3DO CO, 424B1, 1999-07-23

3DO CO
424B1, 1999-07-23
PREPACKAGED SOFTWARE

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<PAGE>
PROSPECTUS

7,900,000 SHARES

[3DO LOGO]

COMMON STOCK

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

The 3DO Company is offering 7,900,000 shares to be sold in this offering. Of
these shares, we have reserved 1,400,000 shares for sale to William M. Hawkins
III, our Chairman and Chief Executive Officer, who has expressed an interest in
purchasing shares in this offering at the public offering price. Any reserved
shares not purchased by Mr. Hawkins will be offered by the underwriters to the
general public on the same basis as the other shares offered hereby. The last
reported sale price of our common stock on the Nasdaq National Market on July
22, 1999 was $5.56 per share.

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

PRICE $5.4375 PER SHARE

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

TRADING SYMBOL:
NASDAQ NATIONAL MARKET SYMBOL--THDO

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.

<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- -------------
<S> <C> <C>
Public offering price.............................................. $ 5.43750 $ 42,956,250
Underwriting discounts and commissions............................. $ 0.32625 $ 2,120,625
Proceeds to The 3DO Company........................................ $ 5.11125 $ 40,835,625
</TABLE>

The underwriters will not receive any underwriting discounts or commissions
from the sale of 1,400,000 shares to Mr. Hawkins. We have granted to the
underwriters an option to purchase up to 1,185,000 additional shares to cover
over-allotments.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

GERARD KLAUER MATTISON & CO., INC. WEDBUSH MORGAN SECURITIES

Prospectus dated July 23, 1999

<PAGE>
INSIDE FRONT COVER

There is a green plastic army man figure saluting on a background of a
fictitious green flag. Emblazoned across the foreground is:

"I want you to know, I'd be proud to lead you to victory."--Sarge
<PAGE>
GATEFOLD GRAPHIC

There is a central bubble on a blue background with The 3DO Company logo
inscribed and surrounded by the words: Engines, Libraries and Tools. Bubbles of
various sizes radially emanate from the central bubble. Within each bubble is a
graphic of an existing software title or a title under development with the
letters, PC, N, or P attached in a smaller bubble and keyed to the legend:
personal computer, Nintendo 64 and PlayStation Game Console. Several smaller
bubbles with the words New Brands, PlayStation, Sequels, and N64 are dispersed
across the entire graphic. The phrase, "Brand Leverage--Turning Technology Into
Fantasy Worlds" is located in the upper-right corner. The 3DO Company logo is
located in the lower-right corner.

The following titles are included in bubbles in the graphic. Family Game
Pack 2; Vegas Games 2000; BattleTanx II: Global Assault; Might and Magic VI: The
Mandate of Heaven; Heroes of Might and Magic III; Armageddon's Blade Expansion
Pack; Might and Magic VII: For Blood and Honor; Crusaders of Might and Magic;
High Heat Baseball 1999; High Heat Baseball 2000; Army Men II; Army Men III;
Army Men 3D; Army Men: Air Attack; Army Men: Sarge's Heroes.
<PAGE>
PROSPECTUS SUMMARY

BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. IN THIS PROSPECTUS, "3DO," "WE," "US" AND "OUR"
REFER TO THE 3DO COMPANY AND ITS SUBSIDIARIES. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES, AND ESPECIALLY THE RISKS DESCRIBED UNDER "RISK FACTORS," BEFORE
DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. UNLESS WE STATE OTHERWISE IN
THIS PROSPECTUS, ALL OF THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION.

THE 3DO COMPANY

We are a leading developer and publisher of branded interactive
entertainment software. Our software products operate on several multimedia
platforms including personal computers, the Sony PlayStation and Nintendo N64
video game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color hand-held video game platform and are planning to
develop software for next-generation video game consoles. We plan to continue to
extend our popular brands across multiple categories, or "genres," and
platforms. These brands include Army Men, BattleTanx, Family Game Pack, Heroes
of Might and Magic, High Heat Baseball, and Might and Magic, many of which have
won industry awards. Our software products cover a variety of genres, including
action, strategy, adventure/role playing, sports and family entertainment. We
develop our software internally in our company-owned studios and have created an
extensive portfolio of versatile technologies that allow us to develop new
software products more quickly and cost-effectively. Our software publishing
revenues increased 409% to $48.0 million in our fiscal year ended March 31, 1999
from $9.4 million in our fiscal year ended March 31, 1998.

The NPD Group estimates that retail sales of interactive entertainment
software in the United States grew more than 25% to $4.9 billion in 1998 from
$3.9 billion in 1997. Declining prices of video game consoles and personal
computers, together with lower-cost, higher-quality graphics and audio
capabilities, have led to a growing installed base of platforms and greater
demand for video games. NPD estimates that a total of 20.9 million Sony
PlayStation and Nintendo N64 video game console systems have been sold in the
United States as of April 1999. International Data Corporation estimates that 46
million U.S. households owned a personal computer in 1998, of which over 71%
have played video games on their personal computers.

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

Our objective is to enhance our position as a leading developer and
publisher of branded interactive entertainment software. The key elements of our
strategy are to:

- BUILD UPON OUR RECOGNIZED PORTFOLIO OF HIGH-QUALITY BRANDS. Our product
strategy is to extend our established interactive entertainment software
brands and proprietary technologies across multiple genres and platforms
in order to better differentiate our products to consumers and retailers.

- CONTINUE TO DEVELOP SOFTWARE PRODUCTS AND PROPRIETARY TECHNOLOGIES IN OUR
INTERNAL DEVELOPMENT STUDIOS. We develop our interactive entertainment
software and brands internally to better control product quality,
development schedules and costs.

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<PAGE>
- EXTEND OUR PROPRIETARY TECHNOLOGIES OVER MULTIPLE PRODUCTS, GENRES AND
PLATFORMS. Our internal studios will continue to create an extensive
portfolio of versatile, company-owned technologies, including interactive
software engines, development tools, various programming codes and
artwork, that we can use to develop new products more quickly and
cost-effectively.

- EXPAND OUR OPERATIONS IN EUROPE. In fiscal 2000, we plan to expand our
European operations by increasing our direct sales and marketing efforts,
as well as customizing our products for local markets.

We distribute our products through a broad variety of retail outlets,
including mass merchants, warehouse club stores, computer and software retail
chains and other specialty retailers. We have significantly increased the number
of retail outlets that sell our products to over 20,000 in fiscal 1999 from
approximately 6,000 in fiscal 1998. Our largest retail customers in fiscal 1999
were Best Buy, Wal-Mart, Electronics Boutique, Babbage's, Toys "R" Us,
Blockbuster Video, Target, Sears, Hollywood Video, KayBee Toys and Kmart. In
addition, we have recently enhanced our sophisticated Web site to enable
consumers to directly purchase products from us and to obtain game tips and chat
on-line about our products.

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

Our executive offices are located at 600 Galveston Drive, Redwood City,
California 94063 and our telephone number is (650) 261-3000. Our Web site is
located at www.3do.com. Information contained on our Web site should not be
considered part of this prospectus.

RECENT OPERATING RESULTS

We recently announced that our revenues were $13.1 million in the quarter
ended June 30, 1999. Our gross profit was $9.2 million and total operating
expenses were $15.7 million for the quarter. We had a net loss of $6.8 million,
or a net loss of $0.26 per share. As of June 30, 1999, our cash, cash
equivalents and short-term investments were $14.4 million and our working
capital was $16.7 million.

THE OFFERING

<TABLE>
<S> <C>
Common stock offered by 3DO................. 7,900,000 shares

Common stock to be outstanding immediately
after this offering....................... 33,440,242 shares

Use of proceeds............................. We expect to use the net proceeds of this
offering for working capital and general
corporate purposes, including approximately
$10.0 million to develop software for
next-generation video game platforms and $5.0
million to expand our operations in Europe.
See "Use of Proceeds."

Nasdaq National Market symbol............... THDO
</TABLE>

The number of shares of our common stock outstanding immediately after this
offering is based on shares of our common stock outstanding as of March 31,
1999, excluding treasury stock and also excluding 11,421,526 shares of our
common stock subject to outstanding options and 5,546,670 shares of our common
stock available for future grants under our stock option plan. If the
underwriters exercise the over-allotment option in full, there will be
34,625,242 shares outstanding.

4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share and other data)

The following table summarizes our financial data. The data presented in
this table are derived from the "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations of Software Publishing Business" and
our consolidated financial statements and notes to those statements that are
included elsewhere in this prospectus. You should read those sections for a
further explanation of the financial data summarized here. The as adjusted
balance sheet data gives effect to this offering and the application of the
estimated net proceeds of approximately $40.1 million.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED MARCH 31,
---------------------------------- ------------------------
1997 1998 1999 1998 1999
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

SOFTWARE PUBLISHING
Revenues.............................................. $ 9,540 $ 9,429 $ 48,019 $ 1,550 $ 23,191
Gross profit.......................................... 4,143 5,513 34,241 980 17,599
Operating income (loss)............................... (39,500) (22,981) (14,095) (6,707) 2,545
Income (loss) before taxes............................ (37,385) (21,107) (12,976) (6,202) 2,529

HARDWARE SYSTEMS
Revenues.............................................. $ 82,810 $ 29,461 -- -- --
Gross profit.......................................... 80,218 29,418 -- -- --
Operating income...................................... 54,731 25,831 -- -- --
Gain on sale of hardware systems assets............... -- 18,032 -- -- --
Income before taxes................................... 54,731 43,863 -- -- --

CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS
Income (loss) before taxes............................ $ 17,346 $ 22,756 $ (12,976) $ (6,202) $ 2,529
Net income (loss)..................................... 13,271 22,537 (13,167) (6,338) 2,552
Basic net income (loss) per share..................... $ 0.48 $ 0.85 $ (0.51) $ (0.25) $ 0.10
Diluted net income (loss) per share................... $ 0.46 $ 0.83 $ (0.51) $ (0.25) $ 0.09

OTHER DATA:
Products released..................................... 4 3 14 1 5
Products sold......................................... 11 7 17 7 17
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......................................... $ 13,851 $ 53,987
Working capital........................................................................... 15,675 55,811
Total assets.............................................................................. 40,488 80,624
Short-term debt........................................................................... 9,505 9,505
Total stockholders' equity................................................................ 20,115 60,251
</TABLE>

5
<PAGE>
RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS.

IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE
ALL OR PART OF YOUR INVESTMENT.

THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.

OUR QUARTERLY OPERATING RESULTS FREQUENTLY VARY SIGNIFICANTLY DUE TO FACTORS
OUTSIDE OUR CONTROL.

We have experienced and expect to continue to experience wide fluctuations
in quarterly operating results as a result of a number of factors. We cannot
control many of these factors, which include the following:

- the timing and number of new title introductions;

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

- market acceptance of our titles;

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

- announcements and introductions of new hardware platforms;

- product returns;

- changes in pricing policies by us and our competitors;

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

- delays in shipment.

For these reasons, you should not rely on period-to-period comparisons of
our financial results as indications of future results. Our future operating
results could fall below the expectations of securities industry analysts or
investors. Any such shortfall could result in a significant decline in the
market price of our common stock. Fluctuations in our operating results will
likely increase the volatility of our stock price.

OUR SALES ARE SEASONAL, AND WE DEPEND ON STRONG SALES DURING THE HOLIDAY SEASON.

Sales of our titles are seasonal. Our peak shipments typically occur in the
third and fourth calendar quarters (our second and third fiscal quarters) as a
result of increased demand during the year-end holiday season. If we do not
achieve strong sales in the second half of each calendar year, our fiscal year
results would be adversely affected.

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

In fiscal 1999, three brands accounted for approximately 75% of our
revenues. Titles in the Army Men brand represented 31%, BattleTanx represented
19%, and Might and Magic represented 25% of our total revenues in fiscal 1999.
Because we depend on a limited number of brands for the

6
<PAGE>
development of sequels and line extensions, if one or more of our brands were to
lose their current popularity, our revenues and profits may be seriously harmed.
Furthermore, we cannot be certain that a sequel or line extension of a popular
brand will be as popular as prior titles in that brand.

OUR BUSINESS DEPENDS ON "HIT" PRODUCTS, SO IF WE FAIL TO ANTICIPATE CHANGING
CONSUMER PREFERENCES WE COULD SUFFER DECLINING REVENUES.

Few interactive entertainment software products have achieved sustained
market acceptance, with those "hits" accounting for a substantial portion of
revenues in the industry. Our ability to develop a hit title depends on numerous
factors beyond our control, including:

- critical reviews;

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

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

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

- rapidly changing consumer preferences and demographics.

If we fail to accurately anticipate and promptly respond to these factors,
our sales could decline. If we do not achieve adequate market acceptance of a
title, we could be forced to accept substantial product returns or grant
significant markdown allowances to maintain our relationship with retailers and
our access to distribution channels.

IF WE DO NOT CREATE TITLES FOR NEW HARDWARE PLATFORMS, OUR REVENUES WILL
DECLINE.

The interactive entertainment software market and the personal computer and
video game console industries in general have been affected by rapidly changing
technology, which leads to software and platform obsolescence. Our titles have
been developed primarily for multimedia personal computers and video game
consoles, including the Nintendo N64 and Sony PlayStation. Our software designed
for personal computers must maintain compatibility with new personal computers,
their operating software and their hardware accessories. If we are unable to
successfully adapt our software and develop new titles to function on various
hardware platforms and operating systems, our business could be seriously
harmed.

TITLES WE DEVELOP FOR NEW PLATFORMS MAY NOT BE SUCCESSFUL.

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

IF OUR NEW PRODUCT INTRODUCTIONS ARE DELAYED, WE COULD LOSE SIGNIFICANT
POTENTIAL REVENUES.

Most of our products have a relatively short life cycle and sell for a
limited period of time after their initial release, usually less than one year.
We depend on the timely introduction of successful new products, including
enhancements of or sequels to existing products and conversions of previously
released products to additional platforms, to replace declining net revenues
from older products.

The complexity of product development, uncertainties associated with new
technologies and the porting of our products to new platforms makes it difficult
to introduce new products on a timely basis. We have experienced delays in the
introduction of some new products. We anticipate that we will experience delays
in the introduction of new products, including some products currently under

7
<PAGE>
development. We may also experience delays in receiving approval of our games
from Sony and Nintendo. Delays in the introduction of products, especially in
the third calendar quarter, could significantly harm our operating results.

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

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

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

We typically earn a higher gross margin on sales of games for the personal
computer platform. Gross margins on sales of products for game console platforms
are generally lower because of:

- license fees payable to Sony and Nintendo; and

- higher manufacturing costs for game cartridges for the Nintendo N64
console platform.

Therefore, our gross margins in any period can be significantly affected by the
mix of products we sell for the personal computer, Sony PlayStation and Nintendo
N64 platforms.

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

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

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

- increasing sophistication of hardware technology and consumer tastes; and

- increasing costs of licenses for intellectual properties.

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

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

Historically, the anticipation or introduction of next-generation video game
platforms has resulted in decreased sales of interactive entertainment software
for existing platforms. Sega has introduced its Dreamcast system in Japan and
expects to introduce it in the United States and Europe in late 1999. We
recently entered into an agreement with Ubi Soft Entertainment under which Ubi
Soft will adapt Heroes of Might and Magic III for the Dreamcast system. We
cannot be certain that this product will be released on schedule or at all. Sony
has recently announced the development of the next generation of the
PlayStation. Nintendo has stated that it is in the process of developing a new
video game platform. If sales of current models of multimedia personal computers
or video game consoles level off or decline as a result of the anticipated
release of new platforms or other technological changes, sales of our software
titles developed for current platforms can be expected to decrease. We expect
that as

8
<PAGE>
more advanced platforms are introduced, consumer demand for software for older
platforms may decline. As a result, our titles developed for such platforms may
not generate sufficient sales to make such titles profitable. Obsolescence of
software or platforms could leave us with increased inventories of unsold titles
and limited amounts of new titles to sell to consumers.

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

The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new hardware systems and
software products. Our competitors vary in size from small companies to very
large corporations which have significantly greater financial, marketing and
product development resources than us. Due to these greater resources, some of
our competitors are better able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to third party software
developers and licensors of desirable properties.

Our competitors include the following:

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

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

- Large diversified entertainment or software companies, such as The Walt
Disney Company or Microsoft, many of which own substantial libraries of
available content and have substantially greater financial resources than
us, may decide to compete directly with us or to enter into exclusive
relationships with our competitors.

