 570,352 shares of Common Stock to be issued under stock options
and 90,278 shares of Common Stock to be issued under a warrant that are
currently exercisable or that will become exercisable within sixty (60) days
of July 21, 1997.

18
<PAGE>
COMMON STOCK -- PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the only persons,
other than those persons shown on the previous table, who beneficially owned (to
the Company's knowledge) more than 5% of the Company's Common Stock as of July
21, 1997.

<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED OWNED(1)
- ----------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
FMR Corp.(2) 4,048,700 14.3%
82 Devonshire Street
Boston, MA 02109

SWICO Anstalt(3) 1,984,313 7.0%
c/o Rowbotham & Company, Inc.
400 Montgomery Street, Suite 600
San Francisco, CA 94104

Massachusetts Financial Services Company(4) 3,390,270 12.0%
500 Boylston Street, 15th Floor
Boston, MA 02116
</TABLE>

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

(2) Includes 3,745,500 shares beneficially owned by Fidelity Management &
Research Company and 303,200 shares beneficially owned by Fidelity
Management Trust Company. FMR Corp. is the parent holding company of both of
the foregoing entities.

(3) Includes 196,078 shares of Common Stock issuable upon conversion of the
Series A Convertible Preferred Stock held by PH(US), Inc. SWICO Anstalt is
the sole shareholder of PH(US), Inc.

(4) Includes 3,330,295 shares beneficially owned by Massachusetts Financial
Services Company and 59,975 shares which may be acquired through the
conversion of convertible bonds.

PREFERRED STOCK

The following table sets forth beneficial ownership information for the
Company's Preferred Stock outstanding as of July 21, 1997.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ---------------------------------------------------- ------------------------------ ---------------------
<S> <C> <C>
PH(US), Inc.(1) 4,000,000 99.6%
c/o Rowbotham Company, Inc. Series A Preferred
400 Montgomery Street, Suite 600
San Francisco, CA 94104

The Nalco Chemical Company(2) 16,045 *
c/o The Northern Trust Company Series B-1 Preferred Stock
P.O. Box 92923
Chicago, IL 60675
</TABLE>

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

* Less than one percent of the outstanding Preferred Stock

19
<PAGE>
(1) SWICO Anstalt is the sole shareholder of PH(US), Inc., the record owner of
all shares of Series A Preferred Stock of the Company. Accordingly, SWICO
Anstalt may be deemed to be the beneficial owners of all the shares of
Series A Preferred Stock of the Company. These Preferred Shares are
convertible into 196,078 shares of the Company's Common Stock.

(2) These Preferred Shares are convertible into an aggregate of 16,045 shares of
Common Stock.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent beneficial owners are required
by SEC regulation to furnish the Company with copies of all Section 16(a)
reports they file.

Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that, except as further described below, there was compliance
for the fiscal year ended March 30, 1997 with all Section 16(a) filing
requirements applicable to the Company's officers, directors and greater than
ten-percent beneficial owners.

Derek McLeish, a new officer of the Company, filed a late Form 3 reporting
his beneficial ownership of securities of the Company upon commencement as an
officer of the Company.

20
<PAGE>
EXECUTIVE COMPENSATION AND RELATED INFORMATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table provides certain summary information concerning the
compensation earned for each of the three fiscal years preceding March 30, 1997
by the Company's Chief Executive Officer and the four most highly compensated
executive officers of the Company earning at least $100,000 for services
rendered in all capacities to the Company and its subsidiaries (the "Named
Executive Officers"). No executive officer who would have otherwise been
includible in such table on the basis of salary and bonus earned for the 1997
fiscal year has resigned or terminated employment during the fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL SALARY COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) BONUS($) ($)(2) OPTIONS(#) ($)(3)
- -------------------------------------- ----------- --------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Race, 1997 296,384 289,785 -- --(5) 3,912
Director and Chief 1996 172,404 75,000 -- 500,000 529
Executive Officer(4) 1995 -- -- -- -- --

