================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

     (Mark One)

       |X|      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1999

       |_|         TRANSITION REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 0-27102

                                  eGames, Inc.
             (Exact name of registrant as specified in its charter)

                 PENNSYLVANIA                        23-2694937
        (State or other jurisdiction of            (IRS Employer
        incorporation or organization)         Identification Number)

                      2000 Cabot Boulevard West, Suite 110
                            Langhorne, PA 19047-1811
                    (address of Principal executive offices)

          Issuer's Telephone Number, Including Area Code: 215-750-6606

                                 Not Applicable
                     (Former name, former address and former
                   fiscal year, if changed since last report.)

Check  whether  the issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

                                Yes ( X ) No ( )

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

                                 Yes ( ) No ( )

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  9,676,290 shares of common stock, no
par value per share, as of October 31, 1999.

Transitional Small Business Disclosure Format (check one): Yes (   )   No ( X )


<PAGE>


                                  eGames, Inc.

                                      INDEX

                                                                           Page
                                                                           ----
Part I.       Financial Information

Item 1.       Financial Statements:

              Consolidated Balance Sheet as of September 30, 1999........     3

              Consolidated Statements of Operations for the three
                  months ended September 30, 1999 and 1998 ..............     4

              Consolidated Statements of Cash Flows for the three
                  months ended September 30, 1999 and 1998 ..............     5

              Notes to Consolidated Financial Statements.................   6-8

Item 2.       Management's Discussion and Analysis of Financial
                  Condition and Results of Operations ...................  8-14

Part II.      Other Information

Item 6.       Exhibits and Reports on Form 8-K...........................    14

Signatures    ...........................................................    15

Exhibit Index ...........................................................    16

Exhibits      ...........................................................    17






<PAGE>
Item 1.  Financial Statements


                                  eGames, Inc.
                           Consolidated Balance Sheet
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                       As of
                                                                   September 30,
                                   ASSETS                              1999
                                                                       ----
<S>                                                                 <C>
Current assets:
   Cash and cash equivalents                                        $   549,964
   Accounts receivable, net of allowances totaling $1,007,949         4,581,159
   Inventory                                                          1,104,617
   Prepaid expenses                                                      74,129
                                                                    -----------
          Total current assets                                        6,309,869

Furniture and equipment, net                                            358,714
Other assets                                                            435,754
                                                                    -----------
          Total assets                                              $ 7,104,337
                                                                    ===========


                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Note payable                                                     $    51,283
   Accounts payable                                                   1,698,920
   Accrued expenses                                                   1,073,005
   Capital lease obligations                                             22,025
                                                                    -----------
          Total current liabilities                                   2,845,233

Capital lease obligations, net of current portion                        18,284
Note payable, net of current portion                                    161,434
Convertible subordinated debt                                           150,000
                                                                    -----------
          Total liabilities                                           3,174,951

Stockholders' equity:

   Common stock, no par value (40,000,000 shares authorized;
          9,893,390 issued and 9,661,490 outstanding)                 8,984,889
   Additional paid in capital                                         1,148,550
   Accumulated deficit                                               (5,691,550)
   Treasury stock, at cost - 231,900 shares                            (501,417)
   Accumulated other comprehensive loss                                 (11,086)
                                                                    -----------
          Total stockholders' equity                                  3,929,386
                                                                    -----------
          Total liabilities and stockholders' equity                $ 7,104,337
                                                                    ===========
</TABLE>





        See accompanying notes to the consolidated financial statements.


<PAGE>


                                  eGames, Inc.
                      Consolidated Statements of Operations
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                           Three months ended
                                                             September 30,
                                                       -------------------------

                                                           1999          1998
                                                           ----          ----
<S>                                                    <C>           <C>
Net sales                                              $ 4,117,575   $ 2,506,200

Cost of sales                                            1,603,308       880,577
                                                       -----------   -----------

Gross profit                                             2,514,267     1,625,623

Operating expenses:
    Product development                                    242,847       205,667
    Selling, general and administrative                  1,600,406       979,642
                                                       -----------   -----------

        Total operating expenses                         1,843,253     1,185,309
                                                       -----------   -----------

Operating income                                           671,014       440,314

Interest expense, net                                        5,100        10,649
                                                       -----------   -----------

Income before income taxes                                 665,914       429,665

Provision for income taxes                                  89,295        26,300
                                                       -----------   -----------

Net income                                             $   576,619   $   403,365
                                                       ===========   ===========



Net income per common share:
       - Basic                                         $      0.06   $      0.04
                                                       ===========   ===========
       - Diluted                                       $      0.06   $      0.04
                                                       ===========   ===========


Weighted average common shares outstanding - Basic       9,633,973     9,442,329

Dilutive effect of common stock equivalents                503,569       164,508
                                                       -----------   -----------

Weighted average common shares outstanding - Diluted    10,137,542     9,606,837
                                                       ===========   ===========
</TABLE>







        See accompanying notes to the consolidated financial statements.


