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 December 31, 2000

    |_|        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:  9,749,975 shares of common stock, no
par value per share, as of February 12, 2001.

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 December 31, 2000.........    3

              Consolidated Statements of Operations for the three
                  and six months ended December 31, 2000 and 1999 .......    4

              Consolidated Statements of Cash Flows for the six
                  months ended December 31, 2000 and 1999................    5

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

Item 2.       Management's Discussion and Analysis of Financial
                  Condition and Results of Operations ..................   9-17

              Risk Factors..............................................  18-22

Part II.      Other Information

Item 4.       Submission of Matters to a Vote of Security Holders........    23

Item 6.       Exhibits and Reports on Form 8-K...........................    24

Signatures    ...........................................................    25

Exhibit Index ...........................................................    26

Exhibits      ...........................................................    27






<PAGE>


Item 1.  Financial Statements

                                  eGames, Inc.
                           Consolidated Balance Sheet
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                       As of
                                                                    December 31,
ASSETS                                                                  2000
------                                                              ------------
<S>                                                                 <C>
Current assets:
   Cash and cash equivalents                                        $    62,707
   Accounts receivable, net of allowances totaling $4,145,575         5,479,943
   Inventory                                                          3,132,838
   Prepaid expenses and other current assets                            364,106
                                                                    -----------
          Total current assets                                        9,039,594

Furniture and equipment, net                                            288,570
Intangibles and other assets, net                                       229,624
                                                                    -----------
          Total assets                                              $ 9,557,788
                                                                    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
   Notes payable                                                    $    62,834
   Accounts payable                                                   3,041,940
   Revolving credit facilities                                        1,050,000
   Accrued expenses                                                   1,500,755
   Deferred revenues                                                     45,000
   Capital lease obligations                                            293,841
                                                                    -----------
          Total current liabilities                                   5,994,370

Capital lease obligations, net of current portion                         6,418
Notes payable, net of current portion                                    92,004
                                                                    -----------
          Total liabilities                                           6,092,792

Stockholders' equity:
   Common stock, no par value (40,000,000 shares authorized;
          9,981,875 issued and 9,749,975 outstanding)                 9,134,234
   Additional paid-in capital                                         1,148,550
   Accumulated deficit                                               (6,261,238)
   Treasury stock, at cost - 231,900 shares                            (501,417)
   Accumulated other comprehensive loss                                 (55,133)
          Total stockholders' equity                                  3,464,996
                                                                    -----------
          Total liabilities and stockholders' equity                $ 9,557,788
                                                                    ===========


</TABLE>


        See accompanying notes to the consolidated financial statements.


<PAGE>


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


                                                   Three months ended           Six months ended
                                                      December 31,                December 31,
                                              --------------------------   --------------------------

                                                  2000           1999          2000           1999
                                              --------------------------   --------------------------
<S>                                           <C>            <C>           <C>            <C>
Net sales                                     $ 3,867,799    $ 4,362,329   $ 7,791,535    $ 8,434,701

Cost of sales                                   2,143,876      1,561,637     4,044,623      3,164,945
                                              -----------    -----------   -----------    -----------
Gross profit                                    1,723,923      2,800,692     3,746,912      5,269,756

Operating expenses:
    Product development                           176,348        220,745       357,495        463,592
    Selling, general and administrative         1,829,113      1,821,535     3,635,958      3,376,738
                                              -----------    -----------   -----------    -----------

        Total operating expenses                2,005,461      2,042,280     3,993,453      3,840,330
                                              -----------    -----------   -----------    -----------

Operating income (loss)                          (281,538)       758,412      (246,541)     1,429,426

Interest expense, net                              22,574          4,977        30,569         10,077
                                              -----------    -----------   -----------    -----------

Income (loss) before income taxes                (304,112)       753,435      (277,110)     1,419,349

Provision (benefit) for income taxes              (34,281)       152,107       (31,460)       241,402
                                              -----------    -----------   -----------    -----------

Net income (loss)                             ($  269,831)   $   601,328   ($  245,650)   $ 1,177,947
                                              ===========    ===========   ===========    ===========


Net income (loss) per common share:
            - Basic                           ($     0.03)   $      0.06   ($     0.03)   $      0.12
                                              ===========    ===========   ===========    ===========
            - Diluted                         ($     0.03)   $      0.06   ($     0.03)   $      0.12
                                              ===========    ===========   ===========    ===========



Weighted average common shares
        outstanding - Basic                     9,749,975      9,697,486     9,749,975      9,665,729

Dilutive effect of common stock equivalents         - 0 -        437,493         - 0 -        439,866
                                                ---------     ----------     ---------     ----------

Weighted average common shares
        outstanding - Diluted                   9,749,975     10,134,979     9,749,975     10,105,595
                                                =========     ==========     =========     ==========
</TABLE>



        See accompanying notes to the consolidated financial statements.


<PAGE>


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

                                                                        Six months ended
                                                                           December 31,
                                                                   --------------------------

                                                                       2000           1999
                                                                   -----------    -----------
<S>                                                                <C>            <C>
 Cash flows from operating activities:
 -------------------------------------
    Net income (loss)                                              ($  245,650)   $ 1,177,947
    Adjustment to reconcile net income (loss) to net cash
         used in operating activities:
    Depreciation, amortization and other non-cash items                159,428        218,542
    Gain on disposal of furniture and equipment                         (4,124)         - 0 -

    Changes in items affecting operations
             Restricted cash                                             - 0 -         17,560
             Accounts receivable                                    (2,746,250)    (2,585,142)
             Prepaid expenses and other current assets                (101,616)        36,251
             Inventory                                                (713,539)      (281,966)
             Accounts payable                                        1,006,394        307,199
             Deferred revenues                                          45,000          - 0 -
             Accrued expenses                                          704,175        590,047
                                                                   -----------    -----------
Net cash used in operating activities                               (1,896,182)      (519,562)
                                                                   -----------    -----------
Cash flows from investing activities:
-------------------------------------
    Purchase of furniture and equipment                                (40,328)       (65,669)
    Proceeds from disposal of furniture and equipment                   16,502          - 0 -
    Purchase of software rights and other assets                        (4,980)        (1,225)
                                                                   -----------    -----------
Net cash used in investing activities                                  (28,806)       (66,894)
                                                                   -----------    -----------
Cash flows from financing activities:
-------------------------------------
    Proceeds from exercise of warrants and options                       - 0 -        247,543
    Proceeds from borrowings under revolving credit facilities       2,250,000        250,000
    Repayments of borrowings under revolving credit facilities      (1,200,000)      (250,000)
    Repayments of notes payable                                       (178,693)      (105,078)
    Repayments of capital lease obligations                            (19,160)       (13,004)
                                                                   -----------    -----------
Net cash provided by financing activities                              852,147        129,461
                                                                   -----------    -----------

Effect of exchange rate changes on cash and cash equivalents            (3,630)         1,798
                                                                   -----------    -----------

Net decrease in cash and cash equivalents                           (1,076,471)      (455,197)

Cash and cash equivalents:
--------------------------
    Beginning of period                                              1,139,178      1,313,853
                                                                   -----------    -----------
    End of period                                                  $    62,707    $   858,656
                                                                   ===========    ===========

Supplemental cash flow information:
-----------------------------------
Cash paid for interest                                             $    39,411    $    20,722
                                                                   ===========    ===========
Cash paid for income taxes                                         $     - 0 -    $   236,000
                                                                   ===========    ===========
Non cash investing and financing activities:
--------------------------------------------
    Acquisition of furniture, equipment and other current assets
         through capital leases                                    $   294,070    $     - 0 -
                                                                   ===========    ===========

</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, 2000 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. Prior period amounts reflect all necessary reclassifications for any
recent  accounting   pronouncement.   The  interim  operating  results  are  not
necessarily indicative of the results for a full year.

During its second  quarter of fiscal  2001,  the Company  adopted  the  Emerging
Issues Task Force ("EITF")  00-14,  "Accounting  for Certain Sales  Incentives".
Accordingly,  net sales  amounts  for  current  and prior  periods  reflect  the
reclassification  of consumer and retailer rebate costs,  from selling,  general
and administrative expenses to net sales.

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 targets the
growing market of home personal  computer ("PC") users who value  full-featured,
value-priced  and easy-to-use  entertainment  software.  The Company's sales are
made through various national  distributors on a non-exclusive basis in addition
to direct  relationships  with  national and regional  retailers.  The Company's
products  generally sell at retail for under $15, a price point that is intended
to generate impulse purchases in mass market shopping environments.

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.

Permanent Racking and Fixture Costs

The Company has included the costs of all permanent racking and fixtures already
shipped to retail stores for use in its Store-In-A-Store ("SIAS") program within
the Balance Sheet classification of "Prepaid expenses and other current assets".
The Company  expenses these costs over a one-year period from the date the racks
are placed into use at retail  locations.  As of December 31, 2000,  the Company
had $184,000 of these costs reflected in the "Prepaid expenses and other current
assets"  section of its Balance Sheet.  Any costs relating to permanent  racking
and fixtures not yet in use at retail  locations are classified in the inventory
section of the Company's  Balance Sheet, and as of December 31, 2000 these costs
amounted to $109,000.