Gilman Louie, 1997 213,462 223,061 -- --(5) 2,702
Chairman 1996 203,173 -- -- 200,000 2,282
1995 177,000 -- -- -- 2,625

Tim Christian, 1997 183,435 82,134 -- --(5 -- 48,467
Managing Director, 1996 131,750 77,520 -- -- 16,800
Europe\Asia Pacific 1995 78,416 -- -- 13,839

Gregory S. Kennedy(6) 1997 179,543 60,000 -- 15,000(5) 2,842
Senior Vice President, 1996 137,325 40,000 -- 5,000 2,139
Business and Legal Affairs 1995 112,156 -- 70,000(7) -- --
and Secretary

Jeffery J. Forestier(8) 1997 163,000 52,000 -- -- 1,416
Senior Vice President, Sales 1996 30,769 35,000 -- 100,000 --
1995 -- -- -- -- --
</TABLE>

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

(1) Salary includes salary deferred under the Company's 401(k) Plan.

(2) In accordance with Commission rules, perquisites constituting less than the
lesser of $50,000 or 10% of total salary and bonus are not reported.

(3) "All Other Compensation" reflects a matching contribution to the Company's
401(k) Plan.

(4) Mr. Race has served as the Chief Executive Officer of the Company since
August 16, 1995. His salary in the 1996 fiscal year was for a partial year.

(5) On June 26, 1996, as part of an Option Exchange Program, the Company agreed
to enter into Option Exchange Agreements with each of its employee option
holders, including Messrs. Race, Louie, Christian and Kennedy, pursuant to
which the Company issued, in exchange for tendered option agreements with an
exercise price in excess of $5.375 from current employee option holders, new
options, each with an exercise price of $5.375 which represents the fair
market value of one share of the Company's Common Stock on June 26, 1996, as
reported by Nasdaq. Mr. Race exchanged options to purchase 500,000 shares,
Mr Louie exchanged options to purchase 150,000 shares, Mr. Christian
exchanged options to purchase 50,000 shares and Mr. Kennedy exchanged
options to purchase 78,800 shares. The Company's Board of Directors approved
the Option Exchange Program.

21
<PAGE>
(6) Mr. Kennedy was hired on May 23, 1994. His salary in the 1995 fiscal year
was for a partial year.

(7) Mr. Kennedy's Other Compensation in the 1995 fiscal year was for his
relocation expense.

(8) Mr. Forestier was hired on December 11, 1995. His salary in the 1996 fiscal
year was for a partial year.

STOCK OPTIONS

The following table contains information concerning the grant of stock
options made under the Company's 1994 Stock Option Plan for the 1997 fiscal year
to the Named Executive Officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS OF
------------------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS/SARS FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4)
OPTIONS/SARS EMPLOYEE IN BASE PRICE EXPIRATION --------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($)
- ------------------------------- -------------- ----------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Race, --(3) -- -- -- -- --
Director and Chief
Executive Officer

Gilman G. Louie, --(3) -- -- -- -- --
Chairman

Tim Christian, --(3) -- -- -- -- --
Managing Director,
Europe\Asia Pacific

Gregory S. Kennedy(1) 15,000(3) 0.48% 5.375 06/25/06 50,722 128,495
Senior Vice President,
Business and Legal
Affairs and Secretary

Jeffery J. Forestier -- -- -- -- -- --
Senior Vice President,
Sales
</TABLE>

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

(1) The options granted to Mr. Kennedy are incentive and nonqualified options
granted under the Company's 1994 Stock Option Plan. Mr. Kennedy's options
become exercisable as follows: 16.7% of the option shares six (6) months
after the vesting commencement date and the balance of the shares vest in a
series of thirty (30) equal monthly installments. Each option will
immediately vest in the event the Company is acquired by a merger, reverse
merger or asset sale, unless the options are either assumed by the successor
corporation or replaced with a comparable option to purchase shares of the
capital stock of the successor corporation. Each option has a maximum term
of 10 years, subject to earlier termination in the event of the optionee's
cessation of service with the Company.