<PAGE>


                                  eGames, Inc.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                   Three months ended
                                                                     September 30,
                                                               --------------------------

                                                                    1999           1998
                                                                    ----           ----
<S>                                                            <C>            <C>
Cash flows from operating activities:
    Net income                                                 $   576,619    $   403,365
    Adjustment to reconcile net income to net cash
         (used in) provided by operating activities:
    Depreciation and amortization                                  103,383         85,354
    Changes in items affecting operations
             Restricted cash                                        17,560            252
             Accounts receivable                                (2,628,050)      (350,235)
             Prepaid expenses                                       36,843          4,975
             Inventory                                              54,649        212,588
             Accounts payable                                      651,590       (286,762)
             Accrued expenses                                      441,906        109,937
                                                               -----------    -----------
Net cash (used in) provided by operating activities               (745,500)       179,474
                                                               -----------    -----------

Cash flows from investing activities:
    Acquisition, net of cash acquired                                - 0 -        (12,428)
    Purchase of furniture and equipment                            (30,212)       (22,368)
    Purchase of software rights and other assets                      (245)       (25,235)
                                                               -----------    -----------
Net cash used in investing activities                              (30,457)       (60,031)
                                                               -----------    -----------

Cash flows from financing activities:
    Proceeds from exercise of warrants and options                 110,000          - 0 -
    Repayment of notes payable                                     (94,466)       (15,888)
    Repayment of capital lease obligations                          (6,614)       (30,581)
                                                               -----------    -----------
Net cash provided by (used in) financing activities                  8,920        (46,469)
                                                               -----------    -----------

Effect of exchange rate changes on cash and cash equivalents         3,148          1,002
                                                               -----------    -----------

Net (decrease) increase in cash and cash equivalents              (763,889)        73,976

Cash and cash equivalents:

   Beginning of period                                           1,313,853        953,648
                                                               -----------    -----------
   End of period                                               $   549,964    $ 1,027,624
                                                               ===========    ===========

Supplemental cash flow information:

Cash paid for interest                                         $    11,194    $    16,427
                                                               ===========    ===========

Cash paid for income taxes                                     $     - 0 -    $    20,800
                                                               ===========    ===========

Non cash investing and financing activities:



    150,000 shares of Common Stock issued in
         connection with an acquisition                        $     - 0 -    $   213,000
                                                               ===========    ===========

</TABLE>





        See accompanying notes to the consolidated financial statements.


<PAGE>


                                  eGames, Inc.

                   Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

Basis of Presentation

The  accompanying  unaudited  interim  consolidated  financial  statements  were
prepared in accordance with generally accepted accounting principles for interim
financial information.  Accordingly,  they do not include all of the information
and footnotes required by generally accepted accounting  principles for complete
financial statements. The Notes to Consolidated Financial Statements included in
the Company's Form 10-KSB for the fiscal year ended June 30, 1999 should be read
in conjunction with the accompanying  statements.  These statements  include all
adjustments  the Company  believes are necessary for a fair  presentation of the
statements.  The interim operating results are not necessarily indicative of the
results for a full year.

Description of Business

eGames, Inc. (the "Company"),  a Pennsylvania  corporation  incorporated in July
1992,  develops,  publishes,  markets and sells a  diversified  line of personal
computer software  primarily for consumer  entertainment.  The Company's product
line  enables  it  to  serve   customers  who  are  seeking  a  broad  range  of
high-quality,  value-priced  software.  The  Company's  sales  are made  through
various  national  distributors on a  non-exclusive  basis in addition to direct
relationships with certain national retailers.

Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned  subsidiary.  All inter-company  balances and transactions have
been eliminated.

