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 March 31, 2001
    |_|                           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: 9,989,337 shares of common stock, no
par value per share, as of May 11, 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 March 31, 2001..........    3

                Consolidated Statements of Operations for the three and
                    nine months ended March 31, 2001 and 2000 ...........    4

                Consolidated Statements of Cash Flows for the nine
                     months ended March 31, 2001 and 2000................    5

                Notes to Consolidated Financial Statements...............   6-9

Item 2.         Management's Discussion and Analysis of Financial
                    Condition and Results of Operations .................  10-18

                Risk Factors.............................................  19-23

Part II.        Other Information

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

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

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

Exhibits        .........................................................  27-37






<PAGE>


Item 1.  Financial Statements

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

                                                                      As of
                                                                     March 31,
ASSETS                                                                 2001
------                                                                 ----
<S>                                                                 <C>
Current assets:
   Cash and cash equivalents                                        $   115,981
   Accounts receivable, net of allowances totaling $3,664,916         3,828,549
   Inventory                                                          2,890,013
   Prepaid expenses and other current assets                            256,793
                                                                    -----------
          Total current assets                                        7,091,336

Furniture and equipment, net                                            245,976
Intangibles and other assets, net                                       194,200
                                                                    -----------
          Total assets                                              $ 7,531,512
                                                                    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
   Notes payable                                                    $    64,766
   Accounts payable                                                   2,403,239
   Revolving credit facilities                                        1,000,000
   Accrued expenses                                                   1,105,135
   Capital lease obligations                                            217,194
                                                                    -----------
          Total current liabilities                                   4,790,334

Capital lease obligations, net of current portion                         4,209
Notes payable, net of current portion                                    78,267
                                                                    -----------
          Total liabilities                                           4,872,810

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                                         1,155,479
   Accumulated deficit                                               (7,055,605)
   Treasury stock, at cost - 231,900 shares                            (501,417)
   Accumulated other comprehensive loss                                 (73,989)
                                                                    -----------
          Total stockholders' equity                                  2,658,702
                                                                    -----------
          Total liabilities and stockholders' equity                $ 7,531,512
                                                                    ===========

</TABLE>



        See accompanying notes to the consolidated financial statements.


<PAGE>


                                  eGames, Inc.
                      Consolidated Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                    Three months ended              Nine months ended
                                                         March 31,                      March 31,
                                                    2001          2000             2001           2000
                                                --------------------------     ----------------------------
<S>                                             <C>             <C>            <C>               <C>
Net sales                                       $ 2,886,420   $ 1,584,492      $ 10,677,955   $ 10,019,193

Cost of sales                                     1,748,028       832,858         5,792,651      3,997,803
                                                -----------   -----------      ------------   ------------

Gross profit                                      1,138,392       751,634         4,885,304      6,021,390

Operating expenses:
    Product development                             194,973       201,479           552,445        665,071
    Selling, general and administrative           1,730,083     1,509,107         5,366,064      4,885,845
                                                -----------   -----------      ------------   ------------

        Total operating expenses                  1,925,056     1,710,586         5,918,509      5,550,916
                                                -----------   -----------      ------------   ------------

Operating income (loss)                            (786,664)     (958,952)       (1,033,205)       470,474


Interest expense, net                                34,697         1,634            65,266         11,711
                                                -----------   -----------      ------------   ------------

Income (loss) before income taxes                  (821,361)     (960,586)       (1,098,471)       458,763

Provision (benefit) for income taxes                (26,994)     (163,106)          (58,454)        78,296
                                                -----------   -----------      ------------   ------------

Net income (loss)                               ($  794,367)  ($  797,480)     ($ 1,040,017)      $380,467
                                                ===========   ===========      ============   =============


Net income (loss) per common share:

            - Basic                             ($     0.08)  ($    0.08)      ($      0.11)  $       0.04
                                                ===========   ===========      ============   =============

            - Diluted                           ($     0.08)  ($    0.08)      ($      0.11)  $       0.04
                                                ===========   ===========      ============   ============



Weighted average common shares
     outstanding - Basic                          9,749,975     9,745,820         9,749,975      9,692,426

Dilutive effect of common stock equivalents           - 0 -         - 0 -             - 0 -        422,848
                                                  ---------     ---------         ---------     ----------
 Weighted average common shares
       outstanding - Diluted                      9,749,975     9,745,820         9,749,975     10,115,274
                                                  =========     =========         =========     ==========

</TABLE>


        See accompanying notes to the consolidated financial statements.