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

Retailers of our products typically have a limited amount of shelf space and
promotional resources. Publishers of interactive entertainment software products
compete intensely for high quality retail shelf space and promotional support
from retailers. To the extent that the number of consumer software products
increases, competition for shelf space may intensify and may require us to
increase our marketing expenditures. Due to increased competition for limited
shelf space, retailers and distributors are in an increasingly better position
to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return privileges. Retailers
and distributors also consider marketing support, quality of customer service
and historical performance in selecting products to sell. Our products
constitute a relatively small percentage of any retailer's sales volume, and we
cannot be certain that retailers will continue to purchase our products or to
provide our products with adequate levels of shelf space and promotional
support.

IF MORE MASS MERCHANTS ESTABLISH EXCLUSIVE BUYING ARRANGEMENTS, OUR SALES AND
GROSS MARGIN WOULD BE ADVERSELY IMPACTED.

Mass merchants have become the most important distribution channels for
retail sales of interactive entertainment software. A number of these mass
merchants, including Wal-Mart, have entered into exclusive buying arrangements
with other software developers or distributors, which prevent us from selling
some of our products directly to that mass merchant. If the number of mass
merchants entering into exclusive buying arrangements with software distributors
were to increase, our ability to sell to those merchants would be restricted to
selling through the exclusive distributor. Because we typically earn a lower
gross margin on sales to distributors than on direct sales to retailers, this
would have the effect of lowering our gross margin.

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

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

Our sales are typically made on credit, with terms that vary depending upon
the customer and the demand for the particular title being sold. We do not hold
any collateral to secure payment by our customers. As a result, we are subject
to credit risks, which are increased when our receivables represent sales to a
limited number of retailers or distributors or are concentrated in foreign
markets. Distributors and retailers in the computer industry have from time to
time experienced significant fluctuations in their businesses, and there have
been a number of business failures among these entities. The insolvency or
business failure of any significant distributor or retailer of our products
could result in reduced revenues and write-offs of accounts receivable. If we
are unable to collect on accounts receivable as they become due and such
accounts are not covered by insurance, it could adversely affect our business,
operating results and financial condition.

RETURNS OR EXCHANGES OF OUR TITLES MAY HARM OUR BUSINESS.

Our arrangements with retailers for published titles require us to accept
returns for unsold titles or defects, or provide adjustments for markdowns. We
establish a reserve for future returns of published titles at the time of sales,
based primarily on these return policies and historical return rates, and we
recognize revenues net of returns. Our provision for sales returns and
allowances was $6.9 million in fiscal 1999. If return rates or markdowns
significantly exceed our estimates, our business could be seriously harmed.

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

We depend heavily on non-exclusive licenses with Sony and Nintendo both for
the right to publish titles for their platforms and for the manufacture of our
software designed for use on their platforms. Our licenses with Sony and
Nintendo require that we obtain their approval for title proposals as well as
completed games and all associated artwork and marketing materials. This
approval process could cause a delay in our ability to release a new title and
cause us to incur additional expenses to modify the product and obtain approval.
As a result, the number of titles we are able to publish for these platforms may
be limited.

The license with Sony covering the United States terminates in September
2001 and the license with Nintendo terminates in May 2001. Our license with Sony
covering many countries in Europe and the Middle East as well as Australia and
New Zealand expires in December 2005. We are currently negotiating with Nintendo
to renew and expand the scope of the Nintendo license. If any of these licenses
were terminated or not renewed on acceptable terms, we would be unable to
develop and publish software developed for these platforms and our business
would be seriously harmed.

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

Each of Sony and Nintendo is the sole manufacturer of the titles we publish
under license from them. Each platform license provides that the manufacturer
may raise our costs for the titles at any time and grants the manufacturer
substantial control over whether and when we can release new titles. The
relatively long manufacturing and delivery cycle for cartridge-based titles for
the Nintendo platform (from four to six weeks) requires us to accurately
forecast retailer and consumer demand for

10
<PAGE>
our titles far in advance of expected sales. Nintendo cartridges are also more
expensive to manufacture than CD-ROMs, resulting in greater inventory risks for
those titles. Each of Sony and Nintendo also publishes software for its own
platform and also manufactures titles for all of its other licensees and may
choose to give priority to its own titles or those of other publishers if it has
insufficient manufacturing capacity or if there is increased demand.

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

Our contract manufacturers, Sony, Nintendo and JVC, may not have sufficient
production capacity to satisfy our scheduling requirements during any period of
sustained demand. If manufacturers do not supply us with finished titles on
favorable terms without delays, our operations could be materially interrupted,
and our business could be seriously harmed.

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

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

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

IF OUR INTERNATIONAL OPERATIONS EXPAND, WE WILL ENCOUNTER RISKS WHICH COULD
ADVERSELY AFFECT OUR BUSINESS.

Our products are sold in international markets both directly and through
licensees, primarily in Canada, the United Kingdom and other European countries,
and to a lesser extent in Asia and Latin America. As a result of our current
international sales and our international expansion, we will become increasingly
subject to risks inherent in foreign trade, which can have a significant impact
on our operating results. These risks include the following:

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

- increased credit risks and collection difficulties;

- tariffs and duties;

- increased risk of piracy;

- shipping delays;

- fluctuations in foreign currency exchange rates; and

- international political, regulatory and economic developments.

IF INTERNET-BASED GAMEPLAY BECOMES POPULAR, WE WOULD NEED TO QUICKLY DEVELOP
PRODUCTS AND ESTABLISH A VIABLE INTERNET BUSINESS MODEL.

We offer a role playing fantasy game called "Meridian 59," which is a
server-based Internet game. This type of game's software resides on a remote
server, and can be played only by accessing that server via the Internet.
Meridian 59 has not achieved significant market penetration. We provide free
play time and other incentives, such as discounts and contests, to interest the
limited number of

11
<PAGE>
consumers currently in the Internet game market to try Meridian 59. We have not
yet established that any of these incentives, the availability of server-based
games on the Internet or whether the expenses we incur in offering these
incentives will result in significant growth in the use of our server-based
Internet games or generate revenues for us in the future. A number of software
publishers who compete with us have developed or are currently developing
server-based Internet games for use by consumers over the Internet. If the
Internet becomes a more popular venue for interactive software games, then we
will need to both rapidly develop and release games for the Internet, and also
establish a profitable business model for Internet-based games.

WE DEPEND ON OUR KEY PERSONNEL AND OUR ABILITY TO HIRE ADDITIONAL QUALIFIED
PERSONNEL.

Our success is largely dependent on the personal efforts of certain
personnel, especially Trip Hawkins. Our success is also dependent upon our
ability to hire and retain additional qualified operating, marketing, technical
and financial personnel. We rely heavily on our own internal development studios
to develop our products. The loss of any key developers or groups of developers
may delay the release of our products. Competition for personnel is intense,
especially in the San Francisco Bay area where we maintain our headquarters, and
we cannot be certain that we will successfully attract and retain additional
qualified personnel.

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

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

ILLEGAL COPYING OF OUR SOFTWARE ADVERSELY AFFECTS OUR SALES.

Although we use copy-protection devices, an unauthorized person may be able
to copy our software or otherwise obtain and use our proprietary information. If
a significant amount of illegal copying of software published or distributed by
us occurs, our product sales could be adversely impacted. Policing illegal use
of software is extremely difficult, and software piracy is expected to persist.
In addition, the laws of some foreign countries in which our software is
distributed do not protect us and our intellectual property rights to the same
extent as the laws of the U.S.

WE MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,
software developers may increasingly become subject to infringement claims.
Although we make reasonable efforts to ensure that our products do not violate
the intellectual property rights of others, we cannot be certain that claims of
infringement will not be made. Any such claims, with or without merit, can be
time consuming and expensive to defend. From time to time, we have received
communications from third parties asserting that features or content of certain
of our products may infringe upon their intellectual property rights. We cannot
be certain that existing or future infringement claims against us will not
result in costly litigation or require us to seek to license the intellectual
property rights of third parties, which licenses may not be available on
acceptable terms, if at all.

12
<PAGE>
WE DEPEND ON LICENSES FROM THIRD PARTIES FOR THE DEVELOPMENT OF ONE OF OUR
BRANDS.

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

RATING SYSTEMS FOR INTERACTIVE ENTERTAINMENT SOFTWARE, GOVERNMENT CENSORSHIP OR
RETAILER RESISTANCE TO VIOLENT GAMES COULD INHIBIT OUR SALES OR INCREASE OUR
COSTS.

The home video game industry requires interactive entertainment software
publishers to identify products within defined rating categories and
communicating the ratings to consumers through appropriate package labeling and
through advertising and marketing presentations consistent with each product's
rating. If we do not comply with these requirements, it could delay our product
introductions and require us to remove products from the market.

Legislation is currently pending at both the federal and state level in the
United States to establish mandatory video game rating systems. Mandatory
government imposed interactive entertainment software products rating systems
eventually may be adopted in many countries, including the United States. Due to
the uncertainties inherent in the implementation of such rating systems,
confusion in the marketplace may occur and publishers may be required to modify
or remove products from the market. However, we are unable to predict what
effect, if any, such rating systems would have on our business.

Many foreign countries have laws which permit governmental entities to
censor the content of certain works, including interactive entertainment
software. As a result, we may be required to modify some of our products or
remove them from the market which could result in additional expense and loss of
revenues.

Certain retailers have in the past declined to stock some software products
because they believed that the content of the packaging artwork or the products
would be offensive to the retailer's customer base. Although such actions have
not yet affected us, we cannot be certain that our distributors or retailers
will not take such actions in the future.

THE YEAR 2000 RISK MAY ADVERSELY AFFECT US.

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

THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.

Disclosures of our operating results (particularly if below the estimates of
securities industry analysts), announcements of various events by us or our
competitors and the development and marketing of new titles affecting the
interactive entertainment software industry, as well as other factors, may cause
the market price of our common stock to change significantly over short periods
of time.

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

We expect the net proceeds from this offering, cash expected to be generated
from operations and available borrowings under our credit facilities should be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds,
which may not be available on acceptable terms, if at all. We may also require
additional capital to acquire or invest in complementary businesses or products
or obtain the right to use complementary

13
<PAGE>
technologies. If we issue additional equity securities to raise funds, the
ownership percentage of our existing stockholders, including the investors in
this offering, would be reduced. New investors may demand rights, preferences or
privileges senior to those of existing holders of our common stock. Debt
incurred by us would be senior to equity in the ability of debtholders to make
claims on our assets. The terms of any debt issued could impose restrictions on
our operations. If we cannot raise needed funds on acceptable terms, we may not
be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.

FUTURE ACQUISITIONS MAY STRAIN OUR OPERATIONS.

We have acquired various properties and businesses, and we intend to
continue to pursue opportunities by making selective acquisitions consistent
with our business strategy, although we may not make any more acquisitions. The
failure to adequately address the financial and operational risks raised by
acquisitions of technology and businesses could harm our business.

Financial risks related to acquisitions include the following:

- potentially dilutive issuances of equity securities;

- use of cash resources;

- the incurrence of additional debt and contingent liabilities;

- large write-offs; and

- amortization expenses related to goodwill and other intangible assets.

Acquisitions also involve operational risks, including:

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

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

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

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

- loss of key employees of the acquired company.

MANAGEMENT HAS BROAD DISCRETION AS TO USE OF PROCEEDS.

Our management can spend the proceeds from this offering in ways with which
our investors may not agree. We cannot predict that the proceeds will be used to
yield a favorable return.

WE HAVE NO INTENTION OF PAYING DIVIDENDS.

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

ANTI-TAKEOVER PROVISIONS MAY PREVENT AN ACQUISITION.

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

14
<PAGE>
OFFICERS AND DIRECTORS MAY BE ABLE TO INFLUENCE STOCKHOLDER ACTIONS.

Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately 24.1% of our outstanding common stock
following the completion of this offering. Of this amount, Trip Hawkins, our
Chairman and Chief Executive Officer, will beneficially own approximately 22.1%,
assuming that he purchases the 1,400,000 shares reserved for him in this
offering. These stockholders acting together would be able to significantly
influence all matters that require approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions. See "Principal Stockholders."

SHARES ELIGIBLE FOR FUTURE SALE MAY NEGATIVELY AFFECT OUR STOCK PRICE.

If our stockholders sell substantial amounts of common stock (including
shares issued upon the exercise of options) in the public market following this
offering, the market price of our common stock could fall. The perception that
such sales may occur could cause the market price of our common stock to fall on
or before the date those shares are first eligible for sale. Such sales also
might make it more difficult for us to sell securities in the future at a time
and price that we deem appropriate. Upon completion of this offering, we will
have outstanding approximately 33,440,242 shares of common stock (based upon
shares outstanding as of March 31, 1999), assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options after
March 31, 1999. Of these shares, 6,500,000 shares of the 7,900,000 shares sold
in this offering and approximately 20,362,338 additional shares will be freely
tradable. An additional approximately 6,577,904 shares will be eligible for sale
in the public market 180 days after the date of this prospectus upon expiration
of lock-up agreements with the underwriters.

15
<PAGE>
FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. These forward-looking statements include, but are
not limited to, statements under "Management's Discussion and Analysis of
Financial Resources and Results of Operations," "Use of Proceeds" and
"Business." This prospectus also contains forward-looking statements attributed
to certain third parties relating to their estimates regarding the growth of
certain markets. Forward-looking statements are subject to known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance, achievements and prospects to be materially different
from those expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include, among others, those identified under
"Risk Factors" and elsewhere in this prospectus.

These forward-looking statements apply only as of the date of this
prospectus. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this prospectus might not occur. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us
described above and elsewhere in this prospectus. Such forward-looking
statements include statements as to, among others:

- our expectations regarding the timing of the introduction of some new
products;

- our expectations regarding the decrease in average selling prices;

- our ability to reduce manufacturing costs;

- our expectations that as more advanced platforms are introduced, consumer
demand for software for older platforms may decline;

- our expectations as to the change in the distribution channels for
interactive software;

- our expectations to satisfy cash requirements for at least twelve months
from a combination of the proceeds from this offering, our cash flow from
operations and our available credit facilities;

- our expectations as to our future cash requirements;

- our expectations as to our international expansion and hiring personnel
for the European expansion;

- our expectations as to the retention of future earnings;

- our expectations regarding the future development of our business;

- our expectations regarding negative cash flows;

- our expectations regarding operating results and expenses;

- our expectations regarding the success and cost of the Year 2000 working
group;

- our expectations regarding the development of Year 2000 contingency plans;

- our expectations regarding the effect of recent accounting pronouncements;

- our expectations regarding product releases;

- our expectations regarding the localization of our products for European
countries; and

- our expectations regarding the planned increase of sales directly to
retailers in North America.
------------------------

3DO, 3DO Games Decathlon, Air Attack, Armageddon's Blade, Army Men,
BattleTanx, Blood and Honor, Celebrity Poker, Crusaders of Might and Magic, Dark
Auspices, Family Game Pack, Game Update, Gulf War: Operation Desert Hammer,
Heroes, Heroes of Might and Magic, High Heat Baseball, Killing Time, Lead and
Destroy, Meridian, Meridian 59 Liberation, Might and Magic, Might and Magic
Crusade, Mind Games, Mother of All War Games, New World Computing, Real Combat.
Plastic Men., Requiem: Avenging Angel, Sarge, Sarge's Heroes, Team .366, Toy
Heroes, Toys in Space, Toy Wars, TruPitch, TruPlay, U.S. vs. Iraq, Uprising,
Vegas Games, We're Here to Play, Worlds of Might and Magic and their respective
logos are trademarks of The 3DO Company in the United States and other
countries. All other trademarks or service marks appearing in this prospectus
are trademarks or service marks of the respective companies that use them.

16
<PAGE>
USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of our common stock
offered by us will be approximately $40.1 million (approximately $46.2 million
if the underwriters' over-allotment option is exercised in full), at a public
offering price of $5.4375 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us.

We currently expect to use the net proceeds from this offering primarily for
working capital and general corporate purposes, including approximately $10.0
million for the development of interactive entertainment software games for
next-generation video game platforms. We also expect to use approximately $5.0
million of the net proceeds to expand our operations in Europe, including hiring
sales, marketing and administrative personnel and expanding our facilities. In
addition, we may use a portion of the net proceeds for further development of
our product lines through the acquisition of complementary products,
technologies and businesses. However, we have no present agreements,
commitments, or understandings with respect to any acquisitions. Pending such
uses, we will invest the net proceeds in short-term, investment grade,
interest-bearing securities.

DIVIDEND POLICY

We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, our line of credit with Coast Business Credit
prohibits the payment of dividends.