2.  Acquisition

On August 14,  1998,  the  Company  acquired  all of the  outstanding  shares of
Software Partners Publishing and Distribution Limited ("Software Partners"),  in
exchange  for  150,000  shares  of  the  Company's   Common  Stock,   valued  at
approximately  $213,000,  which was the fair value of the Company's Common Stock
on the closing date of the acquisition.  This acquisition was accounted for as a
purchase and the corresponding goodwill in the approximate amount of $308,000 is
being amortized over five years. On March 31, 1999,  Software  Partners  changed
its name to eGames Europe  Limited  ("eGames  Europe").  For the quarters  ended
September 30, 1999 and 1998,  eGames Europe  contributed  $576,000 and $301,000,
respectively, in net sales as well as $79,000 and $105,000, respectively, in net
income.

The following summary of unaudited pro-forma financial  information gives effect
to the eGames  Europe  acquisition  as though it had  occurred  on July 1, 1998,
after  giving  effect to  certain  adjustments,  primarily  the  elimination  of
inter-company  sales and  amortization  of  goodwill.  The  pro-forma  financial
information,  which is for  informational  purposes  only, is based upon certain
assumptions  and  estimates  and does not  necessarily  reflect the results that
would have  occurred  had the  acquisition  taken place at the  beginning of the
period  presented,  nor are they necessarily  indicative of future  consolidated
results.

                    Unaudited Pro-Forma Financial Information

                                                         Three Months Ended
                                                         September 30, 1998
                                                         ------------------

Net sales                                                    $2,564,000
Net income                                                   $  295,000
Net income per diluted share                                 $     0.03



<PAGE>


             Notes to Consolidated Financial Statements (continued)

3.   Comprehensive Income

On July 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income".
This Statement  requires that all items that are required to be recognized under
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial statements. Comprehensive income is computed as follows:

                                                          Three Months Ended
                                                            September 30,
                                                      ------------------------
                                                         1999          1998
                                                         ----          ----
Net income                                             $577,000      $403,000
Other comprehensive income (loss):
   Foreign currency translation adjustment             (12,000)         7,000
                                                       --------      --------
Comprehensive income                                   $565,000      $410,000
                                                       ========      ========

4.   Common Stock

On October 26, 1998, the Company's Board of Directors  authorized the Company to
purchase up to $1,000,000 of its shares of Common Stock in open-market purchases
on the Nasdaq SmallCap  Market.  During the quarter ended September 30, 1999 the
Company did not purchase  any shares of its Common  Stock.  As of September  30,
1999,  the Company had  acquired  231,900  shares of its Common  Stock,  with an
approximate cost of $501,000, pursuant to its stock repurchase program.

5.  Revolving Line of Credit

On September 28, 1999,  the Company  entered into an agreement with a commercial
bank to extend and increase its existing $1 million revolving credit facility to
a $1.5 million  revolving  credit facility  expiring  October 31, 2000.  Amounts
outstanding  under this credit facility are charged  interest at one-half of one
percent  above the bank's  current  prime rate and such interest is due monthly.
The credit  facility is  collateralized  by  substantially  all of the Company's
assets.  The credit  facility  requires  the  Company,  among other  things,  to
maintain certain financial ratios, such as: a minimum working capital balance of
$1,500,000  and a maximum debt to net tangible  assets ratio of 1.50 to 1.00. As
of  September  30,  1999,  the  Company  was in  compliance  with  each of those
covenants.  This credit facility was established to provide, among other things,
additional  working capital to support the Company's  anticipated  growth. As of
November 8, 1999, the Company had not utilized this credit facility.

On September 30, 1999, the Company's  United Kingdom  operation  entered into an
agreement  with a commercial  bank to extend and  increase its existing  $80,000
revolving credit facility to a $160,000 credit facility  expiring  September 30,
2000. Amounts outstanding under this credit facility are charged interest at two
and one-half percent above the bank's current base rate and such interest is due
monthly.  As of November  8, 1999,  the  Company  had not  utilized  this credit
facility.

6.  Operations by Reportable Segments and Geographic Area

The Company  adopted SFAS No. 131,  "Disclosure  about Segments of an Enterprise
and Related Information", as of July 1, 1998. SFAS No. 131 establishes standards
for reporting  information about an enterprise's  operating segments and related
disclosures about its products, geographic areas and major customers.

The Company publishes interactive  entertainment  software for PCs. Based on its
organizational  structure,  the  Company  operates  in only one  non-geographic,
reportable segment, which is publishing.


<PAGE>


             Notes to Consolidated Financial Statements (continued)

The President and Chief  Executive  Officer  allocates  resources to each of the
geographical  areas in which the Company  operates  using  information  on their
respective  revenues  and  operating  profits  before  interest  and taxes.  The
President and Chief Executive Officer has been identified as the Chief Operating
Decision Maker as defined by SFAS No. 131.