(2) The exercise price of these options may be paid in cash, in shares of Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares and the
federal and state tax liability incurred in connection with such exercise.
The optionee may be permitted, subject to the approval of the plan
administrator, to apply a portion of the shares purchased under the option
(or to deliver existing shares of Common Stock) in satisfaction of such tax
liability.

(3) On June 26, 1996, as part of an Option Exchange Program, the Company agreed
to enter into Option Exchange Agreements with each of its employee option
holders, including Messrs. Race, Louie, Christian and Kennedy, pursuant to
which the Company issued, in exchange for tendered option

22
<PAGE>
agreements with an exercise price in excess of $5.375 from current employee
option holders, new options, each with an exercise price of $5.375 which
represents the fair market value of one share of the Company's Common Stock
on June 26, 1996, as reported by Nasdaq. Mr. Race exchanged options to
purchase 500,000 shares, Mr Louie exchanged options to purchase 150,000
shares, Mr. Christian exchanged options to purchase 50,000 shares and Mr.
Kennedy exchanged options to purchase 78,800 shares. The Company's Board of
Directors approved the Option Exchange Program.

(4) The five percent (5%) and ten percent (10%) assumed annual rates of
compounded stock price appreciation are mandated by the rules of the
Securities and Exchange Commission. There is no assurance provided to any
executive officer or any other holder of the Company's securities that the
actual stock price appreciation over the 10-year option term will be at the
assumed 5% and 10% levels or at any other defined level.

OPTION EXERCISES AND HOLDINGS

The following table provides information with respect to the Named Executive
Officers concerning the exercise of options during the 1997 fiscal year and
unexercised options held as of the end of the 1997 fiscal year.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
SHARES VALUE YEAR-END(1997)(1) YEAR-END(1)(2)
ACQUIRED ON REALIZED -------------------------- ------------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE($) UNEXERCISABLE($)
- ------------------------------ ----------- ----------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Race, -- -- 196,191 303,809 245,239 379,761
Director and Chief
Executive Officer

Gilman G. Louie, -- -- 58,333 141,667 72,916 177,084
Chairman

Tim Christian, -- -- 26,111 33,889 32,639 42,361
Managing Director,
Europe\Asia Pacific

Gregory S. Kennedy -- -- 55,555 43,245 69,444 54,056
Senior Vice President,
Business and Legal
Affairs and Secretary

Jeffery J. Forestier -- -- 23,334 76,666 29,168 95,833
Senior Vice President, Sales
</TABLE>

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

(1) Options granted pursuant to the Company's 1994 Stock Option Plan.

(2) Based on the fair market value of the shares on the last day of the 1997
fiscal year ($6.625 per share) less the exercise price payable for such
shares.

EMPLOYMENT AGREEMENTS

In August 1995, the Company entered into an employment agreement with
Stephen M. Race, Chief Executive Officer of the Company, which terminates upon
Mr. Race's termination of employment with the Company. The agreement provides
for an initial annual base salary of $275,000, which will be reviewed at least
annually, but which may not be reduced below such level. His current salary is
$310,000. The agreement provides that the Company grant Mr. Race options to
purchase 500,000 shares of Common

23
<PAGE>
Stock, which options vest ratably over a 50 month period. See "Stock Options."
The agreement also provides for an annual performance bonus of up to 100% of his
base salary if the Company exceeds certain performance targets established by
its Board of Directors. Under the terms of his employment agreement and subject
to certain conditions, Mr. Race will receive a special bonus of $3,000,000 (less
any realizable value from options Mr. Race holds that are exercisable or gains
as a result of a sale of the stock purchased pursuant to such options) if Mr.
Race remains employed with the Company through March 31, 1999. Mr. Race is also
entitled to reimbursement of certain expenses in connection with his employment
with the Company, including automobile expenses and reimbursement for taxes. He
is also entitled to participate in most Company benefit plans.