2.  Liquidity

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  timeliness  of product  returns and the
Company's ability to resell such products after return; the  creditworthiness of
the primary  distributors  and retail customers of the Company's  products;  the
continuing retail demand for value-priced PC game software;  the development and
sell-through of the Company's products,  the costs of developing,  producing and
marketing such products; and various other factors, many 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,  in  addition  to the  Company's
revolving  credit  facilities,  should  be  sufficient  to  fund  the  Company's
operations  through  at  least  October  31,  2001.  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.


<PAGE>

Notes to Consolidated Financial Statements (continued)

3.  Comprehensive Income (Loss)

Comprehensive income (loss) is computed as follows:
<TABLE>
<CAPTION>
                                                Three Months Ended           Six Months Ended
                                                    December 31,               December 31,
                                             -----------------------     -------------------------
                                                 2000         1999          2000          1999
                                             ----------    ---------     ----------    -----------

<S>                                          <C>           <C>           <C>           <C>
Net income (loss)                            ($ 270,000)   $ 601,000     ($ 246,000)   $ 1,178,000
Other comprehensive income (loss):
   Foreign currency translation adjustment       75,000       (9,000)        14,000        10,000
                                             ----------    ---------     ----------    -----------
Comprehensive income (loss)                  ($ 195,000)   $ 592,000     ($ 232,000)   $ 1,188,000
                                             ==========    =========     ==========    ===========
</TABLE>

4.  Common Stock

On November 10, 2000,  the Company  received  notification  from Nasdaq that its
common  stock had failed to  maintain a minimum bid price of $1.00 over a period
of 30 consecutive  trading days as required for continued  listing on the Nasdaq
SmallCap Market as set forth in Marketplace  Rule 4310 (c) (4) (the "Rule").  In
accordance with  Marketplace  Rule 4310 (c) (8) (B), the Company had 90 calendar
days,  or until  February  8, 2001,  to regain  compliance  with this  Rule.  On
February  7, 2001,  the  Company  requested  a hearing  before a Nasdaq  Listing
Qualifications  Panel,  which has stayed the delisting of the  Company's  common
stock  from the  Nasdaq  SmallCap  Market  pending  the  Panel's  decision.  The
Company's  hearing is scheduled for March 23, 2001. As of February 12, 2001, the
Company  continued to satisfy all other aspects of its listing agreement for the
Nasdaq SmallCap Market.

5.  Operations by Reportable Segments and Geographic Area

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.

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 three and six months ended December 31, 2000 and
1999 is based  on the  location  of the  selling  entity.  The  Company  records
international  net sales  from both of its North  American  and  United  Kingdom
locations.  Information about the Company's  operations by segmented  geographic
locations  for the three and six  months  ended  December  31,  2000 and 1999 is
presented below.

<TABLE>
<CAPTION>
Three months ended
------------------
                         North America   United Kingdom   Eliminations   Consolidated
                         -------------   --------------   ------------   ------------
<S>                       <C>              <C>             <C>            <C>
December 31, 2000:
------------------
Net sales                 $ 3,424,000      $   768,000    ($   324,000)  $ 3,868,000
Operating income (loss)      (311,000)          29,000           - 0 -      (282,000)
Assets                    $ 9,424,000      $ 1,340,000    ($ 1,206,000)  $ 9,558,000

December 31, 1999:
------------------
Net sales                 $ 4,025,000      $   612,000    ($   275,000)  $ 4,362,000
Operating income (loss)       731,000           27,000           - 0 -       758,000
Assets                    $ 7,845,000      $ 1,176,000    ($ 1,407,000)  $ 7,614,000
</TABLE>
<PAGE>




Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>

Six months ended
----------------
                         North America   United Kingdom   Eliminations   Consolidated
                         -------------   --------------   ------------   ------------
<S>                       <C>              <C>            <C>            <C>
December 31, 2000:
------------------
Net sales                 $ 6,965,000      $ 1,359,000    ($   532,000)   $ 7,792,000
Operating income (loss)      (151,000)         (96,000)         - 0 -       (247,000)
Assets                    $ 9,424,000      $ 1,340,000    ($ 1,206,000)   $ 9,558,000

December 31, 1999:
------------------
Net sales                 $ 7,686,000      $ 1,189,000    ($   440,000)   $ 8,435,000
Operating income (loss)     1,384,000           45,000          - 0 -       1,429,000
Assets                    $ 7,845,000      $ 1,176,000    ($ 1,407,000)   $ 7,614,000

</TABLE>



6.  Revolving Credit Facilities

On August 9, 2000,  the  Company  entered  into a  $2,000,000  revolving  credit
facility  ("new credit  facility")  with a  commercial  bank,  which  expires on
October 31, 2001. This credit  facility was established to provide,  among other
things, additional working capital to support the Company's operations.  Amounts
outstanding  under this new 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 new credit facility is  collateralized by substantially all of the
Company's  assets.  The new credit  facility  requires the Company,  among other
things,  to maintain  certain  financial  covenants,  such as: a minimum working
capital  balance of $1,500,000  and a maximum senior debt to effective net worth
ratio of 1.50 to 1.00.  Additionally,  this new credit  facility  had an initial
minimum  effective net worth covenant starting at $3.1 million at June 30, 2000,
which increases by $150,000 quarterly to a $3.7 million  requirement at June 30,
2001. Effective net worth is defined as the Company's  stockholders' equity less
its intangibles and other assets.

As of December  31,  2000,  the Company was not in  compliance  with the maximum
senior  debt to  effective  net worth  ratio  and  minimum  effective  net worth
covenants. The bank has waived the Company's non-compliance with these covenants
at December  31,  2000.  The  Company  believes  that it will  continue to be in
non-compliance  with the already identified  covenants through June 30, 2001 and
is currently  working with its bank on a mutually  agreeable  resolution  to the
non-compliance  issue.  As of  February  12,  2001,  the  Company had a $950,000
outstanding balance under this credit facility and continues to have full access
to the remaining balance available under this $2,000,000 credit facility.

The Company's United Kingdom operation has a $225,000  revolving credit facility
with a  commercial  bank.  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 February 12, 2001,  the Company did not
have any  outstanding  balance  under this  credit  facility,  which  expires on
September 30, 2001.




<PAGE>


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

The  accompanying  consolidated  financial  statements  as of December  31, 2000
include the  accounts  of eGames,  Inc.  (the  "Company")  and its  wholly-owned
subsidiary.

Forward-Looking Statements

This Quarterly Report on Form 10-QSB and in particular  Management's  Discussion
and  Analysis  of  Financial   Condition  and  Results  of  Operations  contains
forward-looking  statements  about  circumstances  that  have not yet  occurred,
including,  without limitation,  statements  regarding  international sales; the
longer-term  placement  of the  Company's  Store-In-A-Store  displays  in retail
stores  and  the  effect  this  longer-term   placement  will  have  on  product
sell-through and replenishment  orders; the programs  implemented by the Company
designed to increase  sales  through its website;  the ability of the  Company's
Store-In-A-Store  program to decrease the rate of product  returns due to longer
product exposure on retailers' product shelves; the Company's ability to achieve
a more profitable  balance  between  short-term  promotional  sales programs and
longer-term, non-promotional sales programs in the food and drug retail channel;
the  Store-In-A-Store  program  continuing  to be an important  component of the
Company's  sales  strategy for fiscal 2001;  the  Company's  efforts to increase
distribution  of its  products  via the  Internet;  the  Company's  strategy  of
improving its gross profit margins in the Store-In-A-Store program by seeking to
enter into licensing and replication arrangements with third-party publishers to
allow the  Company to reduce its  third-party  product  acquisition  costs;  the
Company's  ability  to  manage  its  cost  structure;  the  payment  of  certain
promotional  costs resulting in increased  sell-through  rates for the Company's
products during  short-term  promotional  programs;  resolution of the Company's
non-compliance  with certain  covenants under its revolving credit facility with
its commercial  bank; the  sufficiency of the Company's cash and working capital
balances  to fund the  Company's  operations  for the  foreseeable  future;  the
expectation  that  certain  new  accounting   pronouncements  will  not  have  a
significant impact on the Company's results of operations, financial position or
cash flows; as well as other  statements  including words such as  "anticipate",
"believe" or "expect" and statements in the future tense. These  forward-looking
statements are subject to business and economic risks,  and actual events or the
Company's actual future results could differ  materially from those set forth in
the forward-looking statements due to such risks and uncertainties.  The Company
will not necessarily update information if any  forward-looking  statement later
turns out to be inaccurate.