The accounting policies of these segments are the same as those described in the
Summary of Significant  Accounting Policies.  Revenue derived from sales between
segments is eliminated in consolidation.

Geographic  information  for the quarters  ended  September 30, 1999 and 1998 is
based on the location of the selling  entity.  Information  about the  Company's
operations by segmented  geographic  locations for the quarters ended  September
30, 1999 and 1998 is presented below.

<TABLE>
<CAPTION>

                      United States  United Kingdom  Eliminations  Consolidated
                      -------------  --------------  ------------  ------------
September 30, 1999:
<S>                    <C>              <C>            <C>          <C>
Sales                  $3,707,000       $576,000       ($165,000)   $4,118,000
Operating Income          598,000         73,000           - 0 -       671,000
Assets                 $6,791,000       $901,000       ($588,000)   $7,104,000

September 30, 1998:
Sales                  $2,249,000       $301,000        ($44,000)   $2,506,000
Operating Income          332,000        108,000           - 0 -       440,000
Assets                 $4,846,000       $730,000       ($141,000)   $5,435,000
</TABLE>



Item 2.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations

The  accompanying  consolidated  financial  statements  as of September 30, 1999
include  the  accounts  of  eGames,  Inc.,  ("eGames"),  and  its  wholly  owned
subsidiary.

Results of Operations

Three Months Ended September 30, 1999 and 1998

Net Sales

Net sales for the quarter ended September 30, 1999 were  $4,118,000  compared to
$2,506,000 for the quarter ended September 30, 1998, representing an increase of
$1,612,000  or 64%.This  increase  generally  resulted from a shift in sales mix
reflecting increases in sales of the Company's full-release game products, while
sales of the  Company's  shareware-based  products,  personal  productivity  and
non-eGames  products  decreased.  For the quarter ended  September 30, 1999, the
Company's  net  sales  were  comprised  of  full-release  game  products  (78%),
shareware-based   products  (2%),  personal   productivity  products  (13%)  and
non-eGames  products  (7%).  For the  quarter  ended  September  30,  1998,  the
Company's  net  sales  were  comprised  of  full-release  game  products  (34%),
shareware-based   products  (50%),  personal  productivity  products  (13%)  and
non-eGames  products (3%).  These changes in products sold reflect the Company's
transition from publishing and distributing primarily  shareware-based  products
to full-release,  proprietary products,  which transition began during the first
quarter of fiscal 1999.


<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (continued)

The Company's  international sales for the quarter ended September 30, 1999 were
$649,000  or 16% of net sales,  compared to $451,000 or 18% of net sales for the
quarter ended  September 30, 1998,  representing an increase of $198,000 or 44%.
The increase in  international  sales from quarter to quarter can be attributed,
in part,  to the fact that the Company  acquired  eGames Europe half way through
the quarter  ended  September  30, 1998,  and  therefore  did not reflect a full
quarter's sales from that subsidiary a year ago.

Until April 1999, the Company primarily  distributed its entertainment  software
products  in  North  America  through  a large  national  distributor,  GT Value
Products, a division of GT Interactive Software  Corporation.  At that time, the
Company terminated its exclusive  distribution  agreement with GT Value Products
and began  entering  into  non-exclusive  distribution  agreements  with various
national distributors, including GT Value Products. The Company has also entered
into  several  direct  sales  relationships  with  certain  retailers.  This new
distribution  strategy is  intended  to  diversify  the  Company's  distribution
channels  to  retail,   provide  for  more   effective   inventory   management,
merchandising  and  communications   with  retailers,   diminish  the  Company's
dependence  on any  one  third-party  distributor  for  sales  of the  Company's
products, and increase the potential gross profit margin that may be realized on
the sale of its  products.  The Company  continues  to  distribute  its products
through GT Value  Products to certain mass  merchandise  retailers that purchase
value-priced  software  exclusively  through GT Value  Products.  The  Company's
product  sales to GT Value  Products  accounted for 15% and 72% of the Company's
net sales for the quarters ended September 30, 1999 and 1998, respectively.  For
the quarters ended September 30, 1999 and 1998, sales of the Company's  products
to other  distributors  accounted for approximately 38% and 28% of the Company's
net sales,  while direct sales to retailers  accounted for approximately 47% and
0% of the Company's net sales,  respectively.  The Company believes that for the
year  ending  June 30,  2000,  sales to GT Value  Products  could  account for a
decreasing, but significant, amount of the Company's net sales.

The Company has continued to take steps to increase distribution of its products
via the Internet,  including improving and expanding its web site;  establishing
electronic  distribution  capabilities  over  the  Internet;  and  incorporating
on-line  functionality into existing  products.  Sales of the Company's products
via the Internet  represented  less than 1% of the  Company's  net sales for the
quarters ended September 30, 1999 and 1998, respectively.

During the quarters ended  September 30, 1999 and 1998, the Company's  provision
for product returns was approximately $1,041,000 and $20,000,  respectively,  or
twenty percent and one percent of the Company's gross sales,  respectively.  The
Company has increased its provision for product returns primarily as a result of
increased  exposure to potential  returns  caused by the change in the Company's
distribution relationship with GT Value Products, as well as the Company's other
recently established distribution relationships,  all of which allow for product
returns.  The Company  expects to experience a higher return rate as a result of
increased  distribution of its products into non-traditional retail stores, such
as drug  stores.  The Company  expects the return  rates from these stores to be
higher than returns experienced to date from traditional retail stores.

Cost of Sales and Gross Profit Margin

Cost of sales for the quarter ended September 30, 1999 were $1,603,000  compared
to $881,000 for the quarter ended  September 30, 1998,  representing an increase
of $722,000 or 82%.  This  increase was caused  primarily  by increased  product
costs  associated  with the 64% rise in product  sales along with  increases  in
freight and royalty costs associated with the Company's expanded distribution of
its  full-release  software titles into new and existing  retail  relationships.
Product costs consist  mainly of replicated  compact discs,  printed  materials,
protective jewel cases and boxes for certain  products.  Gross profit margin for
the quarter  ended  September  30, 1999  decreased to 61.1%,  from 64.9% for the
quarter  ended  September  30, 1998.  This  decrease in gross profit  margin was
caused  primarily by  increased  freight  costs  associated  with the  Company's
expansion into new retail opportunities,  and increased royalty costs associated
with the Company's shift to publishing and distributing  primarily  full-release


<PAGE>


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations (continued)

products.  The Company had primarily distributed shareware products in the first
quarter  of fiscal  1999..  These  cost  increases  were  partially  offset by a
decrease  in product  costs  resulting  from a  combination  of a  reduction  in
per-unit product costs due to volume discounts and an increased per unit selling
price achieved through increases in direct retail distribution.

Operating Expenses

Product  development  expenses  for the quarter  ended  September  30, 1999 were
$243,000  compared to $206,000 for the quarter  ended  September  30,  1998,  an
increase of $37,000 or 18%. This increase was caused primarily by an increase in
salary and related costs for employees  hired to focus on the Company's  product
development  and  quality  assurance  efforts,  which  was due to the  Company's
significant  increase in the  development of  full-release  products  during the
quarter ended  September 30, 1999 as compared to the quarter ended September 30,
1998.

The  development  of  full-release   software  requires   substantially  greater
resources  than  producing   shareware-based   software,   because  it  involves
identifying  potential  sources  of  software  content,   negotiating  licensing
agreements with the developers of such content, and preparing a finished product
based  upon  the  acquired  content,   which  requires  additional  in-house  or
independent  contractor  development efforts.  Additionally,  as competition for
quality  software  content  intensifies,  the Company  anticipates  that it will
require additional resources to continue to develop high-quality products.

The Company  recorded sales from 45  full-release  game products for the quarter
ended  September 30, 1999 compared to recorded sales from 13  full-release  game
products for the quarter ended  September 30, 1998. The Company also  introduced
six fully  localized  products in five  foreign  languages  during the  quarter,
namely: French, German, Spanish, Italian and Portuguese.  These products include
localized  external  packaging,  instructive  electronic help files and complete
software  translation  which are  intended  to permit  the  Company  to  further
penetrate the foreign markets. Also during the first quarter of fiscal 2000, the
Company  continued its efforts in technical  revisions of existing game products
to  incorporate,  among other changes,  the Company's  "browser-like"  interface
which  incorporates   advertising   functions  to  facilitate  potential  direct
marketing and advertising efforts.

Selling, general and administrative expenses for the quarter ended September 30,
1999 were  $1,600,000  compared to $980,000 for the quarter ended  September 30,
1998,  an increase of $620,000 or 63%.  This  increase  was caused  primarily by
increases in marketing promotional costs, salary and related costs and operating
expenses  incurred by the  Company's  sales and  distribution  operation  in the
United Kingdom,  acquired on August 14, 1998, which were not experienced for the
full quarter a year ago.

Interest Expense, net

Net  interest  expense  for the  quarter  ended  September  30,  1999 was $5,000
compared to $11,000 for the quarter  ended  September  30,  1998,  a decrease of
$6,000 or 55%.  The  primary  reason  for this  decrease  was the  reduction  of
long-term debt and capital lease  obligations  due to normal  monthly  principal
payments.

Provision for Income Taxes

Provision for income taxes for the quarter ended  September 30, 1999 was $89,000
compared to $26,000 for the quarter  ended  September  30, 1998,  an increase of
$63,000. The increase in the provision for income taxes was primarily due to the
increase in net income  achieved  during the first  quarter of fiscal  2000,  as
compared  to the net income  for first  quarter of fiscal  1999.  The  effective
income tax rates of 13% and 6% for the  quarters  ended  September  30, 1999 and
1998,  respectively  reflect  the  limitation  of  certain  net  operating  loss
carryforwards not available to offset federal and state taxable income.


<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (continued)

Net Income

Net income for the quarter  ended  September  30, 1999 was $577,000  compared to
$403,000 for the quarter  ended  September  30, 1998, an increase of $174,000 or
43%.  This increase in  profitability  resulted  primarily  from the increase in
gross profit derived from  increased  sales,  which was partially  reduced by an
increase in  operating  expenses  necessary to support the  Company's  increased
sales.

Liquidity and Capital Resources

As of September 30, 1999, the Company's cash and working  capital  balances were
$550,000 and $3,465,000,  respectively,  and the Company's  total  stockholders'
equity balance at September 30, 1999 was $3,929,000.  The Company's cash balance
has decreased by $764,000 since June 30, 1999,  primarily as a result of reduced
cash  collections from the Company's  customers during the quarter.  These lower
cash  collections  were  caused by a smaller  amount of the  Company's  accounts
receivable  becoming  due and  payable in this  quarter,  due to the  historical
seasonal  decline in sales of the  Company's  products in the quarter ended June
30,  1999.  Additionally,  the  Company  has  experienced  a gradual  slowing in
receivable  collections  from  one of its  existing  distributors.  The  Company
continues to receive ongoing  receivable  payments from this  distributor and is
managing  its sales and  receivable  collections  based upon a  mutually  agreed
distribution   plan.  At  September  30,  1999,  this  distributor   represented
approximately 36% of the Company's accounts receivable.

Net cash  used in  operating  activities  was  $746,000  for the  quarter  ended
September  30, 1999 as opposed to net cash  provided by operating  activities of
$179,000 for the quarter ended September 30, 1998. The $746,000 net cash used in
operating activities for the quarter ended September 30, 1999 resulted primarily
from the  increase  in  accounts  receivable,  which  was  partially  offset  by
increases in the Company's  net income  adjusted for non-cash  depreciation  and
amortization expense, accounts payable, accrued expenses,  inventory and prepaid
expenses. As indicated in the accompanying  financial statements,  the Company's
net income  for the  quarter  ended  September  30,  1999 was  $577,000  and the
Company's net income for the quarter ended September 30, 1998 was $403,000.

Net cash used in investing  activities for the quarter ended  September 30, 1999
and 1998 were $30,000 and $60,000, respectively. The $30,000 in net cash used in
investing activities for the quarter ended September 30, 1999, resulted from the
purchase of furniture and equipment.

Net cash  provided by  financing  activities  was $9,000 for the  quarter  ended
September 30, 1999 and net cash used in financing activities was $46,000 for the
quarter ended  September 30, 1998.  During the quarter ended September 30, 1999,
the Company  received  net proceeds  from the  exercise of Common Stock  options
totaling  $110,000,  and made  repayments  of notes  payable and  capital  lease
obligations of $94,000 and $7,000, respectively.

On October 26, 1998, the Company's Board of Directors  authorized the Company to
purchase up to $1,000,000  of its shares of Common Stock in the Nasdaq  SmallCap
Market. During the quarter ended September 30, 1999 the Company did not purchase
any shares of its Common  Stock.  As of  September  30,  1999,  the  Company had
acquired 231,900 shares of its Common Stock, at an approximate cost of $501,000,
pursuant to its stock repurchase program.

On September 28, 1999,  the Company  entered into an agreement with a commercial
bank to extend and increase its existing $1 million revolving credit facility to
a $1.5 million  revolving credit facility expiring October 31, 2000. This credit
facility was  established  to provide,  among other things,  additional  working
capital to support the Company's  anticipated growth.  Amounts outstanding under
this credit  facility are charged  interest at one-half of one percent above the
bank's current prime rate and such interest is due monthly.  The credit facility
is


<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (continued)

collateralized by substantially all of the Company's assets. The credit facility
requires the Company,  among other things, to maintain certain financial ratios,
such as: a minimum  working  capital balance of $1,500,000 and a maximum debt to
net tangible assets ratio of 1.50 to 1.00. As of September 30, 1999, the Company
was in  compliance  with each of those  covenants.  As of November 8, 1999,  the
Company had not utilized this credit facility.

The Company's  ability to achieve and maintain positive cash flow depends upon a
variety of factors,  including the  timeliness  and success of the collection of
outstanding  accounts  receivable,  the creditworthiness of the distributors and
retailers that purchase the Company's products,  the successful  development and
sell-through of the Company's products,  the costs of developing,  producing and
marketing such products, and various other factors, some of which are beyond the
Company's  control.  In the  future,  the  Company  expects its cash and working
capital  requirements  to be  affected  by each of these  factors.  The  Company
believes  cash and  working  capital  balances  will be  sufficient  to fund the
Company's  operations  for the  foreseeable  future.  However,  there  can be no
assurances that the Company will be able to achieve and maintain a positive cash
flow or that additional  financing will be available if and when required or, if
available, will be on terms satisfactory to the Company.

Year 2000

The Company's State of Readiness
--------------------------------

The  Company  has  reviewed  its  critical  information  systems  for Year  2000
compliance.  The  compliance  review  revealed that all but one of the Company's
critical information systems were Year 2000 compliant, which system was upgraded
in December 1998.

The  Company  has  determined  that there  should be no Year 2000 issues for the
products it has already sold since the Company's products  predominantly contain
no date-sensitive software.

As part of the Company's Year 2000 compliance  review, the Company has contacted
its primary vendors, distributors and customers to determine the extent to which
the Company is vulnerable to such third parties'  failures to address their Year
2000 compliance issues. The Company has received responses  indicating Year 2000
compliance from all of its primary  vendors,  including the primary  third-party
manufacturers of the Company's products and packaging.  Responses have also been
received from the majority, but not all, of the significant  distributors of the
Company's  products,  as well as  retailers  to which a  significant  amount  of
product  has been sold to date.  The  Company  will  continue  to work to obtain
sufficient information and assurances from its significant vendors, distributors
and customers as the Year 2000  approaches.  However,  there can be no guarantee
that third  parties  on which the  Company's  business  relies  will  adequately
address their Year 2000  compliance  issues nor is there any guarantee  that the
failure by such third parties to adequately deal with such issues would not have
a material adverse effect on the Company and its operations.

The Cost to Address the Company's Year 2000 Issues
--------------------------------------------------

The  Company  has  completed  its Year 2000  compliance  review of its  critical
information  systems,  including the upgrading of one of its software systems at
an approximate cost of $15,000. The Company's Year 2000 compliance review of its
third party suppliers,  distributors  and vendors is an ongoing process,  but to
date has not  required any material  amount of Company  resources or funds.  The
Company's  costs to review and address any Year 2000  compliance  issues are not
expected  to be  material  to the  Company's  financial  position,  cash flow or
results of operations.


<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (continued)

The Risks Associated with the Company's Year 2000 Compliance
------------------------------------------------------------

The Company  believes that its primary risk associated with Year 2000 compliance
is the  failure of third  parties  upon whom the  Company's  business  relies to
timely  address  their Year 2000 issues.  Failure by third parties to adequately
address their Year 2000 issues in a timely manner could result in disruptions in
the Company's supply of products,  packaging and related materials, late, missed
or unapplied  payments,  temporary  disruptions  in order  processing  and other
general problems related to the Company's daily operations.

While the Company  believes  its Year 2000  compliance  review  procedures  will
adequately  address the Company's  internal Year 2000 issues,  until the Company
receives  responses  from  all  of its  significant  vendors,  distributors  and
customers,  the  overall  risks  associated  with the Year 2000 issue  currently
remain  difficult  to  accurately  describe  and  quantify,  and there can be no
guarantee that such  uncertainty  will not have a material adverse effect on the
Company's business, operating results and financial position.