In the event that (i) the Company terminates Mr. Race's employment (other
than for cause), or (ii) Mr. Race's title is no longer Chief Executive Officer
and Mr. Race terminates his employment, or (iii) the Company is acquired and Mr.
Race is no longer the Company's Chief Executive Officer, he (or his
beneficiaries in the case of death) will receive a continuation of his base
salary and Mr. Race will receive certain other benefits for twelve months and
the exercisability of his options will be accelerated as though he had remained
employed for one additional year. In addition, in the event of one of the three
events described above, and subject to certain conditions, including the time at
which Mr. Race's employment with the Company is terminated, the profitability of
the Company and whether there had occurred a change in control of the Company,
Mr. Race is entitled to receive a cash payment from the Company of up to
$3,000,000 (less any realizable value from options Mr. Race holds that are
exercisable or gains as a result of a sale of the stock purchased pursuant to
such options). In the event Mr. Race's employment with the Company terminates
for good cause, the Company is obligated to pay Mr. Race's base salary for a
period of six months following such termination.

Under the employment agreement, the Company has agreed to indemnify Mr. Race
to the fullest extent permitted by law so long as Mr. Race acts in good faith.
Failure by the Company to provide such indemnification is deemed to be a breach
of the employment agreement and may be deemed a termination of Mr. Race's
employment for other than cause.

REPORT OF THE COMPENSATION COMMITTEE CONCERNING
EXECUTIVE COMPENSATION

As members of the Committee of the Spectrum HoloByte, Inc. Board of
Directors, it is our duty to exercise the power and authority of the Board of
Directors with respect to the compensation of executive officers. In addition,
the Committee administers the Company's 1994 Stock Option Plan and Employee
Stock Purchase Plan.

For the 1997 fiscal year, the Committee approved the compensation payable to
Mr. Race, Chief Executive Officer and Mr. Louie, Chairman. The Committee
authorized Mr. Race to determine, in consultation with the Committee,
compensation payable to the other executive officers.

COMPENSATION PHILOSOPHY

Under the supervision of the Committee, the Company has developed a
compensation philosophy which is designed to attract and retain qualified key
executive officers critical to the Company's success and to provide such
executives with performance-based incentives tied to achievement of specific
goals and the profitability of the Company. As an officer's level of
responsibility and accountability within the Company increases over time, a
greater portion of each executive officer's compensation is intended to be
dependent upon the Company's performance, the individual's contribution to the
success of the Company as measured by individual performance, and stock price
appreciation rather than upon base salary. Accordingly, each executive officer's
compensation package is fundamentally comprised of three elements: (i) base
salary which reflects individual performance and expertise; (ii) annual variable
performance awards payable in cash and tied to the Company's achievement of
certain goals; and (iii) long-term stock-based incentive awards which strengthen
the mutuality of interests between the executive officers and the Company's
stockholders.

24
<PAGE>
FACTORS

Several important factors which were considered in establishing the
components of the fiscal year 1997 compensation package for each executive
officer other than the Chief Executive Officer are summarized below. Additional
factors may also be taken into account, and the Committee may in its discretion
apply entirely different factors, particularly different measures of
performance, in setting executive compensation for future fiscal years. All
compensation decisions are designed to further the compensation philosophy
indicated above.

BASE SALARY. Base compensation is established based on competitive market
rates at the time of initial hiring. Base compensation thereafter is reviewed
annually using an analysis of competitive salary ranges provided by an
independent compensation survey which focuses on Silicon Valley companies, with
particular emphasis on the reported compensation paid by companies similar in
size and business who compete with the Company in the recruitment and retention
of senior personnel. The base salary level for executive officers is generally
at the median level determined for such individuals on the basis of the external
salary data provided the Committee by the independent compensation surveys. The
Committee believes that the Company's most direct competitors for executive
talent are not necessarily all of the companies that the Company would use in a
comparison for stockholder returns. Therefore, the compensation comparison group
is not the same as the industry group index in the Performance Graph, below.