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 market
acceptance of the Company's Store-In-A-Store program in the food and drug retail
channel  and the  sustainability  of the program  over time;  the ability of the
Store-In-A-Store  program to secure  longer-term  shelf space for the  Company's
products;  whether the longer-term placement of the Company's products at retail
will result in better  sell-through  rates and therefore  fewer returns from the
food and drug retail  channel;  the  effectiveness  of the steps the Company has
taken to increase website sales of its product;  the Company's  ability to enter
into licensing and replication  agreements with third-party  publishers or other
content  providers on commercially  acceptable  terms; the market acceptance and
successful  sell-through results for the Company's products at retail stores and
the ability of the Company to accurately  estimate  sell-through  volume when an
order is shipped;  the amount of unsold  product that is returned to the Company
by retail  stores;  the Company's  ability to  accurately  predict the amount of
product returns that will occur and the adequacy of the reserves established for
such returns; the success of the Company's distribution strategy,  including its
ability  to enter  into new  distribution  and  direct  sales  relationships  on
commercially  acceptable  terms;  the allocation of adequate shelf space for the
Company's  products in major  retail  chain  stores;  the  Company's  ability to
negotiate  lower  product  promotional  costs  in its  distribution  and  retail
relationships;  the Company's ability to collect outstanding accounts receivable
and  establish  adequate  reserves  for  un-collectible  receivables;  increased
selling,  general and administrative costs,  including increased legal expenses;
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 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;  and various  other  factors,  many of which are beyond the  Company's
control.  Risks and  uncertainties  that may affect the Company's future results
and performance also include,  but are not limited to, those discussed under the
heading  "Risk  Factors" on pages 18 to 22, as well as in the  Company's  Annual
Report on Form 10-KSB for the fiscal  year ended June 30,  2000,  and  Quarterly
Report on Form 10-QSB for the quarter ended  September  30, 2000,  each as filed
with the Securities and Exchange Commission.


<PAGE>


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


Results of Operations

Three Months Ended December 31, 2000 and 1999

Net Sales

Net sales for the quarter ended  December 31, 2000 were  $3,868,000  compared to
$4,362,000 for the quarter ended  December 31, 1999,  representing a decrease of
$494,000 or 11%. This $494,000  decrease in net sales resulted  primarily from a
$1,483,000 decrease in net sales to North American traditional consumer software
retailers,  which was  partially  offset by a net sales  increase of $839,000 to
North  American  food and drug  retailers  and a $150,000 net sales  increase to
international  customers.  Market factors that negatively affected the Company's
net sales to North American  traditional  consumer software retailers  included:
distribution   partners   reducing  their   inventories   by  decreasing   their
replenishment  orders for the Company's products;  increased  competition in the
value-priced  segment of the  consumer  software  marketplace  as several  major
software publishers  initiated price cuts on previously  higher-priced  products
and overall  slower sales of PC game  software in  traditional  retail  software
channels;   and,  certain  office   superstores   reducing  their  selection  of
value-priced  consumer software products,  requiring the Company to increase its
return provisions for the quarter.

The table below  represents the Company's net sales by distribution  channel for
the quarters ended December 31, 2000 and 1999, respectively.

<TABLE>
<CAPTION>
                                                        Quarter Ended    Quarter Ended
                                                         December 31,     December 31,     Increase
Distribution Channel                                         2000             1999        (Decrease)
------------------------------------------------------   ------------     ------------   ------------
<S>                                                      <C>              <C>            <C>
North American traditional consumer software retailers    $   822,000      $ 2,305,000   ($ 1,483,000)
North American food and drug retailers                      2,130,000        1,291,000        839,000
International retailers                                       916,000          766,000        150,000
------------------------------------------------------   ------------     ------------   ------------
Total net sales                                           $ 3,868,000      $ 4,362,000   ($  494,000)
                                                         ============     ============   ============
</TABLE>

As noted in the table above,  the Company's net sales to North American food and
drug retailers  increased by $839,000.  This $839,000  increase in net sales was
comprised  of a  $1,343,000  increase  in net  sales  of  third-party  publisher
software titles,  which was partially offset by a $504,000 decrease in net sales
of the Company's software titles into this channel.  The $1,343,000  increase in
net sales of third-party  publisher software titles was generated primarily from
the continued implementation of the Company's Store-In-A-Store ("SIAS") program.
This  program  provides a one-stop  category-managed  solution  to food and drug
retailers for their consumer  entertainment  software  needs through  customized
permanent  racking  fixtures and fulfilling  orders to fill these displays.  The
displays  are  designed  to remain in the retail  stores  for a one to  two-year
period,   allowing  longer  periods  of  time  for  product   sell-through   and
replenishment.

The $504,000 decrease in net sales of the Company's  software titles to food and
drug retailers was caused primarily by several factors,  including:  weaker than
anticipated  sell-through  results of newly  produced  promotional  titles;  and
increased return provisions and price markdowns required for various promotional
programs  sold on a  short-term  basis  (six to  eight  weeks)  using  temporary
corrugated displays.

The Company's  international  net sales for the quarter ended  December 31, 2000
increased by $150,000 compared to net sales for the same period during the prior
year.  This  $150,000 net sales  increase was  primarily the result of increased
sales to food and drug retailers  throughout the United Kingdom. As a percentage
of net sales, the Company's  international  net sales represented 24% and 18% of
the  Company's  net sales for the  quarters  ended  December  31, 2000 and 1999,
respectively.  For the remainder of fiscal 2001,  the Company  anticipates  that
international net sales will be approximately 20% of consolidated net sales.



<PAGE>


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

The Company has continued to implement  programs  designed to increase  sales of
its products  over the  Internet,  including:  entering  into  cross-promotional
agreements  with larger,  high-profile  companies to offer coupons for discounts
for  the  Company's   products  on  websites  and  in   newsletters;   continual
improvements   and   updates  to  its  website   and   electronic   distribution
capabilities; and incorporation of optional, user-friendly on-line functionality
into its products.  Net sales of the Company's products via the Internet for the
quarters   ended   December   31,  2000  and  1999  were  $43,000  and  $37,000,
respectively,  or  approximately  1% of the  Company's  net  sales  during  both
quarters.

During the quarters ended  December 31, 2000 and 1999, the Company's  provisions
for product returns were $1,898,000 and $805,000,  respectively,  or 33% and 16%
of the Company's  gross sales,  respectively.  This  $1,093,000  increase in the
provision  for product  returns  resulted  primarily  from the  expansion of the
number of  distribution  partners used to distribute the Company's  products and
selling directly to retailers.  All of these non-exclusive  arrangements between
the Company and its  distributors  and  retailers  allow for product  returns or
markdowns.  Additionally,  higher product  returns have been  experienced in the
food and drug retail channel due to many sales programs being sold as short-term
promotional  displays. As a result of this short selling period, the Company has
experienced  higher product  returns in food and drug retail stores  compared to
product  returns from  traditional  software  retail  stores where the Company's
products typically have a longer period of time to sell through to consumers.

During the  remainder of fiscal 2001,  the  Company's  strategy for the food and
drug  channel  is  to  obtain  a  more  profitable  balance  between  short-term
promotional sales programs and longer-term, non-promotional sales programs and a
product mix that  includes  more of the  Company's  software  titles or licensed
third-party  titles,  which in turn,  should increase the  profitability  of the
Store-In-A-Store   program.   During   the   initial   implementation   of   the
Store-In-A-Store  program,  the Company's costs have offset many of the benefits
projected  for this  program.  However,  this program has allowed the Company to
secure  longer-term  shelf space for its products in food and drug stores.  This
longer-term  shelf space should  increase  the  Company's  product  sell-through
resulting in  replenishment  orders and increased  profitability.  This strategy
should  also help  reduce the  Company's  exposure  to  product  returns in this
channel.  This  Store-In-A-Store  strategy remains an important component of the
Company's sales strategy for fiscal 2001.

Cost of Sales

Cost of sales for the quarter ended December 31, 2000 were  $2,144,000  compared
to $1,562,000 for the quarter ended December 31, 1999,  representing an increase
of $582,000 or 37%.  Additionally,  the cost of sales,  as a  percentage  of net
sales,  increased to 55.4% for the quarter  ended  December 31, 2000 compared to
35.8% for the quarter ended December 31, 1999. This $582,000 increase in cost of
sales and 19.6%  increase in cost of sales,  as a percentage of net sales,  were
both caused  primarily  by a change in the  product  mix  between the  Company's
software  titles  and  third-party  publisher  software  titles  resulting  in a
$710,000  increase in product costs associated with increased sales of the lower
margin   third-party   publisher   software   titles   through   the   Company's
Store-In-A-Store  program.  This  increase  was  partially  offset by a $260,000
decrease in product  costs  incurred in the  replication  of the  Company's  own
software  titles due to lower sales of the Company's  software titles during the
quarter as discussed above. In addition, the Company recorded a $70,000 increase
in  the   provision   of   inventory   obsolescence   necessitated   by  product
discontinuances.  Product costs  consist  mainly of  replicated  compact  discs,
printed materials, protective jewel cases and boxes for certain products.

Gross Profit Margin

The  Company's  gross  profit  margin for the quarter  ended  December  31, 2000
decreased  to 44.6% of net sales from 64.2% of net sales for the  quarter  ended
December 31, 1999.  This 19.6% decrease in gross profit margin,  as a percentage
of net sales,  was caused  primarily  by an  increase  in  product  costs,  as a
percentage of net sales, due to: increased sales of third-party  software titles
on which the Company  earns a lower profit margin than it earns from the sale of
its own software titles;  discounted sales of certain of the Company's  software
titles in consumer promotional  programs;  sales of newly developed  promotional
titles  with  lower  margins;  increased  royalty  rates  for  Company-developed
software   titles;   and  increased   provisions   for  inventory   obsolescence
necessitated  by  product  discontinuances.   The  Company  is  working  towards
improving its gross profit margins in the Store-In-A-Store program by seeking to
enter into  licensing  and  replication  arrangements  with certain  third-party
publishers to allow the Company to reduce its  third-party  product  acquisition
costs. However, the Company anticipates


<PAGE>

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

continuing to realize lower gross profit  margins during the remainder of fiscal
2001,  due to the  continued  need of acquiring  higher  costing  finished  good
products of third-party publisher titles for sales within the SIAS program.

Operating Expenses

Product  development  expenses  for the  quarter  ended  December  31, 2000 were
$176,000  compared to $221,000  for the  quarter  ended  December  31,  1999,  a
decrease of $45,000 or 20%. This decrease was caused  primarily by a decrease in
salary  and  related  costs due to  headcount  reductions  among  the  Company's
technology-related  staff and no employee  bonus  accrual for the quarter  ended
December 31, 2000.

Selling,  general and administrative expenses for the quarter ended December 31,
2000 were  $1,829,000  compared to $1,822,000 for the quarter ended December 31,
1999,  an increase  of $7,000.  This  $7,000  increase  in selling,  general and
administrative  expenses was caused  primarily from an increase in the operating
costs of the Company's  United Kingdom  operation needed to support its increase
in net sales.

In January 2001, the Company  effected a 25% reduction in its workforce in order
to save an estimated  $150,000 in salary and related  expenses per quarter.  The
Company is also reducing its utilization of outside professional service vendors
in order to continue to cut operating expenses going forward.

Interest Expense, Net

Net  interest  expense  for the  quarter  ended  December  31,  2000 was $23,000
compared to $5,000 for the  quarter  ended  December  31,  1999,  an increase of
$18,000. The $18,000 increase was primarily due to the increased  utilization of
the revolving credit facility during the quarter ended December 31, 2000.

Provision (Benefit) for Income Taxes

Benefit for income taxes for the quarter  ended  December 31, 2000 was ($34,000)
compared  to a provision  for income  taxes of  $152,000  for the quarter  ended
December  31, 1999,  a decrease in the  provision  for income taxes of $186,000.
This  $186,000  decrease in the  provision for income taxes was primarily due to
the $1,058,000  decrease in the Company's  income (loss) before income taxes for
the quarter  ended  December  31, 2000  compared to the same quarter last fiscal
year.

Net Income (Loss)

As a result of the various factors  discussed  above, the Company recorded a net
loss of  ($270,000)  for the quarter  ended  December  31, 2000  compared to net
income of $601,000  for the  quarter  ended  December  31,  1999,  a decrease of
$871,000.

Weighted Average Common Shares

The weighted  average common shares  outstanding on a diluted basis decreased by
385,004 for the quarter ended December 31, 2000 to 9,749,975 from 10,134,979 for
the quarter ended December 31, 1999. This 385,004  decrease in weighted  average
common  shares  outstanding  was caused  primarily by a decrease in common stock
equivalents resulting from the Company's recording of a net loss for the quarter
ended December 31, 2000.  Such common stock  equivalents  were excluded from the
diluted  shares   calculation,   because  their  inclusion  would  have  had  an
anti-dilutive effect.



<PAGE>


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

Results of Operations

Six Months Ended December 31, 2000 and 1999

Net Sales

Net sales for the six months ended December 31, 2000 were $7,792,000 compared to
$8,435,000 for the six months ended  December 31, 1999,  representing a decrease
of $643,000 or 8%. This $643,000 decrease in net sales resulted primarily from a
$2,847,000 decrease in net sales to North American traditional consumer software
retailers,  which was partially offset by an increase of $1,992,000 in net sales
to North American food and drug  retailers and a $212,000  increase in net sales
to international customers. Market factors that negatively affected net sales to
the  North  American   traditional   consumer   software   retailers   included:
distribution   partners   reducing  their   inventories   by  decreasing   their
replenishment  orders for the Company's products;  increased  competition in the
value-priced  segment of the  consumer  software  marketplace  as several  major
software publishers  initiated price cuts on previously  higher-priced  products
and overall  slower sales of PC game  software in  traditional  retail  software
channels;   and,  certain  office   superstores   reducing  their  selection  of
value-priced  consumer software products,  requiring the Company to increase its
return provisions for the six months ended December 31, 2000.

The table below  represents the Company's net sales by distribution  channel for
the six months ended December 31, 2000 and 1999, respectively.

<TABLE>
<CAPTION>
                                                         Six Months Ended   Six Months Ended
                                                            December 31,       December 31,     Increase
Distribution Channel                                            2000              1999          (Decrease)
------------------------------------------------------   ----------------   ----------------   ------------
<S>                                                           <C>                <C>           <C>
North American traditional consumer software retailers        $ 1,982,000        $ 4,829,000   ($ 2,847,000)
North American food and drug retailers                          4,183,000          2,191,000      1,992,000
International retailers                                         1,627,000          1,415,000        212,000
------------------------------------------------------   ----------------   ----------------   ------------
Total net sales                                               $ 7,792,000        $ 8,435,000   ($   643,000)
                                                         =================  ================   ============
</TABLE>

As noted in the table above,  the Company's net sales to North American food and
drug retailers  increased by $1,992,000.  This $1,992,000  increase in net sales
was  comprised of a $1,542,000  increase in net sales of  third-party  publisher
software  titles  and a  $450,000  increase  in the net  sales of the  Company's
software  titles  into this  channel.  The  $1,542,000  increase in net sales of
third-party  publisher software titles to North American food and drug retailers
was  generated  primarily  from the  continued  implementation  of the Company's
Store-In-A-Store   ("SIAS")   program.   This   program   provides   a  one-stop
category-managed  solution  to  food  and  drug  retailers  for  their  consumer
entertainment  software needs through customized  permanent racking fixtures and
fulfilling orders to fill these displays. The displays are designed to remain in
the retail stores for a one to two-year period,  allowing longer periods of time
for product sell-through and replenishment.

The $450,000 increase in net sales of the Company's  software titles to food and
drug retailers also resulted from the roll-out of the Company's Store-In-A-Store
program,  but was negatively  impacted by weaker than  anticipated  sell-through
results of newly produced promotional titles and increased return provisions and
price markdowns required for various  promotional  programs sold on a short-term
basis ranging from six to eight weeks using temporary corrugated displays.

The  Company's  international  sales for the six months ended  December 31, 2000
increased  by $212,000  compared  to sales for the same period  during the prior
year.  This  $212,000 net sales  increase is  primarily  the result of increased
sales to food and drug retailers  throughout the United Kingdom. As a percentage
of net sales, the Company's  international  net sales represented 21% and 17% of
the  Company's  net sales for the six months  ended  December 31, 2000 and 1999,
respectively.  For the remainder of fiscal 2001,  the Company  anticipates  that
international net sales will be approximately 20% of consolidated net sales.


<PAGE>


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

The Company has continued to implement  programs  designed to increase  sales of
its products  over the  Internet,  including:  entering  into  cross-promotional
agreements with larger, high-profile companies to offer coupons for discounts of
the Company's  products on websites and in newsletters,  continual  improvements
and  updates  to its  website  and  electronic  distribution  capabilities;  and
incorporation  of  optional,   user-friendly   on-line  functionality  into  its
products.  Net sales of the  Company's  products  via the  Internet  for the six
months ended December 31, 2000 and 1999 were $74,000 and $58,000,  respectively,
or approximately 1% of the Company's net sales during both six month periods.

During the six months ended December 31, 2000 and 1999, the Company's provisions
for product returns were $3,301,000 and $1,846,000, respectively, or 30% and 18%
of the Company's  gross sales,  respectively.  This  $1,455,000  increase in the
provision  for product  returns  resulted  primarily  from the  expansion of the
number of  distribution  partners used to distribute the Company's  products and
selling directly to retailers.  All of these non-exclusive  arrangements between
the Company and its  distributors  and  retailers  allow for product  returns or
markdowns.  Additionally,  higher product  returns have been  experienced in the
food and drug retail channel due to many sales programs being sold as short-term
promotional  displays. As a result of this short selling period, the Company has
experienced  higher product  returns in food and drug retail stores  compared to
product  returns from  traditional  software  retail  stores where the Company's
products typically have a longer period of time to sell through to consumers.

During the  remainder of fiscal 2001,  the  Company's  strategy for the food and
drug  channel  is  to  obtain  a  more  profitable  balance  between  short-term
promotional sales programs and longer-term, non-promotional sales programs and a
product mix that  includes  more of the  Company's  software  titles or licensed
third-party  titles,  which in turn,  should increase the  profitability  of the
Store-In-A-Store   program.   During   the   initial   implementation   of   the
Store-In-A-Store  program,  the Company's costs have offset many of the benefits
projected  for this  program.  However,  this program has allowed the Company to
secure  longer-term  shelf space for its products in food and drug stores.  This
longer-term  shelf space should  increase  the  Company's  product  sell-through
resulting in  replenishment  orders and increased  profitability.  This strategy
should  also help  reduce the  Company's  exposure  to  product  returns in this
channel.  This  Store-In-A-Store  strategy remains an important component of the
Company's sales strategy for fiscal 2001.