<PAGE>


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

                                                                       Nine months ended
                                                                           March 31,
                                                                       2001          2000
                                                                   --------------------------
Cash flows from operating activities:
-------------------------------------
<S>                                                                <C>            <C>
    Net income (loss)                                              ($1,040,017)   $   380,467
    Adjustment to reconcile net income (loss) to net cash
         used in operating activities:
    Depreciation, amortization and other non-cash items                251,098        331,641
    Gain on disposal of furniture and equipment                         (3,931)         - 0 -

    Changes in items affecting operations
             Restricted cash                                             - 0 -         17,560
             Accounts receivable                                    (1,115,202)    (1,240,147)
             Prepaid expenses and other current assets                   3,119        (18,895)
             Inventory                                                (496,433)    (1,126,524)
             Accounts payable                                          399,453        604,991
             Accrued expenses                                          319,238        (88,132)
                                                                   -----------    -----------
Net cash used in operating activities                               (1,682,675)    (1,139,039)
                                                                   -----------    -----------

Cash flows from investing activities:
-------------------------------------
    Purchase of furniture and equipment                                (40,851)      (181,246)
    Proceeds from disposal of furniture and equipment                   15,725          - 0 -
    Purchase of software rights and other assets                        (4,980)       (16,225)
                                                                   -----------    -----------
Net cash used in investing activities                                  (30,106)      (197,471)
                                                                   -----------    -----------

Cash flows from financing activities:
-------------------------------------
    Proceeds from exercise of warrants and options                       - 0 -        259,345
    Proceeds from borrowings under revolving credit facilities       3,650,000        750,000
    Repayments of borrowings under revolving credit facilities      (2,650,000)      (250,000)
    Repayments of notes payable                                       (201,735)      (117,118)
    Repayments of capital lease obligations                            (96,582)       (19,178)
                                                                   -----------    -----------
 Net cash provided by financing activities                             701,683        623,049
                                                                   -----------    -----------


Effect of exchange rate changes on cash and cash equivalents
                                                                       (12,099)           899
                                                                   -----------    -----------

Net decrease in cash and cash equivalents                           (1,023,197)      (712,562)

Cash and cash equivalents:
   Beginning of period                                               1,139,178      1,313,853
                                                                   -----------    -----------
   End of period                                                   $   115,981    $   601,291
                                                                   ===========    ===========


Supplemental cash flow information:
-----------------------------------
Cash paid for interest                                             $    76,458    $    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                                    $   298,921    $     - 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, eGames, Inc. (the "Company") adopted
the Emerging Issues Task Force ("EITF") Issue 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

The Company, a Pennsylvania corporation incorporated in July 1992, develops,
publishes, markets and sells a diversified line of personal computer software
primarily for consumer entertainment. The Company's target market is largely
represented by 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. The Company
distributes third-party publisher PC software titles within the food and drug
store retail channel as part of its Store-in-a-Store distribution strategy,
which incorporates attractively merchandised display fixtures featuring a wide
variety of entertainment software for the PC user.

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 March 31, 2001, the Company had
$109,000 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 March 31, 2001 these costs
amounted to $167,000.

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

<PAGE>

Notes to Consolidated Financial Statements (continued)

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 (the Maturity Date of the revolving credit facility).
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. Additionally, if the Company continues to be in non-compliance with the
covenants under its revolving credit facility, there can be no assurance that
the bank will continue to grant waivers to the Company for these deficiencies
and could choose to demand payment on the outstanding balance of this credit
facility at anytime, which the Company may not be able to satisfy due to lack of
available funds.

3.  Comprehensive Income (Loss)

Comprehensive income (loss) is computed as follows:

<TABLE>
<CAPTION>
                                                  Three Months Ended           Nine Months Ended
                                                      March 31,                    March 31,
                                                 2001          2000            2001      2000
                                             -----------   -----------     -----------   -----------
<S>                                          <C>           <C>             <C>           <C>
Net income (loss)                            ($  794,000)  ($  797,000)    ($1,040,000)  $   380,000
Other comprehensive income (loss):
   Foreign currency translation adjustment       (19,000)       (9,000)         (5,000)        2,000
                                             -----------   -----------     -----------   -----------
 Comprehensive income (loss)                 ($  813,000)  ($  806,000)    ($1,045,000)  $   382,000
                                             ===========   ===========     ===========   ===========
</TABLE>

4.  Delisting of 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 stayed the delisting of the Company's common stock
from the Nasdaq SmallCap Market pending the Panel's decision. The Company's
hearing had been scheduled for March 23, 2001. The Company did not attend the
scheduled hearing because management did not believe that it had sufficient
evidence to present to the hearing board, as of March 23rd, that would have
caused them to further stay the Company's de-listing. Accordingly, effective
April 2, 2001, the Company's common stock began trading on the OTC Bulletin
Board under its existing symbol EGAM. The Company's common stock had traded on
the Nasdaq SmallCap Market since October 1995.