INCENTIVE COMPENSATION. During the 1997 fiscal year, the Company's
executive officers participated in an annual incentive compensation plan with
awards based primarily on Company and individual performance targets. Targeted
awards for executive officers of the Company under this plan are consistent with
targeted awards of companies of similar size and complexity to the Company based
on a review of independent compensation surveys covering companies in Silicon
Valley. For the 1998 fiscal year, executive officers will be eligible for target
incentives based on a percentage of base salary, based on individual
performance, achievement of Company goals and, in certain cases, achievement of
goals with respect to specified products or lines of business.

LONG-TERM INCENTIVE COMPENSATION. The Company has adopted the 1994 Stock
Option Plan to provide executive officers and other key employees with
incentives to maximize long-term stockholder values. Awards under the 1994 Stock
Option Plan can take the form of stock options and stock appreciation rights,
which are designed to give the recipient a significant equity stake in the
Company and thereby closely align their interests with those of the Company's
stockholders. In addition to linking executive compensation directly to
stockholder value, the Compensation Committee believes that stock options,
through staged vesting provisions, perform an important role in motivating and
retaining key executives. However, the Committee does not adhere strictly to
these guidelines and will occasionally vary the size of the option grant made to
each executive officer as circumstances warrant.

CEO COMPENSATION. Mr. Race's compensation as Chief Executive Officer during
the 1997 fiscal year was paid in accordance with an employment agreement between
Mr. Race and the Company. In determining Mr. Race's compensation for the 1997
fiscal year, the Committee also considered the factors set forth above. See
"Employment Agreements."

TAX LIMIT. The cash compensation to be paid to each of the Company's
executive officers for the 1997 fiscal year is not expected to exceed the $1
million limit on the tax deductibility of such compensation imposed under
federal tax legislation enacted in 1993. In addition, the Board intends to
impose a limit on the maximum number of shares of Common Stock for which any one
participant may be granted stock options over the remaining term of the plan in
order to ensure that any compensation deemed paid to an executive officer upon
the exercise of an outstanding option under the 1994 Stock Option Plan will
qualify as performance-based compensation which will not be subject to the $1
million limitation. No other changes to the Company's executive compensation
programs will be made as a result of the new limitation until final Treasury
Regulations are issued with respect to such limitation.

25
<PAGE>
We conclude our report with the acknowledgment that no member of the
Compensation Committee is a former or current officer or employee of the Company
or any of its subsidiaries.

Compensation Committee
David Costine
Keith Schaefer

26
<PAGE>
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT
OF 1934 THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT,
IN WHOLE OR IN PART, THE FOREGOING REPORT AND THE PERFORMANCE GRAPH WHICH
FOLLOWS SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH
FILINGS.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

There were no Compensation Committee interlocks or insider participation
during fiscal year 1997.

COMPARISON OF STOCKHOLDER RETURN
PERFORMANCE COMPARISON -- NASDAQ MARKET INDEX AND H & Q TECHNOLOGY INDEX

The following stock performance graph shows the cumulative total return of
the Company's Common Stock from March 31, 1992, and for each fiscal year end
thereafter. The Company's Common Stock performance is compared to the cumulative
total return for the same period of the Nasdaq index and the Hambrecht & Quist
Technology Index. The graph assumes that $100 was invested on March 31, 1992 in
the Company's Common Stock and in each index and that all dividends were
reinvested. No cash dividends have been declared on the Company's Common Stock.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
SPECTRUM HOLOBYTE H&Q TECHNOLOGY NASDAQ STOCK MARKET-U.S.
<S> <C> <C> <C>
Mar-92 100.00 100.00 100.00
Mar-93 45.61 119.32 114.96
Mar-94 64.91 136.72 124.09
Mar-95 112.72 177.37 138.04
Mar-96 57.02 241.39 187.42
Mar-97 43.86 280.57 208.31
Scaled Prices
</TABLE>

27
<PAGE>
ANNUAL REPORT

A copy of the Company's Annual Report for the fiscal year ended March 30,
1997 has been mailed concurrently with this Proxy Statement to all stockholders
entitled to notice of and to vote at the Annual Meeting. The Annual Report to
stockholders is not incorporated into this Proxy Statement and is not considered
proxy solicitation material.