PRICE RANGE OF COMMON STOCK

Our common stock is quoted on the Nasdaq National Market under the symbol
"THDO." The following table sets forth the high and low closing sales prices per
share of our common stock, as reported on the Nasdaq National Market for the
periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1998 (ENDED MARCH 31, 1998)
First Quarter............................................................ $ 5.19 $ 2.75
Second Quarter........................................................... 4.50 3.25
Third Quarter............................................................ 3.75 2.00
Fourth Quarter........................................................... 3.59 2.00
FISCAL 1999 (ENDED MARCH 31, 1999)
First Quarter............................................................ $ 4.03 $ 2.63
Second Quarter........................................................... 3.91 2.75
Third Quarter............................................................ 4.81 2.00
Fourth Quarter........................................................... 6.50 3.69
FISCAL 2000 (ENDING MARCH 31, 2000)
First Quarter............................................................ $ 6.97 $ 4.44
Second Quarter (through July 22, 1999)................................... $ 6.34 $ 5.13
</TABLE>

On July 22, 1999, the last recorded sale price of our common stock on the
Nasdaq National Market was $5.56 per share. On March 31, 1999, there were 810
stockholders of record.

17
<PAGE>
CAPITALIZATION

The following table sets forth as of March 31, 1999:

- our actual capitalization; and

- our as adjusted capitalization to give effect to the receipt of the
estimated net proceeds from the sale of 7,900,000 shares of common stock
at a public offering price of $5.4375 per share after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by us. The underwriters will not receive any underwriting
discounts or commissions from the sale of any shares to William M. Hawkins
III, who has expressed an interest in purchasing shares in this offering
at the public offering price.

You should read this information together with our consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus.

The number of shares outstanding after the offering excludes:

- 11,421,526 shares issuable upon exercise of outstanding options under our
Stock Option Plans at a weighted average exercise price of $3.24 per
share;

- 1,564,662 shares available for issuance under our 1994 Employee Stock
Purchase Plan; and

- 5,546,670 shares available for issuance under our Stock Option Plans.

<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and
outstanding.......................................................................... -- --
Common stock, $0.01 par value; 50,000,000 shares authorized; 29,760,527 shares issued
and 25,540,242 shares outstanding, actual; 37,660,527 shares issued and 33,440,242
shares outstanding, as adjusted...................................................... $ 297 $ 376
Additional paid-in capital............................................................... 161,975 202,032
Accumulated other comprehensive loss..................................................... (255) (255)
Accumulated deficit...................................................................... (127,840) (127,840)
Treasury stock, at cost, 4,220,285 shares................................................ (14,062) (14,062)
---------- -----------
Total stockholders' equity............................................................. 20,115 60,251
---------- -----------
Total capitalization................................................................. $ 20,115 $ 60,251
---------- -----------
---------- -----------
</TABLE>

18
<PAGE>
DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock you pay in this offering and the net tangible book value per share
of our common stock immediately after this offering. Our net tangible book value
as of March 31, 1999 was $19.1 million or approximately $0.75 per share of
common stock. Net tangible book value per share represents the amount of our
total tangible assets less total liabilities, divided by the number of shares of
common stock outstanding. After giving effect to the sale of the 7,900,000
shares of common stock offered by us in this offering at a public offering price
of $5.4375 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, our net tangible book
value as of March 31, 1999 would have been $59.2 million or approximately $1.77
per share. This represents an immediate increase in net tangible book value of
$1.02 per share to existing stockholders and an immediate dilution in net
tangible book value of $3.67 per share to new investors of common stock in this
offering. The following table illustrates this dilution on a per share basis:

<TABLE>
<CAPTION>
Approximate public offering price per share.................................. $ 5.44
<S> <C> <C>
Net tangible book value per share as of March 31, 1999................... $ 0.75
Increase per share attributable to new investors......................... 1.02
---------
Net tangible book value per share after the offering......................... 1.77
---------
Dilution per share to new investors.......................................... $ 3.67
---------
---------
</TABLE>

The foregoing discussion and table assume no exercise of any stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase 11,421,526 shares of common stock at a weighted average
exercise price of $3.24 per share. To the extent any of these options are
exercised, there will be further dilution to investors.

19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected consolidated financial data set forth below
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
to those statements included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended March 31, 1997, 1998 and 1999
and the consolidated balance sheet data at March 31, 1998 and 1999 are derived
from our consolidated financial statements, which have been audited by KPMG LLP,
independent auditors, and are included elsewhere in this prospectus. The
consolidated balance sheet data at March 31, 1997 are derived from our
consolidated financial statements that have been audited by KPMG LLP not
included herein. The consolidated statements of operations data for the three
months ended March 31, 1998 and 1999 are derived from unaudited consolidated
financial statements not included in this prospectus and include, in the opinion
of management, all adjustments consisting only of normal recurring adjustments,
that we consider necessary for the fair presentation of our financial position
and results of operations for those periods.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED MARCH 31, 31,
------------------------------- -----------
1997 1998 1999 1998
--------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER
DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
SOFTWARE PUBLISHING
Revenues.................................................................. $ 9,540 $ 9,429 $ 48,019 $ 1,550
Cost of revenues.......................................................... 5,397 3,916 13,778 570
--------- --------- --------- -----------
Gross profit.............................................................. 4,143 5,513 34,241 980
Operating expenses:
Research and development................................................ 23,717 16,483 25,939 4,732
Sales and marketing..................................................... 5,309 5,612 13,497 2,125
General and administrative.............................................. 6,917 6,399 8,900 830
In-process research and development..................................... 7,700 -- -- --
--------- --------- --------- -----------
Total operating expenses.............................................. 43,643 28,494 48,336 7,687
--------- --------- --------- -----------
Operating income (loss)................................................... (39,500) (22,981) (14,095) (6,707)
Net interest and other income (expense)................................... 2,115 1,874 1,119 505
--------- --------- --------- -----------
Income (loss) before taxes................................................ $ (37,385) $ (21,107) $ (12,976) $ (6,202)
--------- --------- --------- -----------
HARDWARE SYSTEMS
Revenues:
Royalties and license fees.............................................. $ 79,167 $ 29,371 $ -- $ --
Development systems and other........................................... 3,643 90 -- --
--------- --------- --------- -----------
Total revenues........................................................ 82,810 29,461 -- --
Cost of revenues:
Royalties and license fees.............................................. 456 -- -- --
Development systems and other........................................... 2,136 43 -- --
--------- --------- --------- -----------
Total cost of revenues................................................ 2,592 43 -- --
Gross profit.............................................................. 80,218 29,418 -- --
--------- --------- --------- -----------
Operating expenses:
Research and development................................................ 18,360 2,664 -- --
Sales and marketing..................................................... 2,734 -- -- --
General and administrative.............................................. 4,393 923 -- --
--------- --------- --------- -----------
Total operating expenses.............................................. 25,487 3,587 -- --
--------- ---------
Operating income.......................................................... 54,731 25,831 -- --
Gain on sale of hardware systems assets................................... -- 18,032 -- --
--------- --------- --------- -----------
Income before taxes....................................................... $ 54,731 $ 43,863 $ -- $ --
--------- --------- --------- -----------
CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS
Income (loss) before taxes................................................ $ 17,346 $ 22,756 $ (12,976) $ (6,202)
Income and foreign withholding taxes...................................... 4,075 219 191 136
--------- --------- --------- -----------
Net income (loss)......................................................... $ 13,271 $ 22,537 $ (13,167) $ (6,338)
--------- --------- --------- -----------
--------- --------- --------- -----------
Basic net income (loss) per share......................................... $ 0.48 $ 0.85 $ (0.51) $ (0.25)
--------- --------- --------- -----------
--------- --------- --------- -----------
Diluted net income (loss) per share....................................... $ 0.46 $ 0.83 $ (0.51) $ (0.25)
--------- --------- --------- -----------
--------- --------- --------- -----------
OTHER DATA:
Products released......................................................... 4 3 14 1
Products sold............................................................. 11 7 17 7

1999
-----------

<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
SOFTWARE PUBLISHING
Revenues.................................................................. $ 23,191
Cost of revenues.......................................................... 5,592
-----------
Gross profit.............................................................. 17,599
Operating expenses:
Research and development................................................ 7,000
Sales and marketing..................................................... 6,165
General and administrative.............................................. 1,889
In-process research and development..................................... --
-----------
Total operating expenses.............................................. 15,054
-----------
Operating income (loss)................................................... 2,545
Net interest and other income (expense)................................... (16)
-----------
Income (loss) before taxes................................................ $ 2,529
-----------
HARDWARE SYSTEMS
Revenues:
Royalties and license fees.............................................. $ --
Development systems and other........................................... --
-----------
Total revenues........................................................ --
Cost of revenues:
Royalties and license fees.............................................. --
Development systems and other........................................... --
-----------
Total cost of revenues................................................ --
Gross profit.............................................................. --
-----------
Operating expenses:
Research and development................................................ --
Sales and marketing..................................................... --
General and administrative.............................................. --
-----------
Total operating expenses.............................................. --

Operating income.......................................................... --
Gain on sale of hardware systems assets................................... --
-----------
Income before taxes....................................................... $ --
-----------
CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS
Income (loss) before taxes................................................ $ 2,529
Income and foreign withholding taxes...................................... (23)
-----------
Net income (loss)......................................................... $ 2,552
-----------
-----------
Basic net income (loss) per share......................................... $ 0.10
-----------
-----------
Diluted net income (loss) per share....................................... $ 0.09
-----------
-----------
OTHER DATA:
Products released......................................................... 5
Products sold............................................................. 17
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................................................... $ 33,617 $ 34,584
Working capital...................................................................................... 14,067 28,769
Total assets......................................................................................... 44,954 40,447
Short-term debt...................................................................................... -- --
Total long-term liabilities.......................................................................... 1,715 --
Total stockholders' equity........................................................................... 21,399 33,578

1999
---------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................................................... $ 13,851
Working capital...................................................................................... 15,675
Total assets......................................................................................... 40,488
Short-term debt...................................................................................... 9,505
Total long-term liabilities.......................................................................... --
Total stockholders' equity........................................................................... 20,115
</TABLE>

20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND
THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. SEE "RISK
FACTORS."

OVERVIEW

We are a leading developer and publisher of branded interactive
entertainment software. Our software products operate on several multimedia
platforms including personal computers, the Sony PlayStation and Nintendo N64
video game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color and are planning to develop software for next-generation
video game consoles. We plan to continue to extend our popular brands across
multiple categories, or "genres," and platforms. These brands include Army Men,
BattleTanx, Family Game Pack, Heroes of Might and Magic, High Heat Baseball, and
Might and Magic, many of which have won industry awards. Our software products
cover a variety of genres, including action, strategy, adventure/role playing,
sports and family entertainment. We develop our software internally in our
company-owned studios and have created an extensive portfolio of versatile
technologies that allow us to develop new software titles more quickly and
cost-effectively.

We were incorporated in California in September 1991 and commenced
operations in October 1991. In April 1993, we reorganized as a Delaware holding
company and acquired an entity that had developed our hardware technology. We
acquired Cyclone Studios in November 1995, Archetype Interactive Corporation in
May 1996 and certain assets of New World Computing, Inc. in June 1996. We
currently have an active subsidiary in the United Kingdom, 3DO Europe, Ltd.

Software publishing revenues consist primarily of revenues from the sale of
software titles published and distributed by us and license fees for software
developed by us and manufactured, marketed and distributed by third party
licensees in Europe, Latin America, Asia and Australia. Software publishing
revenues are net of allowances for returns, price protection and discounts.
Software publishing revenues are recognized at the time of shipment, provided
that we have no related outstanding obligations. Software licensing revenues are
typically recognized when we fulfill our obligations, such as delivery of the
product master under a distribution agreement. Per-copy royalties that exceed
guaranteed minimum royalty levels are recognized as earned. We recognize revenue
from our Meridian 59 online service monthly upon customers' usage.

Cost of software publishing revenues consists primarily of direct costs
associated with software titles, including manufacturing costs and royalties
payable to platform developers such as Sony and Nintendo and, to a lesser
extent, royalties payable to third-party developers. Cost of revenues for
interactive entertainment software varies significantly by platform. Cost of
revenues for video game console titles is typically higher than cost of revenues
for personal computer titles due to relatively higher manufacturing and royalty
costs associated with these products. Cost of revenues for personal computer
titles primarily consists of the cost of the CD-ROM and packaging.

Research and development expenses consist primarily of personnel and support
costs. Internal development costs of software titles are expensed as incurred
and included in research and development expenses.

Sales and marketing expenses primarily consist of advertising and retail
marketing support, sales commissions, sales and marketing personnel costs and
other costs.

21
<PAGE>
We expect to continue to incur substantial expenditures to develop our
business in the future. We expect that our operating results will fluctuate as a
result of a wide variety of factors, including the factors described in "Risk
Factors--Our quarterly operating results frequently vary significantly."

As of March 31, 1999, we had cumulative federal net operating loss
carryforwards of $100.6 million for federal income tax purposes, which if not
offset against future taxable income, will expire in fiscal 2009 through 2019.
As of March 31, 1999, we had cumulative California net operating loss
carryforwards of $6.8 million, which if not offset against future taxable
income, will expire in fiscal 2002 through 2004.

EXIT FROM HARDWARE SYSTEMS OPERATIONS

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

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

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

- develop and distribute M2-compatible authoring systems; and

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

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

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

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

RECENT OPERATING RESULTS

22
<PAGE>
QUARTERLY RESULTS OF SOFTWARE PUBLISHING OPERATIONS

The following tables set forth certain unaudited consolidated statements of
operations data related to our software publishing operations for each of the
nine quarters ended June 30, 1999, as well as such data expressed as a
percentage of our software publishing revenues for the quarters presented. This
unaudited quarterly information related to our software publishing operations
has been prepared on the same basis as our annual consolidated financial
statements and, in the opinion of our management, reflects all normal recurring
adjustments that we consider necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 2,311 $ 1,848 $ 3,720 $ 1,550 $ 9,533 $ 5,024 $10,271 $23,191
Cost of revenues...................... 1,022 864 1,460 570 2,519 2,043 3,624 5,592
-------- --------- -------- --------- -------- --------- -------- ---------
Gross profit.......................... 1,289 984 2,260 980 7,014 2,981 6,647 17,599
Operating expenses:
Research and development............ 3,838 3,788 4,125 4,732 5,523 6,051 7,365 7,000
Sales and marketing................. 1,077 1,211 1,199 2,125 1,875 2,476 2,981 6,165
General and administrative.......... 1,715 1,932 1,922 830 2,488 2,267 2,256 1,889
-------- --------- -------- --------- -------- --------- -------- ---------
Total operating expenses.......... 6,630 6,931 7,246 7,687 9,886 10,794 12,602 15,054
-------- --------- -------- --------- -------- --------- -------- ---------
Operating income (loss)............... (5,341) (5,947) (4,986) (6,707) (2,872) (7,813) (5,955) 2,545
Net interest and other income
(expense)........................... 189 628 552 505 435 377 323 (16)
-------- --------- -------- --------- -------- --------- -------- ---------
Income (loss) before taxes............ $(5,152) $(5,319) $(4,434) $(6,202) $(2,437) $(7,436) $(5,632) $ 2,529
-------- --------- -------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- --------- -------- ---------

JUNE 30,
1999
---------

<S> <C>
Revenues.............................. $13,072
Cost of revenues...................... 3,885
---------
Gross profit.......................... 9,187
Operating expenses:
Research and development............ 7,659
Sales and marketing................. 5,336
General and administrative.......... 2,696
---------
Total operating expenses.......... 15,691
---------
Operating income (loss)............... (6,504)
Net interest and other income
(expense)........................... (114)
---------
Income (loss) before taxes............ $(6,618)
---------
---------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 44.2 46.8 39.2 36.8 26.4 40.7 35.3 24.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 55.8 53.2 60.8 63.2 73.6 59.3 64.7 75.9
Operating expenses:
Research and development.......... 166.1 205.0 110.9 305.3 57.9 120.4 71.7 30.2
Sales and marketing............... 46.6 65.5 32.2 137.1 19.7 49.3 29.0 26.6
General and administrative........ 74.2 104.5 51.7 53.5 26.1 45.1 22.0 8.1
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses........ 286.9 375.0 194.8 495.9 103.7 214.8 122.7 64.9
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............. (231.1) (321.8) (134.0) (432.7) (30.1) (155.5) (58.0) 11.0
Net interest and other income
(expense)......................... 8.2 34.0 14.8 32.6 4.5 7.5 3.2 (0.1)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes.......... (222.9)% (287.8)% (119.2)% (400.1)% (25.6)% (148.0)% (54.8)% 10.9%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------

<S> <C>
Revenues............................ 100.0%
Cost of revenues.................... 29.7
---------
Gross profit........................ 70.3
Operating expenses:
Research and development.......... 58.6
Sales and marketing............... 40.8
General and administrative........ 20.7
---------
Total operating expenses........ 120.1
---------
Operating income (loss)............. (49.8)
Net interest and other income
(expense)......................... (0.8)
---------
Income (loss) before taxes.......... (50.6)%
---------
---------
</TABLE>

23
<PAGE>
REVENUES. While our revenues have fluctuated from quarter to quarter,
revenues in each quarter of fiscal 1999 were substantially higher than in the
comparable quarters of fiscal 1998. During fiscal 1999 we introduced 14 new
products, including our first products for the Sony PlayStation and Nintendo N64
video game consoles. Fluctuations between quarters during both of these years
were primarily due to the number of new products released in a quarter and
seasonal consumer purchasing patterns. We expect our revenues to continue to
fluctuate on a quarterly basis in the future.