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 Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information".

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.



<PAGE>


Notes to Consolidated Financial Statements (continued)

Geographic information for the three and nine months ended March 31, 2001 and
2000 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 nine months ended March 31, 2001 and 2000 is
presented below.

Three months ended
------------------
<TABLE>
<CAPTION>
                             North America   United Kingdom   Eliminations   Consolidated
                             -------------   --------------   ------------   ------------
March 31, 2001:
---------------
<S>                            <C>             <C>              <C>           <C>
Net sales                      $ 2,486,000     $    373,000     $   27,000    $ 2,886,000
Operating loss                    (764,000)         (23,000)         - 0 -       (787,000)
Assets                         $ 7,462,000     $    809,000    ($  739,000)   $ 7,532,000

March 31, 2000:
---------------
Net sales                      $ 1,297,000     $    568,000    ($  281,000)   $ 1,584,000
Operating loss                    (911,000)         (48,000)         - 0 -       (959,000)
Assets                         $ 7,361,000     $  1,391,000    ($1,834,000)   $ 6,918,000



Nine months ended
-----------------
                             North America   United Kingdom   Eliminations   Consolidated
                             -------------   --------------   ------------   ------------
March 31, 2001:
---------------
Net sales                      $ 9,452,000     $  1,731,000    ($  505,000)   $10,678,000
Operating loss                    (915,000)        (118,000)         - 0 -     (1,033,000)
Assets                         $ 7,462,000     $    809,000    ($  739,000)   $ 7,532,000

March 31, 2000:
---------------
Net sales                      $ 8,983,000     $  1,757,000    ($  721,000)   $10,019,000
Operating income (loss)            474,000           (4,000)         - 0 -        470,000
Assets                         $ 7,361,000     $  1,391,000    ($1,834,000)   $ 6,918,000

</TABLE>



6.  Revolving Credit Facilities

On August 9, 2000, the Company entered into a $2,000,000 revolving 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
credit facility are charged interest at one-half of one percent above the bank's
current prime rate and such interest is due monthly. This credit facility is
collateralized by substantially all of the Company's assets. This 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 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 March 31, 2001, 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 March 31,
2001. 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 the bank on a mutually agreeable resolution to the non-compliance issue. As
of May 11, 2001, the Company had a $1,000,000 outstanding balance under this
credit facility and has not been notified that it does not continue to have full
access to the remaining balance available under this $2,000,000 credit facility.


<PAGE>


Notes to Consolidated Financial Statements (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 March 31, 2001 and May 11, 2001, the
Company did not have any outstanding balance under this credit facility, which
expires on September 30, 2001.

7.  Subsequent Event

On May 11, 2001, the Company sold its United Kingdom subsidiary, eGames Europe
Limited, to Greenstreet Software Limited, a United Kingdom-based software
publisher and distributor. The Company will receive $300,000 in cash proceeds
from this sale over a twelve month period as follows: $150,000 was received at
closing, $120,000 will be paid in twelve monthly payments of $10,000 over a
one-year period, and $30,000 will be paid in six months but will be subject to
setoff for warranty claims. The $300,000 in cash proceeds approximates the
Company's net book value including the related goodwill attributed to eGames
Europe Limited as of April 30, 2001. Simultaneously with the closing of this
transaction, the Company entered into a comprehensive distribution agreement
with Greenstreet Software Limited to continue to sell the Company's products in
the United Kingdom, Europe and other countries.



<PAGE>


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

The accompanying consolidated financial statements as of March 31, 2001 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: increases in the Company's
sales of promotional and customized CD-ROM products as a result of continued
marketing of the "Branded Browser" concept to retailers, the promotional
industry and national brand manufacturers; 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 reduction in the use of outside professional service vendors to reduce
future operating expenses; estimated international net sales as a percentage of
the Company's consolidated net 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
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
expectation that the Company will continue to realize lower gross profit margins
during the remainder of fiscal 2001, due to the continued need to acquire higher
cost finished products of third-party publisher titles for sales within the
Store-In-A-Store program; 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 through October 31, 2001; 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 "Branded Browser" initiative in the promotional,
national brands and retail industries on commercially viable terms; the
commercial viability of the 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 Company's ability to
negotiate achievable financial covenants for the remainder of the term of its
$2,000,000 commercial line of credit; the Company's ability to achieve
profitability at a level sufficient to satisfy the financial covenants of its
line of credit; 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;


<PAGE>

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

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 19 to 23, as well as
in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30,
2000.