Cost of Sales

Cost of sales  for the six  months  ended  December  31,  2000  were  $4,045,000
compared to $3,165,000 for the six months ended December 31, 1999,  representing
an increase of $880,000 or 28%. Additionally, the cost of sales, as a percentage
of net sales,  increased  to 51.9% for the six months  ended  December  31, 2000
compared to 37.5% for the six months  ended  December 31,  1999.  This  $880,000
increase in cost of sales and 14.4%  increase in cost of sales,  as a percentage
of net sales,  were both caused primarily by a change in the product mix between
the  Company's  software  titles  and  third-party   publisher  software  titles
resulting in a $950,000  increase in product  costs  associated  with  increased
sales of the lower margin  third-party  publisher  software  titles  through the
Company's  Store-In-A-Store  program.  This increase was  partially  offset by a
$195,000  decrease in product costs incurred in the replication of the Company's
own  software  titles  due to  lower  sales  of the  Company's  software  titles
discussed  above. In addition,  the Company  recorded a $70,000  increase in the
provision for inventory  obsolescence  necessitated by product  discontinuances.
Product costs consist  mainly of replicated  compact discs,  printed  materials,
protective jewel cases and boxes for certain products.

Gross Profit Margin

The  Company's  gross profit  margin for the six months ended  December 31, 2000
decreased to 48.1% of net sales from 62.5% of net sales for the six months ended
December 31, 1999.  This 14.4% decrease in gross profit margin,  as a percentage
of net sales,  was caused  primarily  by an  increase  in  product  costs,  as a
percentage of net sales, due to: increased sales of third-party  software titles
on which the Company  earns a lower profit margin than it earns from the sale of
its own software titles;  discounted sales of certain of the Company's  software
titles in consumer promotional  programs;  sales of newly developed  promotional
titles  with  lower  margins;  increased  royalty  rates for  Company  developed
software   titles;   and  increased   provisions   for  inventory   obsolescence
necessitated  by  product  discontinuances.   The  Company  is  working  towards
improving its gross profit margins in the Store-In-A-Store



<PAGE>


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

program by seeking to enter into  licensing and  replication  arrangements  with
certain  third-party  publishers to allow the Company to reduce its  third-party
product  acquisition  costs.  However,  the Company  anticipates  continuing  to
realize lower gross profit  margins  during the remainder of fiscal 2001, due to
the  continued  need of  acquiring  higher  costing  finished  good  products of
third-party publisher titles for sales within the SIAS program.

Operating Expenses

Product  development  expenses for the six months  ended  December 31, 2000 were
$358,000  compared to $464,000  for the six months  ended  December  31, 1999, a
decrease of $106,000 or 23%.  This $106,000  decrease was caused  primarily by a
decrease  in salary and  related  costs due to  headcount  reductions  among the
Company's  technology-related  staff and no employee  bonus  accrual for the six
months ended December 31, 2000.

Selling,  general and administrative  expenses for the six months ended December
31,  2000 were  $3,636,000  compared  to  $3,377,000  for the six  months  ended
December 31,  1999,  an increase of $259,000 or 8%. This  $259,000  increase was
caused  primarily by increases in: marketing  promotional  expenses of $280,000,
salary and related expenses of $80,000 and operating expenses from the Company's
United Kingdom operation of $40,000,  which increases were partially offset by a
$150,000  decrease in  professional  services  costs.  The Company is  incurring
increases in marketing  promotional  costs in order to potentially  increase the
sell-through rate for its products during short-term  promotional  programs that
retailers  offer  periodically  to their  customers.  These  marketing costs may
decrease,  as a  percentage  of net  sales,  if the  Company's  Store-In-A-Store
program successfully expands the longer-term placement of the Company's products
in the food and drug channel.  Additionally, the Company continues to experience
higher  promotional  costs in the  traditional  software  retail channels due to
increased  competition for shelf space and related expenses charged by retailers
and distributors to promote and support sales of the Company's products.

In January 2001, the Company  effected a 25% reduction in its workforce in order
to save an estimated  $150,000 in salary and related  expenses per quarter.  The
Company is also reducing its utilization of outside professional service vendors
in order to continue to cut operating expenses going forward.

Interest Expense, Net

Net  interest  expense for the six months  ended  December  31, 2000 was $31,000
compared to $10,000 for the six months ended  December 31, 1999,  an increase of
$21,000. The $21,000 increase was primarily due to the increased  utilization of
the revolving credit facility during the six months ended December 31, 2000.

Provision (Benefit) for Income Taxes

Benefit  for  income  taxes  for the six  months  ended  December  31,  2000 was
($31,000)  compared to a  provision  for income  taxes of  $241,000  for the six
months ended  December 31, 1999, a decrease in the provision for income taxes of
$272,000. This $272,000 decrease in the provision for income taxes was primarily
due to the  $1,696,000  decrease in the  Company's  income  (loss) before income
taxes for the six months  ended  December  31, 2000  compared to the same period
last fiscal year.

Net Income (Loss)

As a result of the various factors  discussed  above, the Company recorded a net
loss of  ($246,000)  for the six months ended  December 31, 2000 compared to net
income of $1,178,000  for the six months ended  December 31, 1999, a decrease of
$1,424,000.


<PAGE>


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

Weighted Average Common Shares

The weighted  average common shares  outstanding on a diluted basis decreased by
355,620 for the six months ended December 31, 2000 to 9,749,975 from  10,105,595
for the six months ended  December 31, 1999.  This 355,620  decrease in weighted
average common shares  outstanding was caused  primarily by a decrease in common
stock equivalents  resulting from the Company's  recording of a net loss for the
six months ended December 31, 2000. Such common stock  equivalents were excluded
from the diluted shares  calculation,  because their inclusion would have had an
anti-dilutive effect.

Liquidity and Capital Resources

As of December 31, 2000,  the Company's cash and working  capital  balances were
$63,000 and  $3,045,000  respectively,  and the  Company's  total  stockholders'
equity balance at December 31, 2000 was $3,465,000.

Net cash used in operating activities was approximately  $1,896,000 and $520,000
for the  six  months  ended  December  31,  2000  and  1999,  respectively.  The
$1,896,000  in net cash used in operating  activities  resulted  primarily  from
increases of  $2,746,000  and  $714,000 in accounts  receivable  and  inventory,
respectively,  which increases were partially  offset by increases of $1,006,000
and  $704,000  in  accounts  payable and  accrued  expenses,  respectively.  The
$2,746,000  increase in accounts  receivable resulted primarily from slower cash
collections from the Company's  customers caused by slow  sell-through  rates of
the Company's  products at retail.  The $1,006,000  increase in accounts payable
resulted primarily from the increased cost of purchasing  third-party  publisher
software titles for  distribution in the Company's  Store-In-A-Store  program to
food and drug retailers. Additionally, the Company's net loss for the six months
ended December 31, 2000 was $246,000,  inclusive of  depreciation,  amortization
and other non-cash expenses of $159,000.

Net cash used in investing activities was approximately  $29,000 and $67,000 for
the six months ended  December 31, 2000 and 1999,  respectively.  The $29,000 in
net cash  used in  investing  activities  resulted  primarily  from  $40,000  in
purchases of furniture and equipment,  which was partially  offset by $17,000 in
proceeds from the disposal of furniture and equipment.

Net cash provided by financing  activities for the six months ended December 31,
2000 and 1999 was $852,000 and $129,000,  respectively. The $852,000 in net cash
provided by  financing  activities  reflects  net  proceeds  from the  Company's
borrowing  of  $2,250,000  under  the  revolving  credit  facilities,  which was
partially  offset by repayments  of this  borrowing  under the revolving  credit
facilities, notes payable and capital lease obligations of $1,200,000,  $179,000
and $19,000, respectively.

On August 9, 2000,  the  Company  entered  into a  $2,000,000  revolving  credit
facility  ("new credit  facility")  with a  commercial  bank,  which  expires on
October 31, 2001. This credit  facility was established to provide,  among other
things, additional working capital to support the Company's operations.  Amounts
outstanding  under this new 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 new credit facility is  collateralized by substantially all of the
Company's  assets.  The new credit  facility  requires the Company,  among other
things,  to maintain  certain  financial  covenants,  such as: a minimum working
capital  balance of $1,500,000  and a maximum senior debt to effective net worth
ratio of 1.50 to 1.00.  Additionally,  this new credit  facility  had an initial
minimum  effective net worth covenant starting at $3.1 million at June 30, 2000,
which increases by $150,000 quarterly to a $3.7 million  requirement at June 30,
2001. Effective net worth is defined as the Company's  stockholders' equity less
its intangibles and other assets.

As of December  31,  2000,  the Company was not in  compliance  with the maximum
senior  debt to  effective  net worth  ratio  and  minimum  effective  net worth
covenants. The bank has waived the Company's non-compliance with these covenants
at December  31,  2000.  The  Company  believes  that it will  continue to be in
non-compliance  with the already identified  covenants through June 30, 2001 and
is currently  working with its bank on a mutually  agreeable  resolution  to the
non-compliance  issue.  As of  February  12,  2001,  the  Company had a $950,000
outstanding balance under this credit facility and continues to have full access
to the remaining balance available under this $2,000,000 credit facility.


<PAGE>


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

The Company's United Kingdom operation has a $225,000  revolving credit facility
with a  commercial  bank.  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 February 12, 2001,  the Company did not
have any  outstanding  balance  under this  credit  facility,  which  expires on
September 30, 2001.

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  timeliness  of product  returns and the
Company's ability to resell such products after return; the  creditworthiness of
the primary  distributors  and retail customers of the Company's  products;  the
continuing retail demand for value-priced PC game software;  the development and
sell-through of the Company's products,  the costs of developing,  producing and
marketing such products; and various other factors, many 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,  in  addition  to the  Company's
revolving credit  facilities  mentioned above,  should be sufficient to fund the
Company's operations through at least October 31, 2001. 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.

On November 10, 2000,  the Company  received  notification  from Nasdaq that its
common  stock had failed to  maintain a minimum bid price of $1.00 over a period
of 30 consecutive  trading days as required for continued  listing on the Nasdaq
SmallCap Market as set forth in Marketplace  Rule 4310 (c) (4) (the "Rule").  In
accordance with  Marketplace  Rule 4310 (c) (8) (B), the Company had 90 calendar
days,  or until  February  8, 2001,  to regain  compliance  with this  Rule.  On
February  7, 2001,  the  Company  requested  a hearing  before a Nasdaq  Listing
Qualifications  Panel,  which has stayed the de-listing of the Company's  common
stock  from the  Nasdaq  SmallCap  Market  pending  the  Panel's  decision.  The
Company's  hearing is scheduled for March 23, 2001. As of February 12, 2001, the
Company  continued to satisfy all other aspects of its listing agreement for the
Nasdaq SmallCap Market.

New Accounting Pronouncements

The Company is currently evaluating the potential impact of Emerging Issues Task
Force 00-10  "Accounting  for Shipping  and  Handling  Fees and Costs" and Staff
Accounting  Bulletin  101  "Revenue  Recognition"  and  related  amendments  and
interpretations.  These  pronouncements  become  effective  no  later  than  the
Company's  fourth  quarter  of fiscal  2001.  The  Company  does not  expect the
adoption of these or any other recently issued accounting pronouncements to have
a significant  impact on its results of operations,  financial  position or cash
flows.


<PAGE>


Risk Factors

This report  contains  certain  forward-looking  statements  involving risks and
uncertainties  that could cause actual results to differ  materially  from those
anticipated,   including,  but  without  limitation:  economic  and  competitive
conditions  in the  software  business  affecting  the demand for the  Company's
products;  the  Company's  need for  additional  funds;  the ability to hire and
retain key management  personnel to manage anticipated  growth; the development,
market acceptance and timing of new products;  access to distribution  channels;
and the  renewal of licenses  for key  software  products.  Those  factors,  the
factors  discussed below,  and the factors  identified on page 9 of Management's
Discussion and Analysis,  should be considered by investors in the Company.  All
forward-looking  statements are  necessarily  speculative and there are numerous
risks and  uncertainties  that could  cause  actual  events or results to differ
materially  from  those  referred  to in such  forward-looking  statements.  The
discussion  below  highlights  some of the more  important  risks  identified by
management,  but should not be assumed to be the only  factors that could affect
future performance.

Maintaining  Profitability.  The Company commenced  operations in July 1992. The
Company experienced  significant losses from inception through the end of fiscal
1997. Fiscal year 1998 was the first year that the Company earned a profit.  The
Company has earned  $253,000,  $463,000 and $1,253,000 in fiscal 2000,  1999 and
1998, respectively, and the accumulated deficit for the Company at June 30, 2000
was  approximately  $6,016,000.  Prior to fiscal 1998, the Company's  operations
were  funded  primarily  through  proceeds  from the  Company's  initial  public
offering  of  Common  Stock in  October  1995 and  through  the sale in  private
offerings of preferred  stock and Common Stock  warrants in November 1996 and in
January and April  1997.  Subsequently,  the  Company has funded its  activities
mainly  through  operations  and bank  borrowings.  During the first  quarter of
fiscal 2001, the Company earned $24,000, and during the second quarter of fiscal
2001,  the Company was not  profitable,  sustaining  a loss of  $270,000.  Given
current  market  conditions  in the  entertainment  software  industry,  and the
Company's  financial  performance  in  fiscal  2001  to  date,  there  can be no
assurance  that the Company  will be able to earn a profit in fiscal  2001.  The
Company's  operations  today continue to be subject to all of the risks inherent
in the development of a recently profitable  business,  particularly in a highly
competitive industry,  including, but not limited to, development,  distribution
and marketing  difficulties,  competition and unanticipated  costs and expenses.
The Company's  future success will depend upon its ability to increase  revenues
and profits from the development,  marketing and distribution of its current and
future software products.

Risks Inherent in the Consumer  Entertainment Software Business. The development
of multimedia  software  products,  which can combine text,  sound, high quality
graphics,  images and video,  is difficult  and time  consuming,  requiring  the
coordinated  participation  of various  technical  and  marketing  personnel and
outside  developers.  Some of the factors that could affect the Company's future
success include,  but are not limited to, the ability of the Company to generate
sufficient  funds  from  operations  or find other  financing  sources to obtain
quality product content; to overcome problems and delays in product development;
and to successfully  implement the Company's  sales,  distribution and marketing
strategy.  There  can  be  no  assurance  the  Company  will  be  successful  in
maintaining  and  expanding  a  sustainable  consumer   entertainment   software
business.

Dependence  On  Distributors  And  Retailers.  Many of the  largest  mass-market
retailers  have  established  exclusive  buying  relationships  under which such
retailers   will  buy  consumer   entertainment   software   only  from  certain
distributors.  In such  instances,  the  Company  will  not be able to sell  its
products to such  mass-market  retailers if these  distributors are unwilling to
distribute the Company's  products.  Additionally,  even if the distributors are
willing to purchase the Company's  products,  the distributor is frequently able
to dictate the price,  timing and other terms on which the Company sells to such
retailers,  or the Company may be unable to sell to such retailers on terms that
the  Company  deems  acceptable.  The  inability  of the  Company  to  negotiate
commercially   viable   distribution   relationships   with   these   and  other
distributors, or the loss of, or significant reduction in sales attributable to,
any of the Company's principal  distributors or retailers could adversely affect
the Company's business, operating results and financial condition.

Risk of Customer  Business  Failure.  Distributors and retailers in the computer
industry and in mass-market  retail channels have from time to time  experienced
significant  fluctuations  in their  businesses  and there have been a number of
business  failures  among these  entities,  particularly  under  current  market
conditions in the software  industry.  The insolvency or business failure of any
significant  retailer or  distributor  of the  Company's  products  could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  Sales are typically made on credit,  with terms that vary
depending upon the customer and the nature of the product.  The Company does not
hold collateral to secure payment.


<PAGE>


Risk Factors (continued)

The Company maintains allowances for uncollected receivables that it believes to
be adequate,  but the actual  allowance  maintained may not be  sufficient.  The
failure  to  pay  an  outstanding   receivable  by  a  significant  customer  or
distributor  could have a material  adverse  effect on the  Company's  business,
operating results and financial condition.

Product  Returns.  Although the Company has  established  allowances for product
returns that it believes  are  adequate,  there can be no assurance  that actual
returns  will not exceed such  allowances.  The Company may also accept  product
returns in order to maintain its relationships  with retailers and its access to
distribution channels. As a result of the Company's termination of its exclusive
distribution  relationship  with  Infogrames,  Inc. in April  1999,  and its new
non-exclusive  distribution relationships with other distributors and its direct
sales to  retailers,  the  Company  is now  increasingly  exposed to the risk of
product  returns from these  retailers and  distributors.  Product  returns that
exceed the  Company's  allowances  could have a material  adverse  effect on the
Company's business, operating results and financial condition.

The Consumer  Entertainment  Software  Market is Highly  Competitive and Changes
Rapidly. The market for consumer  entertainment  software is highly competitive,
particularly at the retail shelf level where a constantly  increasing  number of
software titles are competing for the same amount of shelf space. Retailers have
a  limited  amount of shelf  space on which to  display  consumer  entertainment
software  products.  Therefore,  there is  intense  competition  among  consumer
entertainment  software  publishers  for  adequate  levels  of shelf  space  and
promotional  support from retailers.  As the number of software titles continues
to increase,  the competition for shelf space continues to intensify,  resulting
in greater leverage for retailers and distributors in negotiating terms of sale,
including price discounts and product return  policies.  The Company's  products
represent a relatively  small  percentage of any  retailer's  sales volume,  and
there can be no assurance that retailers will continue to purchase the Company's
products or promote the Company's  products with adequate  levels of shelf space
and promotional  support.  Most of the Company's  competitors have substantially
greater sales,  marketing,  development and financial resources.  Moreover,  the
Company's present or future  competitors may be able to develop products,  which
are  comparable or superior to those offered by the Company,  offer lower priced
products or adapt more quickly than the Company to new  technologies or evolving
customer  requirements.  The Company's competitors also have more money to spend
on marketing  promotions  and  advertising  efforts.  Competition is expected to
intensify.  In order to be successful in the future, the Company must be able to
respond to technological change,  customer requirements and competitors' current
products and  innovations.  There can be no  assurance  that the Company will be
able to compete  effectively in its market or that future  competition  will not
have a material adverse effect on its business  operating  results and financial
condition.