COST OF REVENUES. Cost of revenues as a percentage of sales has generally
declined, except in the second quarter of fiscal 1999, when it increased due to
the number of new products released for the Sony PlayStation. Cost of revenues
is typically higher for new products on this platform due to royalty and product
costs paid to Sony and Nintendo. Gross margin in the first and fourth quarters
of fiscal 1999 was higher primarily due to higher sales of titles for the
personal computer, which typically have higher gross margin.

RESEARCH AND DEVELOPMENT. In fiscal 1998, we shipped three new products,
all for the personal computer. During fiscal 1999, we shipped 14 new products
for all of the three major platforms. We have announced plans to ship as many as
25 new products in fiscal 2000. The increase in our research and development
expense in each of the four quarters in fiscal 1999 compared to the same
quarters in fiscal 1998 is primarily due to the increase in infrastructure to
support our growth in new product releases.

SALES AND MARKETING. Sales and marketing expenses have fluctuated from
quarter to quarter as new products are released. Sales and marketing expenses
were higher during each quarter of fiscal 1999 compared with the same quarters
in fiscal 1998, primarily due to increased releases of new products in fiscal
1999, and to a lesser extent, product mix because all of our products released
in fiscal 1998 were for the personal computer market, which typically require
lower advertising and marketing expenditures. In fiscal 1999, four of the 14 new
products we released were for the video game console platforms.

GENERAL AND ADMINISTRATIVE. During the first and second quarters of fiscal
1998 and 1999, we incurred seasonal expenses associated with our year-end
reporting and preparation of our annual report. These seasonal expenses resulted
in higher expenses as a percentage of revenues compared to the third and fourth
fiscal quarters.

NET INTEREST AND OTHER INCOME (EXPENSE). Software publishing has incurred
negative cash flows during each of the eight quarters ended March 31, 1999, and
we primarily have relied upon cash generated from the sale or license of
hardware systems technology to fund software publishing operations. (See notes G
and H of the notes to the consolidated financial statements.) For presentation
purposes all net interest and other income (expense) has been allocated to
software publishing. The decrease in net interest and other income (expense)
during the last three quarters in fiscal 1999 compared to the same quarters in
fiscal 1998 reflects the decrease in cash and short-term investment balances.

RESULTS OF SOFTWARE PUBLISHING OPERATIONS

The following table sets forth certain consolidated statements of operations
data related to our software publishing operations for fiscal 1997, 1998 and
1999 expressed as a percentage of revenues.

24
<PAGE>
We have not included similar information for our hardware systems operations
because we believe that such information is not helpful in understanding our
current operations.

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

FISCAL 1999 COMPARED TO FISCAL 1998

SOFTWARE PUBLISHING

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

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

RESEARCH AND DEVELOPMENT. Research and development expenses increased by
approximately $9.5 million, or 57%, to $25.9 million in fiscal 1999 from $16.5
million in fiscal 1998. This increase was primarily due to higher on-going
development expenses as we continued to expand our product development efforts
and began to develop products for video game console systems in addition to the
personal computer. Research and development expenses as a percentage of revenues
decreased to 54.0% in fiscal 1999 from 174.8% in fiscal 1998 as revenues grew at
a faster rate than research and development expenses due in part to cost savings
from the use of our proprietary tools and technology in developing new products.

SALES AND MARKETING. Sales and marketing expenses increased $7.9 million,
or 141%, to $13.5 million in fiscal 1999 from $5.6 million in fiscal 1998. This
increase was primarily due to marketing expenses related to the release of ten
personal computer titles, three Sony PlayStation titles and one Nintendo N64
title in fiscal 1999, compared to the release of three new personal computer
titles in fiscal 1998. We also incurred substantial marketing expenses for our
television ad campaigns for BattleTanx for the N64 and Army Men 3D for the
PlayStation in fiscal 1999. Sales and marketing expenses as a percentage of
revenues decreased to 28.1% in fiscal 1999 from 59.5% in fiscal 1998 as revenues
grew at a faster rate than sales and marketing expenses due in part to sales of
new products

25
<PAGE>
in brands for which we were able to take advantage of brand name recognition
generated by our previous advertising campaigns. We anticipate that sales and
marketing expenses will increase in the future as additional software titles are
released.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $2.5 million, or 39%, to $8.9 million in fiscal 1999, from $6.4 million in
fiscal 1998. The increase was primarily due to the increase in administrative
and overhead expenses as we continued to build the infrastructure to support the
release of new titles for the personal computer, Sony PlayStation and Nintendo
N64 platforms. We expect that general and administrative expenses will continue
to increase in the future.

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

HARDWARE SYSTEMS

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

FISCAL 1998 COMPARED TO FISCAL 1997

SOFTWARE PUBLISHING

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

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

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

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

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

IN-PROCESS RESEARCH AND DEVELOPMENT. In June 1996, we purchased certain
assets and assumed certain liabilities of New World Computing, Inc., a personal
computer platform game developer in exchange for one million shares of our
common stock and $5.0 million in cash. We accounted for the acquisition using
the purchase method of accounting. A one-time charge of $7.7 million was
recorded in the first quarter of fiscal 1997, representing the amount of the
purchase price assigned to in-process

26
<PAGE>
research and development because the acquired technology had not yet reached
technological feasibility and had no other future alternative uses. At the time
of the acquisition, a total of 12 products were in development. We estimated
that the average aggregate percentage of completion for those products was
approximately 47% at the time of the acquisition. Of the 12 products in
development, four were subsequently cancelled and four were completed and
released, but generated minimal revenues. The remaining four products were
completed and released with modest market success. However, the average
percentage of completion for those products was only approximately 33% at the
time of the acquisition. We used an income approach in valuing the acquired
in-process research and development. The income approach reflects the present
value of the operating cash flows generated by the in-process research and
development after taking into account the cost to complete the projects, the
relative risk of the projects and an appropriate discount rate to reflect the
time value of investment capital. Also included as part of the purchase price
were intangibles valued at $3.1 million, which are being amortized on a
straight-line basis over a period of approximately five years.

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

HARDWARE SYSTEMS

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

27
<PAGE>
In fiscal 1999, we entered into two line of credit agreements. Our agreement
with Coast Business Credit allows us to borrow up to $20.0 million or 60% of
qualified accounts receivable. Borrowings under this line of credit bear
interest at a rate of prime plus 2.0% (9.75% as of March 31, 1999). This line of
credit expires in March 2002. Our agreement with Coast Business Credit contains
financial covenants. See note P of the notes to consolidated financial
statements. As of March 31, 1999, no borrowings were outstanding under this
facility. Our agreement with Merrill Lynch & Co. allows us to borrow up to $20.0
million or 90% of the cash balance in the pledged collateral account. Borrowings
under this line of credit bear interest at a rate of the 30-day commercial paper
rate plus 2.10% (6.94% as of March 31, 1999). This line of credit expires in
November 2000. As of March 31, 1999, the outstanding loan balance was
approximately $9.5 million. On April 1, 1999, we repaid the outstanding
borrowings to Merrill Lynch and borrowed $9.5 million from Coast Business
Credit.

We expect to continue to incur negative cash flows in fiscal 2000, primarily
due to our continued investment in the internal development of entertainment
software titles that are scheduled to be released in the next fiscal year and
beyond, which include additional capital expenditures primarily for computer
equipment. In addition, we anticipate that a substantial portion of our
operating expenses in fiscal 2000 will be related to marketing and advertising,
as we continue to raise the brand awareness of our products. We anticipate that
the net proceeds of this offering, cash from operations, and available
borrowings under our credit facilities should be sufficient to fund our
activities for at least the next 12 months. We cannot be certain that additional
capital will not be required in fiscal 2000 because cash flows will be affected
by the rate at which we release products and the resulting sale of these
products, the market acceptance of such products and the levels of advertising
and promotions required to promote market acceptance of our products. The level
of financing required beyond fiscal 2000 will depend on these and other factors.
If we need to raise additional funds through public or private financing, we
cannot be certain that additional financing will be available or that, if
available, it will be available on terms acceptable to us. Additional financing
may result in substantial and immediate dilution to existing stockholders. If
adequate funds are not available to satisfy either short- or long-term capital
requirements, we may be required to curtail our operations significantly or to
seek funds through arrangements with strategic partners or other parties that
may require us to relinquish material rights to certain of our products,
technologies or potential markets.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We place our investments with high
quality issuers and, by policy, limit the amount of credit exposure to any one
issuer. We are averse to principal loss and ensure the safety and preservation
of our invested funds by limiting default, market and reinvestment risk. We
classify our cash equivalents and short-term investments as fixed-rate if the
rate of return on such instrments remains fixed over their term. These
fixed-rate investments include fixed-rate U.S. government securities, municipal
bonds, time deposits and certificates of deposit. We classify our cash
equivalents and short-term investments as variable-rate if the rate of return on
such investments varies based on the change in a predetermined index or set of
indices during their term. These variable-rate investments primarily include
money market accounts held at various securities brokers and banks. The table
below presents the amounts and related weighted interest rates of our investment
portfolio at March 31, 1999:

<TABLE>
<CAPTION>
AVERAGE
SHORT-TERM INVESTMENTS INTEREST RATE COST FAIR VALUE
- ------------------------------------------------------------------- --------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed-rate......................................................... 6.00% $ 11,538 $ 11,573
Variable-rate...................................................... 4.18 22 22
</TABLE>

28
<PAGE>
The aggregate fair value of the Company's investment in short-term
investments as of March 31, 1999, by contractual maturity date, consisted of the
following:

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

YEAR 2000 COMPLIANCE

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

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

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

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

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

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

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

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

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

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

COST

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

RISKS AND UNCERTAINTIES

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

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

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

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

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

CONTINGENCY PLANS

We expect to develop contingency plans for key internal systems and critical
business partners by the end of the first quarter of fiscal 2000. This
contingency planning includes identifying additional vendors who could provide
similar goods and services on short notice. We expect these plans to reduce the
risk of interruption, delay or failure of key processes required for business
operations. However, failure of such plans remains a possibility and could have
a materially adverse impact on our results of operations or financial condition.

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

IMPACT OF EUROPEAN MONETARY CONVERSION

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

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

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<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133 ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires us to recognize all derivatives as either assets or liabilities on
the balance sheet and measure them at fair value. Gains and losses resulting
from changes in fair value would be accounted for depending on the use of the
derivative and whether it is designated and qualifies for hedge accounting. SFAS
No. 133 will be adopted by us by the first quarter of fiscal 2001 and is not
expected to have a material impact on our financial statements.

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

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BUSINESS

OVERVIEW

We are a leading developer and publisher of branded interactive
entertainment software. Our software products operate on several multimedia
platforms including personal computers, the Sony PlayStation and Nintendo N64
video game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color hand-held game and are preparing to develop software for
next-generation video game consoles. We plan to continue to extend our popular
brands across multiple categories, or "genres," and platforms. These brands
include Army Men, BattleTanx, Family Game Pack, Heroes of Might and Magic, High
Heat Baseball, and Might and Magic, many of which have won industry awards. Our
software products cover a variety of genres, including action, strategy,
adventure/ role playing, sports and family entertainment. We develop our
software internally in our company-owned studios and have created an extensive
portfolio of versatile technologies that allow us to develop new software
products more quickly and cost-effectively.

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

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

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

INDUSTRY BACKGROUND

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

Declining prices of video game consoles and personal computers and
lower-cost, higher-quality graphics processors and improved audio capabilities
have led to a growing installed base of platforms and greater demand for video
games. NPD estimates that a total of 20.9 million Sony PlayStation and Nintendo
N64 video game console systems have been sold as of April 1999. Growth in the
installed base of personal computers is also driving demand for interactive
entertainment software. International

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<PAGE>
Data Corporation estimates that 46 million U.S. households owned a personal
computer in 1998, of which over 71% have played video games on their personal
computers.

The Internet provides a means by which consumers may play games and obtain
information regarding interactive entertainment software titles. Individuals may
play multiplayer server-based games that reside on Web sites and servers
maintained by software companies. Additionally, players may compete against each
other over the Internet using CD-ROM-based games having multi-player
capabilities that reside on their own personal computers. The Internet also
allows consumers to participate in chat rooms to discuss features and exchange
ideas regarding the games, download video clips and demos of some games and
purchase games online.

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

The interactive entertainment software market can generally be divided into
several game categories or genres. The most popular genres include action,
strategy, adventure/role playing, sports and family entertainment. According to
a May 1999 Game Week magazine reader survey, consumers consider factors such as
brand history, genre, interest of story, high quality graphics, high quality
sound, reliability, pricing, hardware compatibility and ease of learning when
purchasing interactive entertainment software. A limited number of titles have
typically captured a large share of the sales in the interactive entertainment
software market. This hit-driven nature of the market has often led to higher
production budgets for titles as well are more complex development and
production processes and longer development cycles. Publishers with a history of
producing hit titles have generally enjoyed a significant marketing advantage
because of their heightened brand recognition and customer loyalty. To
capitalize on this heightened brand recognition and customer loyalty, some
publishers have introduced sequels or line extensions of their hit titles.
Sequels are typically new releases of games based upon the original game concept
that also include new characters, settings and gameplay attributes. Line
extensions are typically new releases of games based upon the same successful
brands and offering the brand in a different genre and/or on additional
platforms.

We believe that the importance of the timely release of hit titles, as well
as the increased scope, complexity and expense of the product development and
production process, have increased the need for disciplined product development
processes that limit cost and schedule overruns and reduce development time. We
believe that this need has increased the importance of leveraging the
technologies, characters and story lines of past or existing hit titles into
additional interactive entertainment software products in order to spread
development costs among multiple products.

Competition for shelf space at mass merchants and software electronic stores
has intensified because these high volume retailers often stock only a limited
number of titles that are expected to sell

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<PAGE>
large numbers of units. We believe retailers consider the historical performance
of games and may be more willing to stock sequels to successful brands rather
than unproven titles. Retailers are also seeking to distribute their advertising
budget across a small number of titles. We believe that these trends have
increased the importance of internally creating and building upon well-known
brands by releasing sequels and line extensions.

STRATEGY

Our objective is to enhance our position as a leading developer and
publisher of branded interactive entertainment software. The key elements of our
strategy are to:

BUILD UPON OUR RECOGNIZED PORTFOLIO OF HIGH-QUALITY BRANDS

Our product strategy is to extend our established interactive entertainment
software brands across multiple genres and platforms in order to better
differentiate our products to consumers and retailers. Each of our current
brands is based on a well-defined computer game environment, or "fantasy world."
We create fantasy worlds in our products that allow users to engage in
activities that they otherwise may be unable to perform, in settings to which
they may not otherwise have access. We develop products in the most popular
genres, which include action, strategy, adventure/role playing, sports and
family entertainment. We believe that consumers who have enjoyed game playing in
a distinctive fantasy world are more likely to buy other products based on the
same or a similar fantasy world. We offer consumers of our products both sequels
and line extensions of games they already own, as well as new game experiences
in different genres within a familiar fantasy world. For example, our Army Men,
BattleTanx, Family Game Pack, Heroes of Might and Magic, High Heat Baseball and
Might and Magic brands have generated over 30 titles that have been commercially
released and over 20 additional titles that are currently in development. We
employ our branding strategy to leverage our marketing efforts so longer-lived
brands can yield results across multiple platforms and multiple years. In
addition, we intend to selectively add new brands to our portfolio. By retaining
ownership of our established brands, we may be able to enter additional consumer
markets, such as toys or television programming.

CONTINUE TO DEVELOP SOFTWARE PRODUCTS AND PROPRIETARY TECHNOLOGIES IN OUR
INTERNAL DEVELOPMENT STUDIOS

The importance of the timely release of hit titles, especially during the
year-end holiday season, has increased the need for disciplined product
development processes. We develop our interactive entertainment software
products, proprietary technologies and brands internally to better control
product quality, development schedules and costs. Our internal studio developers
are able to focus all of their efforts on creative development of our products,
and improve our ability to respond to changing consumer preferences.
Furthermore, we own all of the software technology that we develop internally.