Results of Operations

Three Months Ended March 31, 2001 and 2000

Net Sales

Net sales for the quarter ended March 31, 2001 were $2,886,000 compared to
$1,584,000 for the quarter ended March 31, 2000, representing an increase of
$1,302,000 or 82%. The table below represents the Company's net sales by
distribution channel for the quarters ended March 31, 2001 and 2000,
respectively.
<TABLE>
<CAPTION>

                                                          Quarter Ended      Quarter Ended
                                                            March 31,          March 31,       Increase
Distribution Channel                                          2001                2000        (Decrease)
---------------------------------------------------------------------------------------------------------
<S>                                                        <C>               <C>              <C>
North American traditional consumer software retailers     $ 1,092,000       $ 1,746,000      ($  654,000)
North American food and drug retailers                       1,124,000          (906,000)       2,030,000
International retailers                                        445,000           744,000         (299,000)
Promotional customer                                           225,000             - 0 -          225,000
---------------------------------------------------------------------------------------------------------
Total net sales                                            $ 2,886,000       $ 1,584,000      $ 1,302,000
                                                           ===========       ===========      ===========
</TABLE>

The $1,302,000 increase in net sales resulted primarily from increases in net
sales to North American food and drug retailers of $2,030,000 and in promotional
customer sales of $225,000, which increases were partially offset by decreases
in net sales to North American traditional consumer software retailers of
$654,000 and International retailers of $299,000. 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 continued to offer historically higher-priced
products at significantly lower price points; and overall slower sales of PC
game software in traditional retail software channels.

As noted in the table above, the Company's net sales to North American food and
drug retailers increased by $2,030,000. This $2,030,000 increase in net sales
was comprised of a $547,000 increase in net sales of third-party publisher
software titles and a $1,483,000 increase in net sales of the Company's software
titles into this channel. Both of these increases in net sales into the food and
drug channel were 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 permanent racking fixtures 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. However, the
majority of the Company's sales into the food and drug retail channel are
distributed in corrugated displays for promotional programs, which generally run
for periods of six to eight weeks increasing the potential for returns compared
to longer term placement of similar products usually experienced in the
traditional software retail channel. Another factor contributing to the
$2,030,000 increase in net sales compared to the quarter ending March 31, 2000
is the additional return provisions that were recorded in the prior year's
quarter, which provisions were recorded due to greater than anticipated product
returns that were identified in that quarter for gross sales shipped in the
first six months of fiscal 2000.


<PAGE>


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

The Company's international net sales for the quarter ended March 31, 2001
decreased by $299,000 compared to net sales for the same period during the prior
year. This $299,000 net sales decrease was primarily the result of decreased
sales to existing retailers due to increased competition within the retail
environment throughout the United Kingdom. As a percentage of net sales, the
Company's international net sales represented 15% and 47% of the Company's net
sales for the quarters ended March 31, 2001 and 2000, respectively.

The Company's sales to promotional customers for the quarter ended March 31,
2001 were $225,000 compared to no such sales for the same quarter last year. The
Company continues to work towards increasing sales in this category as the
Company is aggressively marketing its "Branded Browser" concept to retailers,
the promotional industry and national brand manufacturers.

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 March 31, 2001 and 2000 were $43,000 and $59,000, respectively,
or approximately 2% and 4%, respectively, of the Company's net sales for these
quarters.

During the quarters ended March 31, 2001 and 2000, the Company's provisions for
product returns were $1,880,000 and $1,751,000, respectively, or 39% and 48% of
the Company's gross sales, respectively. This $129,000 increase in the provision
for product returns resulted primarily from the increase in gross sales
generated from the Company's distribution partners and direct retail partners
distributing the Company's products, especially within the food and drug retail
channel. All of these non-exclusive arrangements between the Company and its
distributors and retailers allow for product returns or markdowns. Historically,
the Company has experienced higher product returns in the food and drug retail
channel as compared to the Company's returns experienced with traditional
software retailers, due to many Company sales to food and drug retailers being
sold as short-term promotional programs. 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 quarter ended March 31, 2001, the Company's strategy for the food and
drug channel has continued to focus on obtaining 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. This strategy is designed to result in
increased profitability for 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 increases the amount of time for
products to sell-through, with the intended result of replenishment orders and
increased profitability. This strategy is also designed to 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 the remainder
of fiscal 2001.