The Company's Year 2000 Contingency Plan
----------------------------------------

As of October 31, 1999, the Company  finalized its Year 2000  Contingency  plan,
which involved  identifying  third parties that had not yet confirmed their Year
2000 compliance status and then identifying alternative third parties that could
replace the  non-compliant  third  parties if it became  necessary to do so. The
Company  anticipates  establishing  contacts  with the  alternative  third party
companies prior to December 31, 1999.

Forward-Looking Statements

This  report  contains  statements  that are  forward-looking,  as that  term is
defined  by the  Private  Securities  Litigation  Reform  Act of 1995 and by the
Securities and Exchange  Commission in rules,  regulations  and releases.  These
statements include, but are not limited to, statements regarding:  the Company's
efforts to diversify the distribution  channels used to distribute its products,
including direct sales to traditional and alternative software retailers and use
of the Internet;  the projected amount of sales of the Company's  products to GT
Value Products during the 2000 fiscal year; the Company's expectations regarding
increased  product  returns  caused by the change in the Company's  distribution
relationships   as  well  as  increased   distribution   of  its  products  into
non-traditional  retail stores; the ability of the Company's  localized products
to further penetrate foreign markets;  the sufficiency of the Company's cash and
working  capital  balances to fund the Company's  operations in the future;  the
increase in the Company's  gross profit margin;  and the Company's  expectations
and  cost   estimates   regarding  its  Year  2000   compliance   efforts.   All
forward-looking   statements  are  based  on  current   expectations   regarding
significant  risk  factors,  and such  statements  should not be  regarded  as a
representation  by the Company or any other person that the results expressed in
this report will be achieved.

The  following  important  factors,  among  others  discussed  elsewhere in this
report, could cause the Company's actual results to differ materially from those
indicated  by the  forward-looking  statements  contained  in this  report:  the
success of the Company's  new  distribution  strategy,  including its ability to
enter into new  distribution  and direct  sales  relationships  on  commercially
acceptable  terms;  the market  acceptance  and successful  sell-through  of the
Company's  existing  and new  products  in the United  States and  international
markets;  the allocation of adequate  shelf space for the Company's  products in
major retail chain stores; the Company's ability to collect outstanding accounts
receivable and establish  adequate reserves for uncollectible  receivables;  the
amount of returns of the Company's  products from distributors and retailers and
the Company's ability to establish  adequate  reserves for product returns;  the
continued  increase in the number of computers in homes in North America and the
world;  the  ability  to  deliver  products  in  response  to  orders  within  a
commercially acceptable time frame; downward pricing pressure; fluctuating costs
of developing, producing and marketing the Company's products; the

<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (continued)

Company's  ability to license or develop quality  content for its products;  the
Company's ability to access alternative distribution channels and the success of
the Company's efforts to develop its Internet sales; consumers' continued demand
for value-priced  software;  increased  competition in the value-priced software
category;  the  ability of the  Company  and its key  distributors,  vendors and
suppliers to effectively  address Year 2000 compliance issues; and various other
factors,  many of which are beyond the Company's  control.  The Company does not
undertake to update any  forward-looking  statement  made in this report or that
may be made from time to time by or on behalf of the Company.

Part II. Other Information

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

      Exhibit No.                       Description of Exhibit
      -----------                       ----------------------

         27.1                           Financial Data Schedule



(b) Reports on Form 8-K

On October 20, 1999,  the Company  filed a report on Form 8-K  regarding a press
release  announcing the Company's  unaudited results for the first quarter ended
September 30, 1999.

On October 25,  1999,  the  Company  filed a report on Form 8-K  announcing  the
Company's  agreement  with Sovereign Bank to extend and increase its existing $1
million  revolving  credit facility to a $1.5 million  revolving credit facility
expiring October 31, 2000.



<PAGE>


                                   SIGNATURES



In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.



                                  eGames, Inc.
                                  (Registrant)




Date:  November 12, 1999                    /s/  Gerald W. Klein
       -----------------                    --------------------
                                            Gerald W. Klein, President,
                                            Chief Executive Officer and Director


Date:  November 12, 1999                    /s/ Thomas W. Murphy
       -----------------                    --------------------
                                            Thomas W. Murphy, Chief Financial
                                            Officer and Chief Accounting Officer



<PAGE>



                                  Exhibit Index



     Exhibit No.           Description of Exhibit             Page Number
     -----------           ----------------------             -----------

        27.1               Financial Data Schedule                 17