EXTEND OUR PROPRIETARY TECHNOLOGIES OVER MULTIPLE PRODUCTS, GENRES AND
PLATFORMS

Our internal studios will continue to create an extensive portfolio of
versatile, company-owned technologies including interactive software engines,
development tools, various programming codes and artwork that we can use to
develop new products more quickly and cost-effectively. This portfolio of
technology is maintained and shared across our internal development product
teams under the direction of our Library Group. By sharing our technology across
product and teams, we are able to more efficiently and economically develop
sequels, expansion packs, line extensions and related products for existing
brands. Our strategy of leveraging and reusing our past investments in
technology also generally allows us to move new brands and titles more quickly
and less expensively from story line development to commercial release.

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EXPAND OUR OPERATIONS IN EUROPE

We believe that the interactive entertainment software market in Europe
represents a significant potential market opportunity for us. In fiscal 2000, we
plan to expand our European operations by increasing our direct sales and
marketing efforts, as well as by customizing our products for local markets. By
expanding our European operations, we expect to better control direct sales,
marketing and distribution of our products. Furthermore, by decreasing our
dependence on third-party licensees, we believe that we should be able to
improve our operating margins on products sold in Europe.

BRANDS AND PRODUCTS

In fiscal 1998, we shipped three new products for the personal computer. In
fiscal 1999, we shipped a total of 14 new products for the three major
platforms: the personal computer and the Sony PlayStation and Nintendo N64 video
game consoles. In fiscal 2000, we expect to ship a total of over 25 new products
for the personal computer, the Sony PlayStation and Nintendo N64 and the
Nintendo Game Boy Color hand-held video game platform. We recently entered into
an agreement with Ubi Soft Entertainment under which Ubi Soft will adapt Heroes
of Might and Magic III for the new Sega Dreamcast video game console. All of our
personal computer titles released since the beginning of fiscal 1998 feature
multi-player capabilities that allow players to compete against each other over
the Internet.

We have developed the following major brands:

ARMY MEN

Army Men was first released in April 1998 for the personal computer. Army
Men is a two-dimensional tactical action game with an overhead camera angle,
featuring the familiar green and tan plastic toy soldiers that many consumers
have played with as children. Players control the main character, Sarge, a squad
leader in the green army, and his troops through more than 25 missions in a
variety of outdoor terrains to defeat the opposing tan army. Army Men 3D was
released in March 1999 for the Sony PlayStation and features three-dimensional
graphics with an over-the-shoulder camera angle and similar settings and
campaigns to Army Men. Army Men II, the sequel to Army Men, was released in
February 1999 for the personal computer and is a real-time strategy-like game.
In addition to the jungle, desert and mountain terrains featured in Army Men,
the combat in Army Men II also takes place in the home. This game is set in
everyday living areas such as the kitchen, where the green troops fend off
cockroaches and the heat from an electric range, as well as the opposing tan
troops.

We are continuing to build upon the Army Men brand and expand it into new
genres and settings. Army Men Air Attack for the Sony PlayStation game console
is a helicopter action game with an overhead three-dimensional camera angle. In
this game, Army Men troops take to the air and contend with familiar elements in
a backyard and other outdoor settings. We expect to release Army Men Air Attack
for the Sony PlayStation and personal computer in the second half of fiscal
2000. In addition, Army Men Sarge's Heroes is an over-the-shoulder
three-dimensional camera angle action game built around the main character from
the Army Men brand, Sarge. The game is expected to feature a new story line with
some of the same plastic soldier characters introduced in Army Men and is
planned for release during the second half of fiscal 2000 for the Sony
PlayStation and Nintendo N64. We intend to release Army Men III in the second
half of fiscal 2000 for the personal computer. We also intend to release a
version of Army Men in the second half of fiscal 2000 for the Nintendo Game Boy
Color.

The Army Men brand has received much acclaim after its introduction. The
April 1999 issue of Nintendo Power magazine, the official publication for the
Nintendo N64, reported that "When [Army Men Sarge's Heroes] is ready for
release, it could well be a masterpiece."

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<PAGE>
BATTLETANX

We first released BattleTanx in December 1998 for the Nintendo N64 game
console. BattleTanx is a three-dimensional, multi-player action game for up to
four players that is set in the post-apocalyptic future. Renegade armies wage
war against each other in battle tanks. Players engage in combat action in
Chicago, Las Vegas, New York and San Francisco. BattleTanx combines battle
action with the tactical elements of "capture the flag." A sequel, BattleTanx
II: Global Assault is expected to be released in the second half of fiscal 2000
for the Nintendo N64. In BattleTanx II, players can operate more sophisticated
tanks in a variety of European cities. We also intend to release a version of
BattleTanx for multiple platforms, including the Nintendo Game Boy Color in the
second half of fiscal 2000. The December 1998 issue of Nintendo Power magazine
called BattleTanx the "one of the best multi-player games ever."

VEGAS GAMES AND FAMILY GAME PACK

Vegas Games Entertainment Pack for Windows was first introduced by New World
Computing in July 1992 for the personal computer as that company's first release
in the family entertainment genre. This game was one of New World Computing's
top selling titles in 1993 and 1994. We acquired New World Computing in 1996 and
released Vegas Games Entertainment Pack in March 1997 and Vegas Games 2000 in
September 1998, each for the PC. All three products feature a variety of casino
games and are designed to provide the casual game player with many hours of
entertainment.

Family Game Pack features 26 different games, including board (backgammon,
checkers, chess, etc.), card (bridge, gin, spades, etc.) and casino (blackjack,
craps, slots, etc.) games. Family Game Pack was released in November 1997 for
the PC and features single player action against computer opponents, as well as
multiple players on the same computer.

We plan to extend the Family Games brand by introducing Family Game Pack
2001 for multiple platforms including the personal computer in the second half
of fiscal 2000. We intend to release a version of Vegas Games 2000 for
additional platforms including the Sony PlayStation in the second half of fiscal
2000.

HIGH HEAT BASEBALL

We first released High Heat Baseball 1999 in March 1998 for the personal
computer. High Heat Baseball 1999 features high-resolution graphics, detailed
three-dimensional stadium environments, and high quality three-dimensional
player animations derived from video motion capture. We believe that High Heat
Baseball 1999 provides consumers with the most realistic control over the
pitcher and batter confrontation, fielding and base-running. We released High
Heat Baseball 2000 for the PC in March 1999 and for the Sony PlayStation in May
1999. These are the first titles in our brand to include all of the actual major
league player, team and stadium names pursuant to our licenses from Major League
Baseball and the Major League Baseball Players Association. We expect to
continue to extend the High Heat Baseball brand by releasing a sequel on
multiple platforms, including the PC, in the second half of fiscal 2000.

In April 1999, our High Heat Baseball brand was recognized as "the best
arcade PC baseball game ever" by E-Gamez.com, a gaming web site. PC Gamer
magazine reported in May 1999 that "High Heat Baseball 2000 is on track to be
not only the best baseball game of this season, but possibly of all time."

MIGHT AND MAGIC

New World Computing originally released Might and Magic in 1986 for the
personal computer. Might and Magic is a fantasy role-playing game where the
player assumes the role of multiple fantasy characters such as knights, wizards,
archers and clerics. Players participate in the ongoing story of the

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game as they rescue fair maidens and overcome dragons and giants. Our New World
Computing development team has released six sequels to the series that feature
additional story lines, kingdoms and worlds to explore. Might and Magic VII is
the latest product in the series for the personal computer and was released in
June 1999.

The cornerstone of the Might and Magic brand is the entertaining fantasy
world in which players can explore, embark on adventures and perform heroic
deeds. This is the key concept we have used to expand the brand, content and
style of play into other software genres, such as strategy, adventure and
action.

We plan to continue to extend the Might and Magic franchise to establish a
new brand on the video game console platforms by releasing an action game,
Crusaders of Might and Magic, for the Sony PlayStation and Nintendo N64.
Crusaders of Might and Magic will follow the over-the-shoulder format of some of
the best selling console titles, and will allow players to control the key
character in the Might and Magic universe, Drake. We expect to release these
products for all three platforms in the second half of fiscal 2000.

Might and Magic VI The Mandate of Heaven, released in April 1998, has
received numerous accolades from the computer gaming press. The December 1998
issue of Computer Gaming World magazine named it the number one holiday
role-playing game. In addition, the December 1998 issue of PC Gamer magazine
noted that "It's essential gaming for all fans of fantasy."

HEROES OF MIGHT AND MAGIC

Our Heroes of Might and Magic brand utilizes story lines, characters and
themes from the popular Might and Magic brand and places them in a turn-based
strategy game. Heroes of Might and Magic was released in September 1995 for the
personal computer. Heroes of Might and Magic II was released in November 1996
for the personal computer and added four new campaigns and multiple stand-alone
scenarios. We released in May 1997 an expansion pack to Heroes of Might and
Magic II that adds more gameplay, new heroes, new map locations, a new story
line and an enhanced multi-player focus with scenarios designed specifically for
team play. Heroes of Might and Magic III was released in March 1999 for the
personal computer and shares a common universe and overlapping story lines with
our Might and Magic VI and VII titles. Heroes of Might and Magic III features
new elements, graphics and story lines.

Our Heroes of Might and Magic brand has received critical acclaim from the
computer gaming industry. The October 1998 issue of PC Gamer called Heroes of
Might and Magic II "the most popular turn-based strategy game in history." In
addition, the June 1998 issue of Consumer Games Strategy Plus also rated Heroes
of Might and Magic II with "5 stars out of 5 stars."

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Our current portfolio of brands and products released or in development
includes the titles listed in the following table.

<TABLE>
<CAPTION>
ACTUAL OR
SCHEDULED
3DO RELEASE
BRAND PRODUCT PLATFORM(1) GENRE DATE(2)
<S> <C> <C> <C> <C>
ARMY MEN Army Men Game Boy Action/Strategy FY2000 2H
Army Men Air Attack PC Action FY2000 2H
Army Men Air Attack PlayStation Action FY2000 2H
Army Men III PC Action/Strategy FY2000 2H
Army Men Sarge's Heroes PlayStation Action FY2000 2H
Army Men Sarge's Heroes N64 Action FY2000 2H
Army Men 3D PlayStation Action FY1999 2H
Army Men II PC Action/Strategy FY1999 2H
Army Men PC Action/Strategy FY1999 1H
BATTLETANX BattleTanx Game Boy Action FY2000 2H
BattleTanx II: Global Assault N64 Action FY2000 2H
BattleTanx N64 Action FY1999 2H
FAMILY GAME PACK Family Game Pack 2001 PC Family Entertainment FY2000 2H
Family Game Pack 1999 PC Family Entertainment FY1999 2H
Family Card Games PC Family Entertainment FY1997 1H
GULF WAR Gulf War: Operation Desert Hammer PC Action FY2000 1H
HEROES OF MIGHT AND MAGIC Heroes of Might and Magic III PC Strategy FY2000 2H
Expansion
Heroes of Might and Magic II Gold PC Strategy FY1999 2H
Heroes of Might and Magic III PC Strategy FY1999 2H
Heroes of Might and Magic Compendium PC Strategy FY1998 2H
Heroes of Might and Magic II Expansion PC Strategy FY1998 1H
Heroes of Might and Magic II PC Strategy FY1997 2H
Heroes of Might and Magic PC Strategy FY1997 1H
HIGH HEAT BASEBALL High Heat Baseball 2001 PC Sports FY2000 2H
High Heat Baseball 2000 PlayStation Sports FY2000 1H
High Heat Baseball 2000 PC Sports FY1999 2H
High Heat Baseball 1999 PC Sports FY1998 2H
MIGHT AND MAGIC Crusaders of Might and Magic PC Action/Adventure/Role FY2000 2H
Playing
Crusaders of Might and Magic PlayStation Action/Adventure/Role FY2000 2H
Playing
Crusaders of Might and Magic N64 Action/Adventure/Role FY2000 2H
Playing
Might and Magic VIII PC Adventure/Role Playing FY2000 2H
Might and Magic VII PC Adventure/Role Playing FY2000 1H
Might and Magic VI PC Adventure/Role Playing FY1999 1H
Might and Magic Trilogy PC Adventure/Role Playing FY1997 1H
VEGAS GAMES Vegas Games 2000 PlayStation Family Entertainment FY2000 2H
Vegas Games 2000 PC Family Entertainment FY1999 2H
Vegas Games 1999 PC Family Entertainment FY1997 1H
</TABLE>

(1) "PlayStation" means the Sony PlayStation video game console, "N64" means the
Nintendo N64 video game console, and "Game Boy" means the Nintendo Game Boy
Color hand-held video game.

(2) 1H or 2H refers to first half or second half of the fiscal year indicated.
Scheduled release dates after FY2000 1H are our estimates as of the date of
this prospectus and may be delayed.

INTERACTIVE ENTERTAINMENT SOFTWARE DEVELOPMENT

With 321 studio employees as of March 31, 1999, we believe that we have one
of the largest internal development groups in the interactive entertainment
software industry. Our internal development studios are 3DO Redwood City
(Redwood City, California), 3DO Austin (Austin, Texas) and New World Computing
(Agoura Hills, California).

We believe our internal studios allow us to maintain better control over
product quality, development costs and development schedules in comparison to
companies that outsource product development to external development studios. By
developing our interactive entertainment software internally, we retain
ownership of the technology we develop and spread our investment in research and
development across brands, platforms and genres.

39
<PAGE>
Our internal studios consist of several development teams, all of which
report to our Senior Vice President of Research and Development. Each team is
dedicated to the development of a particular product for the duration of a
specific project. A team generally consists of producers, engineers, designers,
programmers and artists. As of March 31, 1999, we had 175 employees working on
design and art, 109 working on software, audio and video technology and 37
producers. We allocate personnel to brands and platforms to maintain brand
continuity and creativity in development while seeking to maximize productivity
from experts in the technology for each hardware platform. As of March 31, 1999,
264 of our 321 internal studio employees focused on our six primary brands, of
which 126 employees are allocated to games for the personal computer and
Internet platforms, 131 to the Sony platform and 36 to the Nintendo platform.
Upon completion and shipment of a new product, the team members are then
assigned to a product in development.

Interactive entertainment software game concepts are generated by employees
from our internal studios, as well as from our sales, marketing and executive
teams. Concept or theme proposals are reviewed and approved by our executive
team. We also conduct product and marketing focus groups to determine the
potential market for a new product or brand. Once a game is approved, we assign
an executive producer and a product marketing manager to oversee its development
and marketing. This team develops a design document and script for the game, as
well as a timeline. During development, our executives review each product's
development progress against predetermined milestones, as well as market
conditions and the title's potential financial performance. If market conditions
or development milestones indicate that the product will not achieve the
approved strategic or financial plan, we either take corrective actions or
terminate the product and reallocate current resources to other projects.
Products we complete are tested by our executive team and our internal testing
group prior to release for shipment to the retail channel.

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

We have contracted with outside development firms to port several of our
current software titles to the Nintendo Game Boy Color hand-held video game
platform until we establish the internal capabilities to develop software for
this platform. We recently entered into an agreement with Ubi Soft Entertainment
under which Ubi Soft will adapt Heroes of Might and Magic III for the new Sega
Dreamcast video game console.

SALES, MARKETING AND DISTRIBUTION

We target the retail channel and consumers through a variety of sales,
advertising and marketing campaigns including television, print media, public
relations and Internet marketing. The selling and marketing strategies
associated with a particular product may vary depending upon the product
platform. Advertising and marketing campaigns for interactive entertainment
software for the personal computer usually require expenditures in print media
such as trade magazines, newspapers and consumer magazines. Products for the
video game console platform generally require a more significant investment in
the production of a television campaign.

40
<PAGE>

In addition to our 26-person internal sales and marketing organization,
which focuses on sales to major North American retailers and distributors, we
also utilize 10 independent sales representative firms that specialize in the
sales and marketing of products for video game console platforms. We also have
several licensees that sell our products in various territories including
Canada, Europe, Latin America, Asia, and Australia. Our distributors purchase
fully packaged products from us for resale to retailers, while licensees receive
master copies of software code and packaging, which they can manufacture, market
and sell to distributors or retailers in exchange for royalty payments.

NORTH AMERICA. We distribute and sell our interactive entertainment
software in North America through direct relationships with major retail
customers, as well as through third party distributors. Our distributors
primarily sell products for the personal computer platform. We have recently
decreased our reliance on distributors and expect to continue to increase direct
sales to retailers, particularly for video game console products. The number of
retail outlets that sold our products increased to over 20,000 in fiscal 1999
from approximately 6,000 in fiscal 1998. Our largest retailers in fiscal 1999
were:

<TABLE>
<S> <C>
Best Buy Target
Wal-Mart Sears
Electronics
Boutique Hollywood Video
Babbage's KayBee Toys
Toys "R" Us Kmart
Blockbuster Video
</TABLE>

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

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

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

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

- The 3DO Community. This section of the site allows customers to register
individually with their own profiles and screen names, to converse on-line
with each other about our products, and to post messages and receive mail
regarding our products.

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

41
<PAGE>
MANUFACTURING

We believe that our principal strengths are designing and developing strong,
high quality interactive entertainment software brands. In order to concentrate
our efforts on brand and title development, we have established relationships
with JVC, Sony and Nintendo to outsource manufacturing and physical distribution
of our titles. We also outsource these functions to take advantage of the
manufacturing economies of scale which these major companies can offer and to
avoid the capital investment and overhead costs inherent in establishing and
maintaining internal manufacturing operations.

Sony has granted us a non-exclusive license to develop and distribute game
software on CD-ROMs for use on the Sony PlayStation console in the United States
and Canada, under which we pay Sony a per unit royalty for each unit
manufactured. Sony is the exclusive manufacturer of products licensed under this
agreement. The agreement grants us a license to use proprietary Sony software
and hardware to develop titles for the PlayStation and to use Sony trademarks to
market, distribute and sell titles for the PlayStation. We retain all right,
title, and interest in and to our software. Development of new games under this
agreement is subject to approval by Sony and testing and approval of the
completed game by Sony is required prior to market introduction. The license
expires in March 2001 and is terminable earlier by Sony for our breach,
instances related to debt and insolvency, or significant change of control of
our company. Sony has also granted us a non-exclusive license to develop and
distribute game software on CD-ROMs for use on the Sony PlayStation console in
many countries in Europe, Africa and the Middle East as well as Australia and
New Zealand. This license becomes terminable by either party in December 2005.

Nintendo has granted us a non-exclusive license to utilize proprietary
programming specifications, development tools, trademarks, and other
intellectual property rights solely in order to develop video game software and
sell such software for the Nintendo 64 system throughout the Western Hemisphere.
Development of new games for use under this agreement is subject to approval by
Nintendo and testing and approval of the completed game by Nintendo is required
prior to market introduction. Additionally, Nintendo has exclusive
responsibilities for establishing and fulfilling all aspects of the
manufacturing process. We have granted Nintendo an exclusive right with respect
to BattleTanx, which prohibits us from releasing BattleTanx on any other
platform for a one-year period commencing December 1998. Under the agreement,
after licensing a product, we buy discrete quantities of licensed game software
units from Nintendo for sale. The license expires in May 2001 and is terminable
earlier by Nintendo for breach or instances related to our debt and insolvency.

JVC manufactures our personal computer CD-ROMs. We have granted JVC a
non-exclusive license to replicate compact discs of our executable game software
code and assemble and package materials to create a finished product. Prices for
replication are pursuant to prices submitted by written quotation or contract
and are subject to change annually by JVC based on changes in material and labor
costs and market conditions. Additionally JVC provides warehousing services and
takes orders from us for finished products and packages and prepares them for
shipping. At no time does JVC acquire any ownership rights to items we supply to
it. The contract may be terminated by either party with 60 days' prior written
notice.

Before we start shipping a product, we provide our manufacturers with a
title's software code and related artwork, user instructions, warranty
information, brochures and packaging designs. JVC, Nintendo and Sony manufacture
based on purchase orders we submit in the ordinary course of business. JVC and
Sony generally ship our titles within two weeks after receiving our order.
Nintendo generally ships titles within four to six weeks after receiving our
order primarily due to the additional time required to manufacture game
cartridges overseas. Although we depend on a limited number of manufacturers, we
have not experienced any material difficulties or delays in the manufacture of
our

42
<PAGE>
titles, nor have we experienced any material delays due to title defects or due
to the unavailability of components or raw materials. Our software titles carry
a 90-day limited warranty.

COMPETITION

The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new hardware systems and
software products. Our competitors vary in size from small companies to very
large corporations with significantly greater financial, marketing and product
development resources than us. Due to these greater resources, some of our
competitors are better able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, and pay higher fees to licensors of
desirable properties and to third party software developers. We believe that the
principal competitive factors in the interactive entertainment software industry
include brand name recognition, entertainment value of specific titles, product
features, quality, ease of use, price and product support.

We compete primarily with other publishers of interactive entertainment
software for personal computers and video game consoles. Significant competitors
include Acclaim Entertainment, Activision, Eidos, Electronic Arts, GT
Interactive Software, Interplay, LucasArts and THQ. In addition, integrated
video game console hardware/software companies such as Sony and Nintendo compete
directly by developing their own software titles for their respective platforms.
Large diversified entertainment or software companies, such as The Walt Disney
Company or Microsoft, many of which own substantial libraries of available
content and have substantially greater financial resources than us, may decide
to compete directly with us or to enter into exclusive relationships with our
competitors.

Retailers of our products typically have a limited amount of shelf space and
promotional resources, and there is intense competition among consumer software
publishers, and in particular interactive entertainment software publishers, for
high quality retail shelf space and promotional support from retailers. To the
extent that the number of consumer software products and computer platforms
increases, competition for shelf space may intensify and may require us to
increase our marketing expenditures. Due to increased competition for limited
shelf space, retailers and distributors are in an increasingly better position
to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return privileges and other
concessions. Retailers and distributors also consider, as important competitive
factors, marketing support, quality of customer service and historical
performance. Our products constitute a relatively small percentage of any
retailer's sales volume.

INTELLECTUAL PROPERTY

We hold copyrights on our products, product literature and advertising and
other materials, and hold trademark rights in our name, our logo, and some of
our product names and publishing labels. We have licensed certain products to
third parties for manufacture and distribution in particular geographic markets
outside North America, and receive royalties on such licenses. We currently
outsource product development for the Nintendo Game Boy Color hand-held video
game platform and the Sega Dreamcast video console system to third party
developers. We contractually retain all intellectual property rights related to
such projects.

We regard our software as proprietary and rely primarily on a combination of
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights. We
own or license various copyrights and trademarks. While we provide "shrinkwrap"
license agreements or limitations on use with our software, the enforceability
of such agreements or limitations is uncertain. While we copy-protect our
products, we are aware that unauthorized copying occurs within the computer
software industry, and if a significantly greater

43
<PAGE>
amount of unauthorized copying of our interactive entertainment software
products were to occur, our operating results could be materially adversely
affected.

We rely on existing copyright laws to prevent unauthorized distribution of
our software. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy can be
expected to be a persistent problem, especially in certain international
markets. Further, the laws of certain countries in which our products are or may
be distributed either do not protect our products and intellectual property
rights to the same extent as the laws of the U.S. or are weakly enforced. Legal
protection of our rights may be ineffective in such countries, and if we seek to
leverage our software products using emerging technologies, such as the Internet
and on-line services, it may become more difficult to protect our intellectual
property rights, and to avoid infringing the intellectual property rights of
others. In addition, the intellectual property laws are less clear with respect
to such emerging technologies. We cannot be certain that existing intellectual
property laws will provide adequate protection for our products in connection
with such emerging technologies.

As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,
software developers may increasingly become subject to infringement claims.
Although we believe that we make reasonable efforts to ensure that our products
do not violate the intellectual property rights of others, we cannot be certain
that claims of infringement will not be made. Any such claims, with or without
merit, can be time consuming and expensive to defend. From time to time, we have
received communication from third parties asserting that features or content of
certain of our products may infringe upon the intellectual property rights of
such parties. We cannot be certain that existing or future infringement claims
against us will not result in costly litigation or require us to seek to license
the intellectual property rights of third parties, which licenses may not be
available on acceptable terms, if at all.

We license certain copyrights and trademarks for use in our High Heat
Baseball brand and pay applicable royalties. If we were unable to maintain or
renew those licenses for use in High Heat Baseball, we would be unable to
release additional sequels and line extensions for that brand and our business
may be seriously harmed.

GOVERNMENT REGULATION

The home video game industry requires interactive entertainment software
publishers to provide consumers with information about graphic violence and
sexually explicit material contained in their interactive entertainment software
products. This system requires publishers to identify particular products within
defined rating categories and communicate such ratings to consumers through
appropriate package labeling and through advertising and marketing presentations
consistent with each product's rating.

Mandatory government-imposed interactive entertainment software products
rating systems eventually may be adopted in many countries, including the United
States. Due to the uncertainties inherent in the implementation of rating
systems, confusion in the marketplace may occur, and publishers may be required
to modify or remove products from the market. However, we are unable to predict
what effect, if any, such rating systems would have on our business.

Many foreign countries have laws which permit governmental entities to
censor the content of certain works, including interactive entertainment
software. As a result, we may be required to modify our products to comply with
these requirements, or withdraw them from the market which could result in
additional expense and loss of revenues.

Certain retailers have in the past declined to stock some software products
because they believed that the content of the packaging artwork or the products
would be offensive to their customer base.

44
<PAGE>
Although such actions have not yet affected us, we cannot be certain that our
distributors or retailers will not take such actions in the future.

EMPLOYEES

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

FACILITIES

As of March 31, 1999, we leased 50,488 square feet in Redwood City,
California, 12,500 square feet in San Mateo, California, 7,900 square feet in
Austin, Texas, and 14,300 square feet in Agoura Hills, California, for an
aggregate monthly rent expense of approximately $177,000. These facilities house
our administrative, research, development and sales operations. The lease for
the Redwood City facility expires in July 2001. The lease for approximately
7,800 square feet of the San Mateo facility expired and we subleased the
remaining space in May 1999. The lease for the Austin facility expires in
September 2000, and the lease for the Agoura Hills facility expires in January
2001. We believe that these facilities are adequate for our current needs.

LEGAL PROCEEDINGS

We are engaged in certain legal actions arising in the ordinary course of
business. We believe that we have adequate legal defenses and that the ultimate
outcome of these actions will not have a material effect on our financial
position or results of operations, although we cannot be certain as to the
outcome of such litigation.

45
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information for our executive
officers and directors as of March 31, 1999.

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

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

JAMES A. COOK became Executive Vice President, General Counsel and Secretary
of 3DO in April 1996. He had been Senior Vice President, General Counsel and
Secretary since July 1994, and from January 1993 until July 1994, he served as
Vice President, General Counsel and Secretary. From January 1990 until January
1993, he was a partner in the law firm of Cook and Lefevre. From June 1985 to
December 1989, he was a sole practitioner operating as the Law Offices of James
Alan Cook.

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

RICHARD J. HICKS, III joined 3DO as Vice President, Product Development in
October 1997 and was promoted to Senior Vice President, Product Development in
November 1998. He was co-founder of New Wave Entertainment, Inc., an interactive
entertainment software company, and served as its Vice President, Software
Development from July 1995 to August 1997. He was Vice President, Software of
ShaBLAMM Computer, Inc., a computer hardware company, from February 1994 to July
1995. From May 1988 to January 1994, he held several software development
positions at Electronic Arts.

JOHN W. ADAMS became 3DO's Chief Financial Officer in March 1998. He served
as Vice President, Planning and Analysis and Director of Operations at
International Thomson Publishing, from April 1996 to March 1998. Mr. Adams
served as Senior Manager, Financial Planning from February 1993 to April 1996 at
The Walt Disney Company and was a Manager, Business Planning at The Gap

46
<PAGE>
Incorporated from March 1992 to February 1993. Mr. Adams has also held various
planning positions at the Pepsi-Cola Company from February 1986 to March 1992.

ROBERT GAYMAN joined 3DO as Vice President, Sales in March 1999. From
October 1996 to March 1999, he was Western Regional Sales Manager for Sony
Computer Entertainment America, and from January 1993 to October 1996, he was
National Sales Manager for Sun Gro Consumer Products. He has also held sales
positions at Mediagenic, Spalding Sports Worldwide, and RJR Nabisco Brands.

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

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

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

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

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

Our Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws provide that the Board is divided into three classes, with each
class serving staggered three-year terms. Mr. Hall will stand for re-election at
the 1999 annual meeting of stockholders. Mr. Jesse will stand for re-election at
the 2000 annual meeting of stockholders. Mr. Hawkins and Mr. Martin will stand
for re-election at the 2001 annual meeting of stockholders. Each officer serves
at the discretion of the Board of Directors.

47
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information known to us for the beneficial
ownership of our common stock as of March 31, 1999, and as adjusted to reflect
the sale of common stock in this offering by:

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

- each director;

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

- all directors and executive officers as a group.

As of March 31, 1999 there were 25,540,242 shares of common stock
outstanding. This number does not include shares of treasury stock. Except as
otherwise indicated, we believe that the beneficial owners of the common stock
listed below, on the information furnished by such owners, have sole voting
power and investment power over those shares, subject to community property laws
where applicable.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING (1)
------------------------ -----------------------
NUMBER PERCENT NUMBER PERCENT
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Trip Hawkins (2)........................................... 6,239,736 23.4% 7,639,736 22.1%
J&W Seligman & Co., Incorporated
100 Park Avenue
New York, New York 10017................................. 3,232,200 12.7 3,232,200 9.7
William A. Hall (3)........................................ 45,383 * 45,383 *
H. William Jesse, Jr. (4).................................. 38,333 * 38,333 *
Hugh C. Martin (5)......................................... 36,667 * 36,667 *
James A. Cook (6).......................................... 461,085 1.8 461,085 1.4
Stephen E. Fowler (7)...................................... 159,116 * 159,116 *
Richard J. Hicks, III (8).................................. 62,133 * 62,133 *
John W. Adams (9).......................................... 35,818 * 35,818 *
All executive officers and directors as a group
(11 persons) (10)........................................ 7,140,230 26.0 8,540,230 24.1
</TABLE>

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

* Less than 1% of the outstanding shares of common stock.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within 60 days
after March 31, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership of any
other person. Unless otherwise indicated in the table above, the address of
each of the individuals listed in the table is 600 Galveston Drive, Redwood
City, California 94063.

(2) Includes 1,102,833 shares subject to an option exercisable within 60 days
of March 31, 1999. We have reserved 1,400,000 shares for sale to Mr.
Hawkins, who has expressed an interest in purchasing shares in this
offering at the public offering price. See "Underwriting."

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

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

48
<PAGE>
(5) Includes 36,667 shares subject to an option exercisable within 60 days of
March 31, 1999.

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

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

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

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

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

49
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

We are authorized to issue 50,000,000 shares of common stock, $0.01 par
value, and 5,000,000 shares of undesignated preferred stock, $0.01 par value.
The following description of our capital stock does not purport to be complete
and is subject to and qualified in its entirety by our Certificate of
Incorporation and Bylaws.

COMMON STOCK

As of March 31, 1999, there were 25,540,242 shares of common stock
outstanding which were held of record by approximately 810 stockholders. This
number does not include shares of treasury stock.

The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of 3DO, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable.

PREFERRED STOCK

The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of preferred stock. However, the
effects might include, among other things, restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock and delaying or preventing a change in control of us
without further action by the stockholders. No shares of preferred stock are
outstanding, and we have no present plans to issue any shares of preferred
stock.

50
<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Gerard Klauer Mattison & Co., Inc. and Wedbush Morgan Securities Inc. are
acting as representatives, have severally, but not jointly, agreed to purchase
from us the following respective number of shares of common stock:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Gerard Klauer Mattison & Co., Inc.......................................... 4,777,500
Wedbush Morgan Securities Inc.............................................. 2,572,500
Deutsche Bank Securities Inc............................................... 100,000
Hambrecht & Quist LLC...................................................... 100,000
ING Baring Furman Selz LLC................................................. 100,000
U.S. Bancorp Piper Jaffray Inc............................................. 100,000
Arcadia Investment Corporation............................................. 50,000
Morgan Keegan & Company, Inc............................................... 50,000
Sanders Morris Mundy Inc................................................... 50,000
-----------------
Total.................................................................... 7,900,000
-----------------
-----------------
</TABLE>

The underwriting agreement provides that the obligations of the underwriters
are subject to some conditions precedent, and that the underwriters will be
obligated to purchase all of the shares of common stock offered in this
prospectus (other than those shares covered by the over-allotment option
described below) if any are taken. The underwriting agreement provides that in
the event of a default by an underwriter, in some circumstances the purchase
commitments of non-defaulting underwriters may be increased.

The underwriters propose to offer the shares of common stock to the public
initially at the public offering price set forth on the cover page of this
prospectus and to some dealers at a price that represents a concession not in
excess of $0.20 per share. The underwriters may allow and some dealers may
reallow a concession not in excess of $0.10 per share to some other dealers.
After the initial offering of the shares of common stock, the offering price and
concession and discount to dealers may be changed by the representatives of the
underwriters.

We have granted to the underwriters an option exercisable by the
representatives of the underwriters, expiring at the close of business on the
30th day after the date of this prospectus, to purchase up to 1,185,000
additional shares of common stock at the offering price, less underwriting
discounts and commissions, all as set forth on the cover page of this
prospectus. This option may be exercised only to cover over-allotments in the
sale of the shares of common stock. To the extent that the option is exercised,
each underwriter will become obligated, subject to some conditions, to purchase
a number of additional shares of the common stock proportionate to each
underwriter's initial amount reflected in the foregoing table.

The following table summarizes the compensation to be paid to the
underwriters by us.

<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
-------------- --------------
<S> <C> <C>
Underwriting discounts and commissions paid by us............. $ 2,120,625 $ 2,507,231
</TABLE>

We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $700,000.

We and our directors, executive officers, and certain of our employees have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly

51
<PAGE>
or indirectly, any shares of common stock or securities convertible into or
exchangeable or exercisable for any shares of common stock, without the prior
written consent of Gerard Klauer Mattison & Co., Inc. for a period of 180 days
after the date of this prospectus.

The representatives of the underwriters on behalf of the underwriters may
engage in over-allotment, stabilizing transactions, syndicate covering
transactions, penalty bids and "passive" market making in accordance with
Regulation M under the Securities Exchange Act of 1934. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the shares of common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives of the
underwriters to reclaim a selling concession from a syndicate member when the
shares of common stock originally sold by these syndicate members are purchased
in a syndicate covering transaction to cover syndicate short positions. In
"passive" market making, market makers in the securities offered hereby who are
underwriters or prospective underwriters may, subject to some limitations, make
bids for or purchases of such securities until the time, if any, at which a
stabilizing bid is made. These stabilizing transactions, syndicate covering
transactions, penalty bids, and other permissible purchases of shares of common
stock by or on behalf of the underwriters may cause the price of the common
stock to be higher than it would otherwise be in the absence of these
transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

We have agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act.

We have reserved 1,400,000 shares for sale to William M. Hawkins III, our
Chairman and Chief Executive Officer, who has expressed an interest in
purchasing shares in this offering at the public offering price. Any reserved
shares not purchased by Mr. Hawkins will be offered by the underwriters to the
general public on the same basis as the other shares offered hereby. The
underwriters will not receive any underwriting discounts or commissions from the
sale of shares to Mr. Hawkins.

52
<PAGE>
LEGAL MATTERS

The validity of the common stock in this offering will be passed upon for us
by James A. Cook, general counsel. Certain other legal matters will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the underwriters
by Morrison & Foerster LLP, New York, New York.

EXPERTS

The consolidated balance sheets as of March 31, 1998 and 1999, and the
consolidated statements of operations, stockholders' equity and cash flows for
the years ended March 31, 1997, 1998 and 1999 have been included in this
registration statement in reliance upon the report of KPMG LLP, independent
auditors, given and upon the authority of said firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

We have filed with the Commission registration statements on Form S-3 under
the Securities Act with respect to the shares of common stock offered in this
prospectus. This prospectus does not contain all the information set forth in
the registration statements and the exhibits and schedules thereto. For further
information about us and our common stock, we refer you to the registration
statements and to the exhibits filed with them. Statements in this prospectus as
to the contents of any contract or other document referred to are not
necessarily complete. We refer you to those copies of contracts or other
documents that have been filed as exhibits to the registration statements, and
statements relating to such documents are qualified in all respects by such
reference. Anyone may inspect a copy of the registration statements without
charge at the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain copies of all or any portion of the
registration statements by writing to the Commission's Public Reference Room,
450 Fifth Street, N.W., Washington, D.C. 20549, and paying prescribed fees. You
may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. In addition, the Commission maintains a Web
site at www.sec.gov that contains reports, proxy and information statements and
other information regarding companies such as ours that file electronically with
the Commission.

We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and therefore we file reports, proxy statements and
other information with the Commission. You can inspect and copy the reports,
proxy statements and other information that we file at the public reference
facilities maintained by the Commission at the Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain
copies of such material from the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
makes electronic filings publicly available on its Web site within 24 hours of
acceptance. Our common stock is quoted on the Nasdaq National Market under the
trading symbol "THDO." Reports, proxy and information statements and other
information about us may be inspected at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.

INFORMATION INCORPORATED BY REFERENCE

The following documents, which we have filed with the Commission, are
incorporated by reference into this prospectus: (1) our annual report on Form
10-K for the fiscal year ended March 31, 1999; (2) our current report on Form
8-K filed on July 21, 1999; and (3) our proxy statement filed on August 6, 1998
relating to the 1998 Annual Meeting of Stockholders held on September 16, 1998.

All documents that we file with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and
before the termination of the offering of the

53
<PAGE>
common stock offered in this prospectus shall be deemed incorporated by
reference into this prospectus and to be a part of this prospectus from the
respective dates of filing such documents.

We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon such person's written or oral request, a copy of
any or all of the information incorporated by reference in this prospectus
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates). Requests should be directed to The 3DO Company, 600 Galveston
Drive, Redwood City, California 94063, Attention: Investor Relations, telephone
number (650) 261-3000.

Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces such statement. Any statement so modified,
superseded or replaced shall not be deemed, except as so modified, superseded or
replaced, to constitute a part of this prospectus.

54
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-2

Consolidated Balance Sheets as of March 31, 1998 and 1999............................ F-3

Consolidated Statements of Operations for each of the years in the three year period
ended March 31, 1999............................................................... F-4

Consolidated Statements of Stockholders' Equity for each of the years in the three
year period ended March 31, 1999................................................... F-5

Consolidated Statements of Cash Flows for each of the years in the three year period
ended March 31, 1999............................................................... F-6

Notes to Consolidated Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
The 3DO Company:

We have audited the accompanying consolidated balance sheets of The 3DO
Company and subsidiaries as of March 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three year period ended March 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The 3DO
Company and subsidiaries as of March 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1999, in conformity with generally accepted accounting
principles.

/s/ KPMG LLP

Mountain View, California
May 4, 1999

F-2
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 16,209 $ 2,256
Short-term investments................................................................ 18,375 11,595
Accounts receivable, net.............................................................. 216 20,777
Prepaid and other current assets...................................................... 838 1,420
----------- -----------
Total current assets................................................................ 35,638 36,048
Property and equipment, net............................................................. 3,336 3,320
Deposits and other assets............................................................... 1,473 1,120
----------- -----------
Total assets........................................................................ $ 40,447 $ 40,488
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 495 $ 1,859
Accrued expenses...................................................................... 2,468 6,526
Deferred revenue...................................................................... 352 485
Short-term debt....................................................................... -- 9,505
Other current liabilities............................................................. 3,554 1,998
----------- -----------
Total current liabilities........................................................... 6,869 20,373
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued........... -- --
Common stock, $0.01 par value; 50,000 shares authorized; 29,018 and 29,760 shares
issued; 25,570 and 25,540 shares outstanding, respectively.......................... 290 297
Additional paid-in capital............................................................ 159,938 161,975
Accumulated other comprehensive loss.................................................. (290) (255)
Accumulated deficit................................................................... (114,673) (127,840)
Treasury stock, at cost, 3,448 and 4,220 shares, respectively......................... (11,687) (14,062)
----------- -----------
Total stockholders' equity.......................................................... 33,578 20,115
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 40,447 $ 40,488
----------- -----------
----------- -----------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-3
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
SOFTWARE PUBLISHING
Revenues...................................................................... $ 9,540 $ 9,429 $ 48,019
Cost of revenues.............................................................. 5,397 3,916 13,778
---------- ---------- ----------
Gross profit.................................................................. 4,143 5,513 34,241
---------- ---------- ----------
Operating expenses:
Research and development.................................................... 23,717 16,483 25,939
Sales and marketing......................................................... 5,309 5,612 13,497
General and administrative.................................................. 6,917 6,399 8,900
In-process research and development......................................... 7,700 -- --
---------- ---------- ----------
Total operating expenses.................................................. 43,643 28,494 48,336
---------- ---------- ----------
Operating loss................................................................ (39,500) (22,981) (14,095)
Net interest and other income................................................. 2,115 1,874 1,119
---------- ---------- ----------
Loss before taxes............................................................. $ (37,385) $ (21,107) $ (12,976)
---------- ---------- ----------

HARDWARE SYSTEMS
Revenues:
Royalties and license fees.................................................. $ 79,167 $ 29,371 $ --
Development systems and other............................................... 3,643 90 --
---------- ---------- ----------
Total revenues............................................................ 82,810 29,461 --
---------- ---------- ----------
Cost of revenues:
Royalties and license fees.................................................. 456 -- --
Development systems and other............................................... 2,136 43 --
---------- ---------- ----------
Total of cost of revenues................................................. 2,592 43 --
---------- ---------- ----------
Gross profit.................................................................. 80,218 29,418 --
---------- ---------- ----------
Operating expenses:
Research and development.................................................... 18,360 2,664 --
Sales and marketing......................................................... 2,734 -- --
General and administrative.................................................. 4,393 923 --
---------- ---------- ----------
Total operating expenses.................................................. 25,487 3,587 --
---------- ---------- ----------
Operating income.............................................................. 54,731 25,831 --
Gain on sale of hardware systems assets....................................... -- 18,032 --
---------- ---------- ----------
Income before taxes........................................................... $ 54,731 $ 43,863 $ --
---------- ---------- ----------

CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS

Income (loss) before taxes.................................................... $ 17,346 $ 22,756 $ (12,976)
Income and foreign withholding taxes.......................................... 4,075 219 191
---------- ---------- ----------
Net income (loss)............................................................. $ 13,271 $ 22,537 $ (13,167)
---------- ---------- ----------
---------- ---------- ----------
Basic net income (loss) per share............................................. $ 0.48 $ 0.85 $ (0.51)
---------- ---------- ----------
---------- ---------- ----------
Diluted net income (loss) per share........................................... $ 0.46 $ 0.83 $ (0.51)
---------- ---------- ----------
---------- ---------- ----------
Shares used to compute basic net income (loss) per share...................... 27,662 26,387 25,602
---------- ---------- ----------
---------- ---------- ----------
Shares used to compute diluted net income (loss) per share.................... 28,935 27,114 25,602
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-4
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED OTHER
---------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT
--------- ----------- ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Balances as of March 31, 1996...................... 26,003 $ 260 $ 150,541 $ (189) $ (150,481)
Comprehensive Income:
Net income....................................... 13,271
Other comprehensive income (loss)
Unrealized gain from investments............... -- -- -- 36 --
Foreign currency translation................... -- -- -- (11) --
Comprehensive income.............................
Issuance of common stock for acquisition........... 1,610 16 5,664 -- --
Sale of common stock through employee stock plans
and other plans.................................. 709 7 1,844 -- --
Common stock issued under stock incentive
program.......................................... 47 1 440 -- --
--------- ----- ----------- ----- ------------
Balances as of March 31, 1997...................... 28,369 $ 284 $ 158,489 $ (164) $ (137,210)
Comprehensive Income:
Net income....................................... -- -- -- 22,537
Other comprehensive loss
Unrealized loss from investments............... -- -- -- (112) --
Foreign currency translation................... -- -- -- (14) --
Comprehensive income.............................
Sale of common stock through employee stock plans
and other plans.................................. 649 6 1,449 -- --
Repurchase of common stock......................... -- -- --
--------- ----- ----------- ----- ------------
Balances as of March 31, 1998...................... 29,018 $ 290 $ 159,938 $ (290) $ (114,673)
Comprehensive Income:
Net loss......................................... -- -- -- -- (13,167)
Other comprehensive income
Unrealized gain from investments............... -- -- -- 35 --
Comprehensive loss.................................
Sale of common stock through employee stock plans
and other plans.................................. 742 7 2,037 -- --
Repurchase of common stock......................... -- --
--------- ----- ----------- ----- ------------
Balances as of March 31, 1999...................... 29,760 $ 297 $ 161,975 $ (255) $ (127,840)
--------- ----- ----------- ----- ------------
--------- ----- ----------- ----- ------------

<CAPTION>
TREASURY
STOCK, AT STOCKHOLDERS' COMPREHENSIVE
COST EQUITY INCOME (LOSS)
----------- ------------- ---------------
<S> <C> <C> <C>
Balances as of March 31, 1996...................... -- $ 131
Comprehensive Income:
Net income....................................... 13,271 $ 13,271
Other comprehensive income (loss)
Unrealized gain from investments............... -- 36 36
Foreign currency translation................... -- (11) (11)
---------------
Comprehensive income............................. $ 13,296
---------------
---------------
Issuance of common stock for acquisition........... -- 5,680
Sale of common stock through employee stock plans
and other plans.................................. -- 1,851
Common stock issued under stock incentive
program.......................................... -- 441
----------- -------------
Balances as of March 31, 1997...................... -- $ 21,399
Comprehensive Income:
Net income....................................... -- 22,537 $ 22,537
Other comprehensive loss
Unrealized loss from investments............... -- (112) (112)
Foreign currency translation................... -- (14) (14)
---------------
Comprehensive income............................. $ 22,411
---------------
---------------
Sale of common stock through employee stock plans
and other plans.................................. -- 1,455
Repurchase of common stock......................... $ (11,687) $ (11,687)
----------- -------------
Balances as of March 31, 1998...................... $ (11,687) $ 33,578
Comprehensive Income:
Net loss......................................... -- (13,167) $ (13,167)
Other comprehensive income
Unrealized gain from investments............... -- 35 35
---------------
Comprehensive loss................................. $ (13,132)
---------------
---------------
Sale of common stock through employee stock plans
and other plans.................................. -- 2,044
Repurchase of common stock......................... (2,375) (2,375)
----------- -------------
Balances as of March 31, 1999...................... $ (14,062) $ 20,115
----------- -------------
----------- -------------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-5
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ 13,271 $ 22,537 $ (13,167)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization........................................... 7,446 3,744 2,973
Deferred revenue........................................................ (35,870) (11,640) 133
Gain on sale of hardware systems assets................................. -- (18,032) --
Revenue recognized in exchange for common stock......................... -- (10,965) --
In-process research and development..................................... 7,700 -- --
Changes in operating assets and liabilities:
Accounts receivable, net.............................................. 2,571 213 (20,561)
Prepaid and other assets.............................................. 733 803 (678)
Accounts payable...................................................... (2,249) (74) 1,364
Accrued expenses...................................................... (1,540) (783) 4,058
Hardware incentives................................................... (1,236) (2,944) --
Other liabilities..................................................... 1,095 (162) (1,255)
---------- ---------- ----------
Net cash used in operating activities......................................... (8,079) (17,303) (27,133)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of hardware systems assets............................... -- 20,000 --
Sale of short-term investments, net......................................... 21,500 735 6,814
Capital expenditures........................................................ (4,304) (1,254) (2,507)
Acquisition of businesses................................................... (4,575) -- --
---------- ---------- ----------
Net cash provided by investing activities..................................... 12,621 19,481 4,307
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from short-term debt............................................... -- -- 9,505
Repurchase of common stock.................................................. -- (722) (2,375)
Proceeds from issuance of common stock, net................................. 1,851 1,455 2,044
Payments on capital lease obligations....................................... (1,446) (1,083) (301)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................... 405 (350) 8,873
---------- ---------- ----------
Effect of foreign currency translation........................................ (11) (14) --
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 4,936 1,814 (13,953)
Cash and cash equivalents at beginning of year................................ 9,459 14,395 16,209
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 14,395 $ 16,209 $ 2,256
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year
Interest.................................................................. $ 628 $ 135 $ 20
Income and foreign withholding taxes...................................... $ 4,075 -- --
Noncash investing and financing transactions:
Assets acquired under capital lease obligations........................... $ 152 -- --
Common stock issued in connection with business acquisitions.............. $ 5,680 -- --
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-6
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1997, 1998 AND 1999

A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

In April 1993, The 3DO Company was incorporated as a Delaware holding
company. The accompanying Consolidated Financial Statements include the accounts
of The 3DO Company and its wholly owned subsidiaries (Company), 3DO Europe, Ltd.
and Studio 3DO K.K. The 3DO Company develops and publishes branded interactive
entertainment software for multiple platforms.

BASIS OF PRESENTATION

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

All significant intercompany balances and transactions have been eliminated
in consolidation. Certain prior-year amounts have been reclassified to conform
to the current year's presentation.

USE OF ESTIMATES

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

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents include highly liquid investments with remaining maturities
of 90 days or less at the date of purchase.

The Company has classified its investments in certain debt and equity
securities as "available-for-sale." Such investments are recorded at fair value,
with unrealized gains and losses recorded as accumulated other comprehensive
income (loss) in stockholders' equity, until realized. Fair value is based on
quoted market prices for these or similar investments. Realized gains and losses
are recorded in the accompanying Consolidated Statements of Operations and were
immaterial during the periods presented. The cost of securities sold is based
upon the specific identification method.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation and amortization
are calculated using the straight-line method over the shorter of the estimated
useful lives or lease terms, if applicable, of the assets, which range from one
to five years.

F-7
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews its long-lived assets including goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets including goodwill
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets
including goodwill are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of their carrying amount or fair value less cost to sell.

STOCK-BASED COMPENSATION

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

REVENUE RECOGNITION

Revenue from the sale of software titles published and distributed by the
Company is recognized at the time of shipment. Subject to certain limitations,
the Company permits its customers to exchange software titles published and
distributed by the Company, within certain specified periods, and provides price
protection on certain unsold merchandise. Software publishing revenue is
reflected net of allowances for returns, price protection and discounts.
Software licensing revenue is recognized upon persuasive evidence of an
arrangement, 3DO's fulfillment of its obligations (e.g., delivery of the product
golden master) under any such licensing agreement, and determination that
collection of a fixed or determinable license fee is considered probable.
Per-copy royalties on sales that exceed the minimum guarantee are recognized as
earned. Revenue from the Company's on-line service is recognized monthly based
on usage.

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

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

In December 1998, AcSEC issued SOP 98-9 SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN ARRANGEMENTS, which requires recognition of revenue using the
"residual method" in a multiple element arrangement when fair value does not
exist for one or more of the delivered elements in the

F-8
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
arrangement. Under the "residual method", the total fair value of the
undelivered elements is deferred and subsequently recognized in accordance with
SOP 97-2. SOP 98-9 is effective for the Company for transactions entered into
after March 31, 1999. The effect of adopting SOP-98-9 is not expected to have a
material impact on the Company.

OTHER ASSETS

Intangible assets, primarily goodwill from the acquisition of New World
Computing, are stated at cost less accumulated amortization and are included in
other assets. Amortization of goodwill is computed on a straight-line basis over
the estimated useful life of approximately five years.

ADVERTISING EXPENSES

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

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation allowance is recorded to
reduce deferred tax assets to an amount whose realization is more likely than
not.

FOREIGN CURRENCY TRANSLATION

The functional currencies of the Company's foreign subsidiaries are their
local currencies. The Company translates assets and liabilities to U.S. dollars
at the current exchange rate as of the applicable balance sheet date. Revenue
and expenses are translated at the average exchange rates prevailing during the
period. Adjustments resulting from the translation of the foreign subsidiaries'
financial statements are recorded as accumulated other comprehensive income
(loss) in stockholders' equity. Gains and losses from foreign currency
transactions are a result of the effect of exchange rate changes on transactions
denominated in currencies other than the functional currencies. Net gains and
losses resulting from foreign exchange transactions were immaterial during the
periods presented.

NET INCOME (LOSS) PER SHARE

Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding. Diluted earnings per share is computed using
the weighted average number of shares of common stock outstanding and, when
dilutive, common equivalent shares from options to purchase common stock using
the treasury stock method.

F-9
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the periods presented:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------
1997 1998 1999
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)........................................... $ 13,271 $ 22,537 $ (13,167)
Shares used to compute basic net income (loss) per
share--weighted-average number of common shares
outstanding............................................... 27,662 26,387 25,602
Effect of common equivalent shares--stock options
outstanding using the treasury stock method............... 1,273 727 --
--------- --------- ----------
Shares used to compute diluted net income (loss) per
share..................................................... 28,935 27,114 25,602
--------- --------- ----------
--------- --------- ----------
Basic net income (loss) per share........................... $ 0.48 $ 0.85 $ (0.51)
--------- --------- ----------
--------- --------- ----------
Diluted net income (loss) per share......................... $ 0.46 $ 0.83 $ (0.51)
--------- --------- ----------
--------- --------- ----------
</TABLE>

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

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133 ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. SFAS No. 133 will be adopted by the Company in the first quarter of
fiscal 2002 and is not expected to have a material impact on its financial
statements.

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

F-10
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

B. AVAILABLE-FOR-SALE SECURITIES

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

<TABLE>
<CAPTION>
AGGREGATE FAIR VALUE
MARCH 31,
----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments:
U. S. Treasury and other government agency obligations.............. $ 11,553 $ 11,595
Commercial debt securities.......................................... 6,822 --
---------- ----------
Total short-term investments 18,375 11,595
Cash equivalents:
Money market funds.................................................. 15,128 --
---------- ----------
Total available-for-sale securities................................... $ 33,503 $ 11,595
---------- ----------
---------- ----------
</TABLE>

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

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

C. ALLOWANCE FOR DOUBTFUL ACCOUNTS, RETURNS AND PRICE PROTECTION

The following summarizes the activity for the allowance for doubtful
accounts, returns and price protection for fiscal 1997, 1998 and 1999:

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

F-11
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

D. PROPERTY AND EQUIPMENT

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

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

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

E. ACCRUED EXPENSES

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

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

F. STOCK PLANS

EMPLOYEE STOCK PURCHASE PLAN

The Company has an Employee Stock Purchase Plan whereby eligible employees
may authorize payroll deductions of up to 20% of their compensation to purchase
shares at 85% of the lower of the fair market value of the common stock on the
date of commencement of the two-year offering period, or on the last day of each
six-month purchase period. The Employee Stock Purchase Plan commenced in
September 1994. In fiscal 1997, 1998 and 1999, 204,254, 127,596 and 358,297
shares, respectively, were issued by the Company to employees at a price ranging
from $3.98 to $6.80, $2.18 to $2.98 and $2.18 to $2.40 per share, respectively.
The weighted-average fair value of the rights issued to employees to purchase a
share of stock under the Stock Purchase Plan was $2.93, $1.44 and $1.71 at March
31, 1997, 1998 and 1999, respectively. As of March 31, 1997, 1998 and 1999, the
Company had 550,555,

F-12
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

F. STOCK PLANS (CONTINUED)
422,959 and 1,564,662 shares, respectively, of common stock reserved for future
issuance under the Employee Stock Purchase Plan.

STOCK OPTION PLAN

The Company's 1993 Incentive Stock Plan (Plan) authorizes the granting of
incentive and non-qualified stock options and stock purchase rights to
employees. Incentive stock options must be granted with exercise prices at least
equal to the fair market value of the common stock on the date of grant, as
determined by the Company's Board of Directors. Non-qualified stock options and
stock purchase rights must be granted with exercise prices at least equal to 85%
of the fair market value of the common stock on the grant date, as determined by
the Board of Directors. Stock options generally vest over a 60-month period.
Unexercised options generally expire 10 years from date of grant.

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

DIRECTOR OPTION PLAN

The Company's 1995 Director Option Plan (Director Plan) authorizes the
granting of non-qualified stock options to each Outside Director on the date
such person first becomes an Outside Director. The exercise price of the options
is the fair market value per share of the common stock on the grant date. The
stock options vest over a 60-month period. Unexercised options expire ten years
from the date of grant.

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

F-13
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

F. STOCK PLANS (CONTINUED)
Transactions for all of the Company's option plans for fiscal 1997, 1998 and
1999, were as follows:

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

Authorized...................................... 3,000,000 -- --
Granted......................................... (16,005,702) 16,005,702 6.79
Terminated...................................... 13,306,657 (13,306,657) 8.82
Exercised....................................... -- (438,085) 1.64
------------- -------------
Outstanding as of March 31, 1997................ 3,743,880 7,589,489 5.27

Authorized...................................... 3,992,861 -- --
Granted......................................... (12,063,610) 12,063,610 3.14
Terminated...................................... 10,656,742 (10,656,742) 4.75
Exercised....................................... -- (521,287) 2.20
------------- -------------
Outstanding as of March 31, 1998................ 6,329,873 8,475,070 3.07

Authorized...................................... 2,547,489 -- --
Granted......................................... (4,926,250) 4,926,250 3.49
Terminated...................................... 1,595,558 (1,595,558) 3.17
Exercised....................................... -- (384,236) 3.16
------------- -------------
Outstanding as of March 31, 1999................ 5,546,670 11,421,526 $ 3.24
------------- -------------
------------- -------------
</TABLE>

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

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

F-14
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

F. STOCK PLANS (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at March 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ------------------------------ ------------ --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.05 to $0.40................ 39,312 3.36 $ 0.18 39,312 $ 0.18
$2.00 to $2.97................ 1,743,626 8.69 $ 2.25 388,459 $ 2.16
$3.03 to $3.94................ 9,208,888 8.76 $ 3.38 2,552,882 $ 3.27
$4.44 to $5.50................ 427,550 9.94 $ 4.49 16,839 $ 5.46
$8.13......................... 2,150 7.36 $ 8.13 1,141 $ 8.13
------------ -----------
$0.05 to $8.13................ 11,421,526 8.77 $ 3.24 2,998,633 $ 3.10
------------ -----------
------------ -----------
</TABLE>

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

PRO FORMA NET INCOME (LOSS)

Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company is required to disclose the pro forma effects on net income (loss) and
net income (loss) per share data as if the Company had elected to use the fair
value approach to account for all its employee stock-based compensation plans.
Had compensation cost for the Company's plans been determined consistent with
the fair value approach enumerated in SFAS No. 123, the Company's pro forma net
income and pro forma net income per share for fiscal 1997, 1998 and 1999 would
have been as indicated below:

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

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

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

The effects of applying SFAS No. 123 may not be representative of the
effects on reported operating results for future years as the pro forma
calculations are based on grants made in fiscal 1996 through 1999. The fair
value of employee stock options and employee stock purchase plan rights are

F-15
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

F. STOCK PLANS (CONTINUED)
estimated on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions for fiscal 1997, 1998 and 1999:

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

G. MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AGREEMENTS

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

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

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

F-16
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

H. SALE OF SYSTEMS GROUP

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

I. CIRRUS LOGIC, INC.

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

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

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

J. NET INTEREST AND OTHER INCOME

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

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

F-17
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

K. INCOME TAXES

The provision for income taxes consisted of the following:

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

The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income before provision for
income taxes, for fiscal 1997, 1998 and 1999 were as follows:

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

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

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

F-18
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

K. INCOME TAXES (CONTINUED)
The valuation allowance increased $7.9 million in fiscal 1999. Approximately
$0.5 million of the valuation allowance is related to benefits associated with
employee stock options, which will be allocated to equity when realized.

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

As of March 31, 1999, the Company had unused research and development tax
credits of approximately $6.8 million and $5.3 million available to reduce
future federal and California income taxes, respectively. The federal research
and development tax credit expires in various years through 2019. The California
research and development tax credit can be carried forward indefinitely. The
Company also had foreign tax credits of approximately $11.5 million available to
reduce future federal income taxes, expiring through fiscal 2004. There are also
minimum tax credits of approximately $0.5 million available to reduce future
federal income taxes, which will carry forward indefinitely.

L. LEASE COMMITMENTS

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

Future minimum lease payments are as follows:

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

M. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash, cash equivalents, short-term investments, and
accounts receivable. The Company's investment portfolio consists of diversified
investment-grade securities. The Company's policy limits the amount of credit
exposure to investments in any one issue, and the Company believes no
significant concentration of credit risk exists with respect to these
investments.

F-19
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

M. CONCENTRATION OF CREDIT RISK (CONTINUED)
Credit risk in receivables is limited to distributors, retailers, software
developers, software licensees and affiliated labels. The Company performs
ongoing credit evaluations of its customers' financial condition and requires
prepayments when deemed necessary.

N. ACQUISITIONS

NEW WORLD COMPUTING, INC.

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

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

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

F-20
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

N. ACQUISITIONS (CONTINUED)
Pro forma financial information:

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

ARCHETYPE INTERACTIVE CORPORATION

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

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

O. GEOGRAPHIC, SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION

The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, during fiscal 1999. SFAS No.
131 establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance. The Company's chief operating decision maker is considered to be
the Company's Chief Executive Officer (CEO). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenues by products for purposes of making operating
decisions and assessing financial performance. Therefore, the Company operates
in a single operating segment: interactive entertainment software products.

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

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Software publishing revenues:
PC......................................................... $ 9,540 $ 8,346 $ 26,799
Console.................................................... -- -- 20,029
Other...................................................... -- 1,083 1,191
--------- --------- ---------
Total software publishing revenues........................... 9,540 9,429 48,019
Royalty and other revenues................................... 82,810 29,461 --
--------- --------- ---------
Total revenues............................................... $ 92,350 $ 38,890 $ 48,019
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-21
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1997, 1998 AND 1999

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

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

P. LINES OF CREDIT

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

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

The Coast Business Credit revolving credit agreement permits the Company to
obtain a loan amount of up to $20.0 million, or 60% of qualified accounts
receivables, bearing an interest rate equal to Prime Rate plus 2.0% per annum
(9.75% as of March 31, 1999) and will expire on March 31, 2002. Interest expense
is due monthly and the loan balance is due at the expiration date of the credit
agreement. This agreement contains certain financial covenants, including the
requirement that the Company:

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

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

- must not pay dividends.

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

F-22
<PAGE>
There is a light background with The 3DO Company logo. The front graphics
are an assortment of quotes and awards based on our titles. The text on the page
consists of:

ARMY MEN

ARMY MEN 3D

"These guys really know how to make fun games"--PSExtreme (5/99 issue)

ARMY MEN-AIR ATTACK

"What's so damn fun about the Army Men series is the reminiscence
factor"--Imagine Games Network (4/30/99)

ARMY MEN SARGE'S HEROES

"...It could well be a masterpiece"--Nintendo Power (4/99)

"Some very impressive gameplay mechanics and a superb multiplayer
mode"--Imagine Games Network (3/29/99)

ARMY MEN I

"Toy war is a hell of a lot of fun"--The Washington Post (5/22/99)

ARMY MEN II

"...I found it hard to tear myself away"--PC Accelerator May 1999

BATTLETANX

- "5 stars"--CNET Gamecenter (2/5/99)

- "Battletanx blows up the N64 with great gameplay and ferocious multiplay
action"--GamePro (February 1999)

- "One of the best multiplayer games of all time."--Nintendo Power (December
1998)

HIGH HEAT BASEBALL

- "Editor's Choice"--Computer Gaming World (7/99 issue)

- "This game says hello like the business end of a Louisville
slugger"--Computer Gaming World (7/99 issue)

- "High Heat Baseball 2000 is on track to be not only the best baseball game
of this season, but possibly of all time"--PC Gamer (5/99 issue)

- "3DO has already locked up the MVP award, and everyone else can pretty
much go home and work on next year"--Operation Sports (4/26/99)

- "High Heat 2000 (HH2K) is quite possibly the best baseball game of the
year, if not of all time!"-- Operation Sports (4/26/99)

MIGHT AND MAGIC

MIGHT AND MAGIC VI THE MANDATE OF HEAVEN

- Computer Gaming World Editor's Choice (8/98 issue)

- #1 Holiday Role-Playing Pick, Computer Gaming World (12/98 issue)

- PC Gamer Editor's Choice (8/98 issue)

- "Once you start playing, you won't be able to stop"--PC Gamer (8/98 issue)

HEROES OF MIGHT AND MAGIC II

- "The most popular turn-based strategy game in history"--PC Gamer (10/98
issue)

- Computer Gaming World Hall of Fame (7/99)

HEROES OF MIGHT AND MAGIC III

- "5 stars"--CNET Gamecenter (3/11/99)

- "A"--Gameweek (3/17/99 issue)

- "5 stars"--Computer Games Strategy Plus (6/98 issue)

- Computer Games Strategy Plus Stamp of Approval (6/98 issue)

- Computer Gaming World Editor's Choice (6/98 issue)

- Honored in "The Family PC Top 100"--Family PC (June/July '99)

- Family PC tested (June/July '99)

- Rated 92.--Family PC (June/July '99)

- "One of the most brilliant strategy game designs ever conceived"--GameSpot
(3/99)

VEGAS GAMES 2000

- "Put a bet on this one to win the jackpot."--hotgames.com
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
WHICH IS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS MAY BE USED ONLY WHERE IT
IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY
BE ACCURATE ON THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY
OF THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK.

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Forward-Looking Statements..................... 16
Use Of Proceeds................................ 17
Dividend Policy................................ 17
Price Range Of Common Stock.................... 17
Capitalization................................. 18
Dilution....................................... 19
Selected Consolidated Financial Data........... 20
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations................................... 21
Business....................................... 33
Management..................................... 46
Principal Stockholders......................... 48
Description Of Capital Stock................... 50
Underwriting................................... 51
Legal Matters.................................. 53
Experts........................................ 53
Additional Information......................... 53
Information Incorporated By Reference.......... 53
Index To Consolidated Financial Statements..... F-1
</TABLE>

7,900,000 SHARES

[3DO LOGO]

COMMON STOCK

--------------
PROSPECTUS
--------------

GERARD KLAUER MATTISON & CO., INC.

WEDBUSH MORGAN SECURITIES

July 23, 1999

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