Cost of Sales

Cost of sales for the quarter ended March 31, 2001 were $1,748,000 compared to
$833,000 for the quarter ended March 31, 2000, representing an increase of
$915,000 or 110%. As a result of the Company's increased product sales, the
$915,000 increase was caused primarily by increases in product costs associated
with: Company's software titles of $135,000, lower margin third-party publisher
software titles of $211,000 and sales of customized PC software titles to
promotional customers of $165,000. Additionally, reclamation costs associated
with product returns increased by $57,000, and royalty costs for the Company's
software titles and third-party software titles increased by $174,000 and
$103,000, respectively. In general, the cost for the Company to acquire software
content has continued to rise as the competition to obtain higher quality
entertainment software has driven these costs up. Product costs consist mainly
of replicated compact discs, printed materials, protective jewel cases and boxes
for certain products.


<PAGE>


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

Gross Profit Margin

The Company's gross profit margin for the quarter ended March 31, 2001 decreased
to 39.4% of net sales from 47.4% of net sales for the quarter ended March 31,
2000. This 8.0% 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 and promotional
customer sales on which the Company earns a lower profit margin than it earns
from the sale of its own software titles; and discounted sales of certain of the
Company's software titles in consumer promotional and inventory close-out
programs. Additionally, the Company has experienced increases in royalty rates
for its own published software titles as well as third-party software titles and
increases in provisions for inventory obsolescence necessitated by product
discontinuances. The Company is working towards improving its gross profit
margins, especially 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.

Operating Expenses

Product development expenses for the quarter ended March 31, 2001 were $195,000
compared to $201,000 for the quarter ended March 31, 2000, a decrease of $6,000
or 3%. This decrease was caused primarily by a decrease in travel related costs
associated with development projects in the prior year's quarter.

Selling, general and administrative expenses for the quarter ended March 31,
2001 were $1,730,000 compared to $1,509,000 for the quarter ended March 31,
2000, an increase of $221,000 or 15%. This $221,000 increase in selling, general
and administrative expenses was caused primarily by increases in salary related
costs, litigation costs and marketing promotional costs of $130,000, $110,000
and $109,000, respectively, which increases were partially offset by decreases
in public corporation expenses and consultant expenses of $72,000 and $56,000,
respectively. The $130,000 increase in salary related costs was primarily
related to a $103,000 bonus expense reversal, which occurred in the prior year's
quarter and to a $27,000 increase in the current year's quarter's commissions
paid to independent sales representatives.

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. As
part of this reduction, the Company incurred approximately $35,000 in severance
costs, all of which were paid by March 31, 2001. 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 March 31, 2001 was $35,000 compared
to $2,000 for the quarter ended March 31, 2000, an increase of $33,000. The
$33,000 increase was primarily due to the increased utilization of the revolving
credit facility during the quarter ended March 31, 2001.

Provision (Benefit) for Income Taxes

The recorded benefit for income taxes for the quarter ended March 31, 2001 was
($27,000) compared to ($163,000) for the quarter ended March 31, 2000, a
decrease in the benefit for income taxes of $136,000. This $136,000 decrease in
the benefit for income taxes was primarily due to the impact of the Company's
estimate of its taxable income for the fiscal year.

Net Income (Loss)

As a result of the various factors discussed above, the Company recorded a net
loss of ($794,000) for the quarter ended March 31, 2001 compared to a net loss
of ($797,000) for the quarter ended March 31, 2000.


<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 increased by
4,155 for the quarter ended March 31, 2001 to 9,749,975 from 9,745,820 for the
quarter ended March 31, 2000. This 4,155 increase in weighted average common
shares outstanding was caused primarily by an increase in outstanding shares of
the Company's common stock resulting from the exercise of certain common stock
options. For both quarters, any outstanding common stock equivalents were
excluded from the diluted shares calculation, because their inclusion would have
had an anti-dilutive effect.


Results of Operations

Nine Months Ended March 31, 2001 and 2000

Net Sales

Net sales for the nine months ended March 31, 2001 were $10,678,000 compared to
$10,019,000 for the nine months ended March 31, 2000, representing an increase
of $659,000 or 7%. The table below represents the Company's net sales by
distribution channel for the nine months ended March 31, 2001 and 2000,
respectively.