FORM 10-K

The Company filed with the SEC an Annual Report on Form 10-K. Stockholders
may obtain copies of this report, without charge, by writing to the Company's
Vice President Corporate Controller at the Company's executive offices at 2490
Mariner Square Loop, Suite 100, Alameda, California 94501.

OTHER MATTERS

Management does not know of any matters to be presented at this Annual
Meeting other than those set forth herein and in the Notice accompanying this
Proxy Statement.

THE BOARD OF DIRECTORS
OF SPECTRUM HOLOBYTE, INC.

August 1, 1997
Alameda, California

28
<PAGE>
PRELIMINARY COPY
----------------

THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECTRUM HOLOBYTE, INC.

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

SPECTRUM HOLOBYTE, INC.
PROXY FOR 1997 ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 18, 1997

The undersigned stockholder(s) of Spectrum HoloByte, Inc., a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, each dated August 1, 1997, and hereby
appoints Stephen M. Race and Gilman G. Louie, and each of them, Proxies and
Attorneys-in-Fact, with full power to each of substitution, on behalf and in
the name of the undersigned, to represent the undersigned at the 1997 Annual
Meeting of Stockholders of Spectrum HoloByte, Inc. to be held on September
18, 1997 at 9:30 a.m., local time, at the Waterfront Plaza Hotel, Jack London
Square, Ten Washington Street, Oakland, California, 94607 and at any
adjournment or postponement thereof, and to vote all shares of Common Stock
which the undersigned would be entitled to vote if personally present on any
of the following matters and with discretionary authority as to any and all
other matters that may properly come before the meeting.

1. Election of Directors to serve one year terms.

/ / FOR all nominees listed below / / WITHHOLD authority to vote for
(except as indicated). all nominees listed below.

IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW:

Gilman G. Louie Vinod Khosla Keith Schaefer
David C. Costine Stephen M. Race

2. To approve an amendment to the Company's 1994 Stock Option Plan to
increase the number of shares of Common Stock for issuance thereunder by
600,000 shares to 5,064,321 shares.

/ / FOR / / AGAINST / / ABSTAIN

<PAGE>

3. To approve an amendment to the Company's Employee Stock Purchase
Plan for the purpose of increasing the number of shares reserved for issuance
thereunder by 200,000 to 600,000 shares.

/ / FOR / / AGAINST / / ABSTAIN

4. To amend the Company's Certificate of Incorporation to change the
Company's name from Spectrum HoloByte, Inc. to MicroProse, Inc.

/ / FOR / / AGAINST / / ABSTAIN

5. To ratify the selection of Coopers & Lybrand, LLP as the
independent public accountants for the Company for the fiscal year ending
March 29, 1998.

/ / FOR / / AGAINST / / ABSTAIN

6. To act upon such other business as may properly come before the
meeting or at any adjournment or postponement thereof.

/ / FOR / / AGAINST / / ABSTAIN

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED FOR EACH OF THE ABOVE PERSONS AND PROPOSALS, AND FOR
SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING AS THE PROXY
HOLDERS DEEM ADVISABLE.

Dated , 1997
-----------------
Signature:
-----------------------
Signature:
-----------------------

I plan to attend the meeting: / /

(This proxy should be marked, dated and signed by each shareholder exactly
as such shareholder's name appears hereon, and returned promptly in the
enclosed envelope. Persons signing in a fiduciary capacity should so
indicate. A corporation is requested to sign its name by its President or
other authorized officer, with the office held designated. If shares are held
by joint tenants or as community property, both holders should sign.)

TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE MARK, SIGN AND
DATE THIS PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE.