CD-ROM video games technology gives Activision a new lease on life.

Shareholders of Activision Inc. stock are hoping "MechWarrior" can be every bit as heroic and commercial as the characters in "Return to Zork."

The Zork series of interactive video games has been around since 1979 but Activision has infused it with a dose of Hollywood panache and interactivity. "Return to Zork" has sold over 300,000 units since Oct. 1, making Brentwood-based and NASDAQ-traded Activision one of the hottest interactive entertainment software companies in the U.S.

"Return to Zork's" success will be reflected in the company's third-quarter numbers due out later this month.

The Zork series is a number of different games that revolve around classic legends and introduces new casts of characters whom players must talk to, fight and deceive to rid a newly rediscovered underworld of an evil force that is repopulating the planet.

Unlike traditional video games that have fuzzy graphics, the new generation that Activision is making features recognizable television and movie actors set against computer-generated backgrounds. Movie-quality production techniques are used and players can interact with the characters who speak to them. Activision provides a set of actions that dictate the outcome of the conversations. Conversations can be repeated with different responses to elicit new information from the characters.

Among the stars in "Return to Zork" is Robin Lively who was seen on the "Doogie Howser M.D." and "Twin Peaks" TV series. Jason Hervey ("Wonder Years") and Michael Stadvec ("General Hospital") are also in the Zork sequel.

Retailing at a suggested $79.99, "Return to Zork" has been discounted to as low as $39.99 by some retailers who use it as a loss leader to bring consumers into their stores. Activision's largest volume accounts include Wal-Mart, Toys 'R Us, CompUSA and Software Etc.

Since its inception in 1982, Zork has spawned four sequels and two spinoffs, which have racked up total sales of 3.5 million copies. Kotick believes "MechWarrior" will eventually do more than the Zork series. A MechWarrior series also is planned.

Activision has steadily been on the rise since Robert Kotick, a 30-year-old entrepreneur, led a 1991 stock buyout of it. He was on the hunt for a high-tech entertainment company and took a chance on 15-year-old Activision, a Silicon Valley company that went boom and then bust in the 1980s.

The company hit $160 million in revenues in 1983 but then got clobbered when its video games on the Atari systems were blown away by the Sega and Nintendo systems and games. Kotick chose Activision because it had licenses with Sega and Nintendo but was also in debt. He financially reorganized the company in October 1991 while it was in a Chapter 11 bankruptcy proceeding and brought it out of bankruptcy by March 1992.

At the time of the bankruptcy the company was losing almost $27 million a year. It converted $16.2 million of debt to 9 million shares of common stock. Through private placements, it has been able to raise capital since and Las Vegas hotel magnate Steve (The Mirage) Wynn has become a major player in Activision. Kotick moved Activision to Brentwood to be closer to Hollywood's creative community and the results have been dramatic.

Activision reported revenue in the fiscal second quarter ended Sept. 30 jumped 86 percent to $7.8 million from a year earlier, while it posted an operating profit of $833,000 compared to a year-earlier loss of $397,000. The company appears on track to meet analysts' projections of hitting $28 million in revenue for the year, compared to $21 million in fiscal 1993.

Kotick, chairman and CEO, introduced "MechWarrior 2: The Clans," an interactive video game, at the Consumer Electronics Show in Las Vegas earlier this month and it will ship to about 25,000 retailers in March. He predicts it can beat Zork's debut performance and sell about 400,000 copies despite coming out in the spring. "Return to Zork's" success came over the busy November-December Christmas season.

Kotick's confidence stems from the interactive games industry's explosion. Executives in the industry estimate that 1.5 million CD-ROM discs were sold this Christmas season compared to 300,000 a year ago.

Interactive games come in several forms -- for use in personal computer hard drives, and CD-ROMs and for Sega and Nintendo systems. The industry has been dominated by the Sega and Nintendo versions but Kotick is pushing hard on the CD-ROM side to break the stranglehold that the Sega and Nintendo manufacturers have held on this industry.

The turnaround at Activision is more Hollywood theatrics than Silicon Valley technology, according to Kotick who considers himself an industry maverick. He says most people in the interactive business aren't looking to reach mass audiences but are designing interactive cerebral experiences for themselves.

"During our restructuring the major thing we did to be different was to move to Hollywood because this business was changing from a business that strictly appeals to boys 6 to 16 and guys who can't get a date on Saturday night," Kotick said. "It is becoming a medium where you are telling stories interactively. The key to great story telling is telling stories and its a lot easier to educate the great storytellers who live here than to try to turn programmers and engineers in the Silicon Valley into great storytellers." Using the film industry's actors, directors, sound effects specialists and screenwriters, and avoiding the "shoot it, kill it, eat it, slam it" genre, Activision has turned to high production values and non-violent stories to fuel its sales. But Kotick said he would not be averse to pursuing sex and violence themes if he thought that was the growing market niche.

The company is spending an average $2 million on each of the 15 titles it will release in 1994. Other 1994 debuts include "Battletech," "X-Kaliber 2097" and a spoof on "Jurassic Park" called "Radical Rex."

It is also consolidating its operations in the World Savings building on Wilshire Boulevard later this month in Brentwood. Activision is leasing an entire floor in the building to house its 70 employees.

However, there are three vacant floors above Activision and Kotick said he hopes to fill them in the future. But he declined to make long-range growth predictions for the company.