In 1983, he, Rick Dyer, Goldman, and Pomeroy started the Bluth Group and created the groundbreaking arcade game Dragon's Lair, which let the player control an animated-cartoon character on screen (whose adventures were played off a LaserDisc). This was followed in 1984 by Space Ace, a science-fiction game based on the same technology, but which gave the player a choice of different routes to take through the story. Bluth not only created the animation for Space Ace, but he also supplied the voice of the villain, Borf. Work on a Dragon's Lair sequel was underway when the video arcade business crashed. Bluth's studio was left without a source of income and the Bluth Group filed for bankruptcy on March 1, 1985. A sequel called Dragon's Lair II: Time Warp was made in 1991, but it was rarely seen in arcades.
Following the success of Dragon's Lair in 1983, Don Bluth and Cinematronics began plans for seven more arcade games: "The Sea Beast", "Jason and the Golden Fleece", "Devil's Island", "Haywire", "Drac", "Cro Magnon", and "Sorceress". Due to the budgeting issues and the 1983 video game crash, these projects were abandoned. The sequel to Dragon's Lair, Dragon's Lair II: Time Warp, would be shelved until its eventual release in 1991.