Need for Additional Funds. The Company's future capital requirements will depend
on many  factors,  but  particularly  on cash flow from  sales of the  Company's
products and access to the Company's $2,000,000 revolving credit facility with a
commercial  bank that expires on October 31, 2001. If the Company is not able to
achieve cash flow from operations at a level sufficient to support its business,
the  Company  may  require  additional  funds to sustain  and expand its product
development,  marketing and sales activities.  Adequate funds for these purposes
may not be  available  or may be  available  only on terms that would  result in
significant  dilution or otherwise be unfavorable to existing  stockholders.  If
the Company is unable to secure additional  funding, or if the Company is unable
to  obtain  adequate  funds  from  operations  or other  external  sources  when
required,  the Company's inability to do so would have a material adverse effect
on the long-term viability of the Company.

Listing of Securities;  Risk of Low Priced Stocks. The Company's common stock is
listed on the Nasdaq SmallCap Market under the symbol EGAM. A listed company may
be de-listed if it fails to maintain minimum levels of Stockholders' equity, bid
price,  shares publicly held,  number of Stockholders or aggregate market value,
or if it violates other aspects of its listing agreement.  On November 10, 2000,
the Company received  notification  from Nasdaq that its common stock had failed
to maintain a minimum bid price of $1.00 over a period of 30 consecutive trading
days as required  for  continued  listing on the Nasdaq  SmallCap  Market as set
forth in  Marketplace  Rule  4310  (c) (4)  (the  "Rule").  In  accordance  with
Marketplace  Rule 4310 (c) (8) (B), the Company had 90 calendar  days,  or until
February 8, 2001, to regain  compliance with this Rule. On February 7, 2001, the
Company requested a hearing before a Nasdaq Listing  Qualifications Panel, which
has stayed the de-listing of the Company's common stock from the Nasdaq SmallCap
Market pending the Panel's  decision.  If the Company fails to regain compliance
with the  minimum  bid price or any other  criteria  for  trading  on the Nasdaq
SmallCap  Market,  its Common Stock may be de-listed.  Public  trading,  if any,
would  thereafter be conducted in the  over-the-counter  market in the so-called

<PAGE>

Risk Factors (continued)

"pink sheets," or on the NASD's "Electronic Bulletin Board." If the common stock
were  de-listed,  it may be more  difficult  to  dispose  of,  or even to obtain
quotations  as to the price of, the common  stock and the price  offered for the
common stock may be substantially reduced.

Potential for Further Trading  Restrictions for Low-Priced  Stock. If the Common
Stock is de-listed from trading on the Nasdaq SmallCap  Market,  and the trading
price of the Common Stock is less than $1.00 per share,  or the Company has less
than $2 million in net  tangible  assets,  trading in the Common  Stock would be
subject to the  requirements  of Rule  15g-9  promulgated  under the  Securities
Exchange  Act of 1934,  as  amended  (the  "Exchange  Act").  Under  this  rule,
broker/dealers  who recommend such securities to persons other than  established
customers and accredited investors (generally institutions with assets in excess
of $5  million  or  individuals  with a net worth in excess of $1  million or an
annual income  exceeding  $200,000 or $300,000  jointly with their spouses) must
make a special written  suitability  determination for the purchaser and receive
the  purchaser's   written  agreement  to  a  transaction  prior  to  sale.  The
requirements  of  Rule  15g-9,   if  applicable,   may  affect  the  ability  of
broker/dealers to sell the Company's  securities and may also affect the ability
of  purchasers  to sell their shares in the  secondary  market.  The  Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 (the "Penny Stock Rule")
also requires  additional  disclosure in connection with any trades  involving a
stock defined as penny stock (any  non-Nasdaq  equity security that has a market
price or exercise price of less than $5.00 per share and less than $2 million in
net tangible assets,  subject to certain  exceptions).  Unless exempt, the rules
require the delivery,  prior to any  transaction  involving a penny stock,  of a
disclosure schedule prepared by the SEC explaining  important concepts involving
the penny stock  market,  the nature of such market,  terms used in such market,
the  broker/dealer's  duties to the customer,  a toll-free  telephone number for
inquiries  about the  broker/dealer's  disciplinary  history and the  customer's
rights and remedies in case of fraud or abuse in the sale.  Disclosure must also
be made about  commissions  payable to both the broker/dealer and the registered
representative,  and current  quotations for the  securities.  Finally,  monthly
statements must be sent disclosing  recent price information for the penny stock
held in the account and information on the limited market in penny stocks.

Risks Related to Added Product Features and Increased Regulation of the Internet
and   Advertising.   Due  to  the   competitive   environment  in  the  consumer
entertainment  software  industry,  the Company has and will continue to seek to
incorporate  features into its products,  such as an Internet browser  interface
and advertising technology, in order to differentiate its products to retailers,
provide value-added features to consumers, and to potentially create new revenue
streams based on  advertising  and  promotional  opportunities.  There can be no
assurance that such features will enhance the product's  value, and in fact such
features  may  detract  from a product's  value if they are not  accepted in the
marketplace   or  if  new   regulations   governing  the  Internet  and  related
technologies are enacted which impact these features.

Difficulty in Protecting the Company's Intellectual Property Rights. The Company
either  owns  or has  obtained  licenses  to the  rights  to  copyrights  on the
products, manuals, advertising and other materials owned by it. The Company also
either owns trademark rights or is in the process of applying for such rights in
the Company's  name and logo, and the names of the products owned or licensed by
the Company. The Company's success depends in part on its ability to protect its
proprietary  rights  to the  trademarks,  trade  names and  content  used in its
principal  products.   The  Company  relies  on  a  combination  of  copyrights,
trademarks, trade secrets, confidentiality procedures and contractual provisions
to protect its proprietary rights.  There can be no assurance that the Company's
existing or future copyrights,  trademarks,  trade secrets or other intellectual
property  rights will be of sufficient  scope or strength to provide  meaningful
protection or commercial  advantage to the Company.  Also, in selling certain of
its products,  the Company  relies on "shrink wrap" licenses that are not signed
by licensees  and,  therefore,  may be  unenforceable  under the laws of certain
jurisdictions.  In addition,  the laws of some foreign  countries do not protect
the Company's proprietary rights, as do the laws of the United States. There can
be no assurance  that such factors would not have a material  adverse  effect on
the Company's business or operating results.

Substantial  Expenses and Resources Can Be Used to Defend  Infringement  Claims;
Effects of  Settlements  are  Uncertain.  The  Company  may from time to time be
notified that it is infringing on the  intellectual  property  rights of others.
Combinations of content acquired through past or future acquisitions and content
licensed  from third party  developers  will create new products and  technology
that may give rise to claims of infringement.  In February 2000, the Company was
sued for trademark and copyright  infringement by Hasbro Interactive,  Inc. (the
"Hasbro  Action").  Although  this case has been settled,  the Company  incurred
significant  defense costs and utilized internal resources to defend this action
prior to the settlement.  Additionally, pursuant to the settlement of this case,
the Company agreed

<PAGE>

Risk Factors (continued)

to discontinue  selling certain of its software titles after September 30, 2000,
which titles  accounted for $2,100,000 and $2,000,000 in the Company's net sales
for fiscal  2000 and 1999,  respectively,  or 15% and 20% of net sales for those
same  fiscal  years.  Although  the  Company  is  working  with its  retail  and
distribution customers to replace these titles with acceptable alternatives from
the Company's  existing and newly released  product  offerings,  there can be no
assurance  that these  replacement  titles will  generate  similar sales for the
Company.  There can also be no  assurance  that  other  third  parties  will not
initiate  infringement  actions  against the  Company in the future.  Any future
claims could  result in  substantial  cost to and  diversion of resources of the
Company.  If the  Company is found to be  infringing  the  rights of others,  no
assurance can be given that licenses would be obtainable on acceptable  terms or
at all, that significant damages for past infringement would not be assessed, or
that further litigation  relative to any such licenses or usage would not occur.
The failure to obtain necessary licenses or other rights, or the commencement of
litigation arising out of any such claims,  could have a material adverse effect
on the Company's operating results.

Risks Associated With the Company's Distribution of Third-Party Software Titles.
During the fourth  quarter of fiscal 2000 and the first  quarter of fiscal 2001,
the Company launched its Store-In-A-Store  program and other related programs in
the food and drug retail  channels.  These programs have required the Company to
purchase  software  titles  from  third-party  software  publishers  in order to
fulfill the orders placed for these retail programs. In some cases, beginning in
the Company's  fiscal second quarter,  the agreements  governing the purchase of
these  third-party  software titles may provide that the  third-party  publisher
will not accept  returns of the  software,  unless such  software is  defective.
Therefore, if the Company is required to accept returns of these software titles
from food and drug  retailers,  the Company  will have no recourse  against such
third-party  software  publishers.  Although  the Company  believes  that it has
established adequate reserves for these returns and that the purchase price paid
for these titles reflects their non-returnable nature, there can be no assurance
that the Company will not experience losses as a result of these transactions in
the event that retailers return more product than had been anticipated.

Fluctuations  in Quarterly  Results;  Uncertainty of Future  Operating  Results;
Seasonality. The Company's quarterly operating results have varied significantly
in the past and will  likely  vary  significantly  in the  future  depending  on
numerous  factors,  many of which are not under the  Company's  control.  Future
operating results will depend upon many factors including:  the size and rate of
growth  of the  consumer  entertainment  software  market;  the  demand  for the
Company's  products,  particularly  value-priced,  casual PC games; the level of
product and price competition;  the level of product returns;  the length of the
Company's sales cycle;  seasonality of customer buying  patterns;  the timing of
new  product  introductions  and  product  enhancements  by the  Company and its
competitors;  the timing of orders from major  customers;  delays in shipment of
products;  access to  distribution  channels;  product defects and other quality
problems; product life cycles; levels of international sales; changes in foreign
currency  exchange  rates;  and the ability of the Company to develop and market
new  products  and control  costs.  Products  are usually  shipped as orders are
received so the Company typically operates with little or no backlog. Therefore,
net sales in any  quarter  are usually  dependent  on orders  booked and shipped
during that quarter.

The consumer  entertainment software industry is somewhat seasonal due primarily
to  holiday  shopping  and  back-to-school  buying  patterns.   Accordingly,  in
descending  order, the calendar  fourth,  first and third quarters are typically
the  strongest  quarters for sales  results,  with the calendar  second  quarter
typically the weakest. Therefore, net sales and operating results for any future
quarter  are  not  predictable   with  any   significant   degree  of  accuracy.
Consequently,  the Company  believes that  period-to-period  comparisons  of its
operating  results are not necessarily  meaningful and should not be relied upon
as indications of future performance.

Uncertainty  of Market  Acceptance;  Short  Product Life Cycles.  The market for
consumer  entertainment  software has been  characterized  by shifts in consumer
preferences   and  short   product  life  cycles.   Consumer   preferences   for
entertainment  software  products  are  difficult  to predict  and few  products
achieve sustained market acceptance. There can be no assurance that new products
introduced  by the  Company  will  achieve  any  significant  degree  of  market
acceptance,  that such acceptance will be sustained for any significant  period,
or that product life cycles will be  sufficient to permit the Company to recover
development,  marketing  and other  associated  costs.  In  addition,  if market
acceptance  is not achieved,  the Company could be forced to accept  substantial
product returns to maintain its  relationships  with  distributors and retailers
and its access to distribution  channels.  Failure of new products to achieve or
sustain  market  acceptance  or  product  returns  in  excess  of the  Company's
expectations  would have a material  adverse  effect on the Company's  business,
operating results and financial condition.


<PAGE>


Risk Factors (continued)

Rapid  Technological   Change;   Product   Development.   Frequent  new  product
introductions  and  enhancements,  rapid  technological  developments,  evolving
industry standards and swift changes in customer  requirements  characterize the
market for the Company's products.  The Company's continued success depends upon
its ability to continue to quickly and  efficiently  develop and  introduce  new
products and enhance existing products to incorporate technological advances and
responses  to  customer  requirements.  If  any  of  the  Company's  competitors
introduce  products more quickly than the Company,  or if they introduce  better
products,  the Company's business could be adversely affected.  There is also no
assurance  that the Company will be successful  in developing  and marketing new
products or enhancements to its existing  products on a timely basis or that any
new or enhanced  products  will  adequately  address the  changing  needs of the
marketplace.  From time to time, the Company or its competitors may announce new
products,  capabilities  or  technologies  that have the potential to replace or
shorten  the life cycles of the  Company's  existing  products.  There can be no
assurance  that  announcements  of  currently  planned or other new  products by
competitors  will not cause  customers  to delay their  purchasing  decisions in
anticipation of such products, which could have a material adverse effect on the
Company's business, liquidity and operating results.

Risk of Defects.  Products offered by the Company can contain errors or defects.
The PC hardware  environment is  characterized by a wide variety of non-standard
peripherals,  such as sound and graphics  cards,  and  configurations  that make
pre-release  testing for  programming  or  compatibility  errors  difficult  and
time-consuming. Despite the extensive testing performed by the Company's quality
assurance  personnel,  new  products or releases may contain  errors  discovered
after  shipments  have  commenced,  resulting  in a loss of or delay  in  market
acceptance,  which  could  have a  material  adverse  effect  on  the  Company's
business, operating results and financial condition.

Dependence on Key  Management  and Technical  Personnel.  The Company's  success
depends to a  significant  degree upon the  continued  contributions  of its key
management, marketing, technical and operational personnel, including members of
senior  management.  The loss of the services of one or more key employees could
have a material adverse effect on the Company's  operating results.  The Company
also  believes its future  success will depend in large part upon its ability to
attract and retain additional highly skilled management,  technical,  marketing,
product development and operational personnel. Competition for such personnel is
intense,  and there can be no assurance  that the Company will be  successful in
attracting and retaining such personnel.

International  Sales.  International  net sales  represented  24% and 18% of the
Company's  net  sales  for the  quarters  ended  December  31,  2000  and  1999,
respectively.  The  Company  anticipates  that  international  net sales will be
approximately  20% of the  Company's net sales for the remainder of fiscal 2001.
The  Company's  international  business is subject to certain  risks  including:
varying  regulatory  requirements;  tariffs and trade  barriers;  political  and
economic  instability;  reduced  protection for intellectual  property rights in
certain countries; difficulties in supporting foreign customers; difficulties in
managing foreign distributors;  potentially adverse tax consequences; the burden
of complying with a wide variety of complex operations;  customs,  foreign laws,
regulations and treaties;  fluctuating currency valuations;  and the possibility
of difficulties in collecting accounts receivable.

Stock Price  Volatility.  The Company  believes  that a variety of factors could
cause the price of its common stock to fluctuate, perhaps substantially,  over a
short  period of time  including:  quarter to quarter  variations  in  operating
results; announcements of developments related to its business;  fluctuations in
its order levels;  general  conditions in the technology sector or the worldwide
economy;  announcements  of technological  innovations,  new products or product
enhancements  by the Company or its  competitors;  key management  changes;  and
developments in the Company's relationships with its customers, distributors and
suppliers.  In addition,  in recent  years the stock market in general,  and the
market for shares of software,  high technology stocks,  micro-cap and small cap
stocks in particular,  has  experienced  extreme price  fluctuations  which have
often been unrelated to the operating  performance of affected  companies.  Such
fluctuations  could  adversely  affect the market price of the Company's  common
stock.



<PAGE>


Part II. Other Information

Item 4.  Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Shareholders on December 7, 2000. At that
meeting,  the  following  matters were acted upon,  together  with the number of
votes cast for, against or withheld as to each such matter:


(i)      The election of the following directors:

                                                        Votes Cast

                                                 For      Against   Abstain
                                             ------------------------------
         Robert M. Aiken, Jr.                 8,892,027    - 0 -    242,279
         Gerald W. Klein                      8,884,827    - 0 -    249,479
         Thomas D. Parente                    8,884,527    - 0 -    249,779
         Lambert C. Thom                      8,891,827    - 0 -    242,479


(ii)     Amendment to the Company's  1995 Amended and Restated Stock Option Plan
         to increase the number of shares of Common Stock  reserved for issuance
         from 1,950,000 to 2,950,000 shares.

                                                        Votes Cast

                                                 For      Against   Abstain
                                              -----------------------------
                                              3,073,489   481,850    35,310

(iii)    Approval of the 2000 Employee Stock Purchase Program for the Company's
             employees.

                                                        Votes Cast

                                                 For      Against   Abstain
                                              -----------------------------
                                              3,123,023   443,766    23,860

(iv)     Ratification of the appointment of KPMG LLP as the Company's auditors
             for the 2001 fiscal year:

                                                        Votes Cast

                                                 For      Against   Abstain
                                              -----------------------------
                                              9,001,250    85,650    47,406



<PAGE>


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 January 16, 2001,  the Company  filed a report on Form 8-K  regarding a press
release announcing the Company's anticipated unaudited results for the three and
six months ended December 31, 2000.

On January 30, 2001,  the Company  filed a report on Form 8-K  regarding a press
release announcing the Company's  unaudited results for the three and six months
ended December 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: February 14, 2001                    /s/ Gerald W. Klein
-----------------------                    ---------------------------------
                                           Gerald W. Klein, President, Chief
                                           Executive Officer and Director


Date: February 14, 2001                    /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                  27