<TABLE>
<CAPTION>
                                                                Nine Months     Nine Months
                                                                  Ended           Ended
                                                                 March 31,       March 31,      Increase
Distribution Channel                                               2001            2000        (Decrease)
---------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>           <C>
North American traditional consumer software retailers         $ 3,074,000     $ 6,575,000   ($ 3,501,000)
North American food and drug retailers                           5,307,000       1,284,000      4,023,000
International retailers                                          2,072,000       2,160,000        (88,000)
Promotional customer                                               225,000           - 0 -        225,000
---------------------------------------------------------------------------------------------------------
Total net sales                                                $10,678,000     $10,019,000    $   659,000
                                                               ===========     ===========    ===========
</TABLE>

The $659,000 increase in net sales resulted primarily from increases in net
sales to North American food and drug retailers of $4,023,000 and in promotional
customer sales of $225,000, which increases were partially offset by decreases
in net sales to North American traditional consumer software retailers of
$3,501,000 and International retailers of $88,000. 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 continued to offer historically
higher-priced products at significantly lower price points; and overall slower
sales of PC game software in traditional retail software channels.

As noted in the table above, the Company's net sales to North American food and
drug retailers increased by $4,023,000. This $4,023,000 increase in net sales
was comprised of a $2,070,000 increase in net sales of third-party publisher
software titles and a $1,953,000 increase in net sales of the Company's software
titles into this channel. Both of these increases in net sales into the food and
drug channel were 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 permanent racking fixtures 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.

However, the majority of the Company's sales into the food and drug retail
channel are distributed in corrugated displays for promotional programs, which
generally run for periods of six to eight weeks increasing the potential for
returns compared to longer term placement of similar products usually
experienced in the traditional software retail channel.



<PAGE>


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

The Company's international net sales for the nine months ended March 31, 2001
decreased by $88,000 compared to net sales for the same period during the prior
year. This $88,000 net sales decrease was primarily the result of decreased
sales to existing retailers due to increased competition within the retail
environment throughout the United Kingdom. As a percentage of net sales, the
Company's international net sales represented 19% and 22% of the Company's net
sales for the nine months ended March 31, 2001 and 2000, respectively. For the
remainder of fiscal 2001, the Company anticipates that international net sales
will range from approximately 10% to15% of consolidated net sales.

The Company's promotional customer sales for the nine months ended March 31,
2001 were $225,000 compare to no such sales for the same period last year. The
Company continues to work towards increasing sales in this category as the
Company is aggressively marketing its "Branded Browser" concept to retailers,
the promotional industry and national brand manufacturers.

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
nine months ended March 31, 2001 and 2000 were $117,000 for both periods, or
approximately 1%, respectively, of the Company's net sales for these nine month
periods.

During the nine months ended March 31, 2001 and 2000, the Company's provisions
for product returns were $5,181,000 and $3,598,000, respectively, or 31% and 25%
of the Company's gross sales, respectively. This $1,583,000 increase in the
provision for product returns resulted primarily from the increase in the
Company's gross sales generated from the Company's sales into the food and drug
retail channel. Sales into the food and drug retail channel have historically
yielded higher product returns due to many of these sales within this channel
being sold as short-term promotional programs. 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. This strategy is designed to result in increased
profitability for 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 increases the amount of time for
products to sell-through, with the intended result of replenishment orders and
increased profitability. This strategy is also designed to 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 nine months ended March 31, 2001 were $5,793,000 compared
to $3,998,000 for the nine months ended March 31, 2000, representing an increase
of $1,795,000 or 45%. The $1,795,000 increase was caused primarily by increases
in product costs associated with increased sales of lower margin third-party
publisher software titles of $1,012,000 and sales of customized PC software
titles to promotional customers of $165,000. Additionally, other cost of sales
increases included: royalty costs for third-party software titles of $103,000,
freight costs of $104,000, provision for inventory obsolescence costs of
$107,000 and reclamation costs associated with product returns of $107,000. In
general, the cost for the Company to acquire software content has continued to
rise as the competition to obtain higher quality entertainment software has
driven these costs up. Product costs consist mainly of replicated compact discs,
printed materials, protective jewel cases and boxes for certain products.


<PAGE>


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

Gross Profit Margin

The Company's gross profit margin for the nine months ended March 31, 2001
decreased to 45.8% of net sales from 60.1% of net sales for the nine months
ended March 31, 2000. This 14.3% 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; promotional customer sales of software titles
on which the Company earns a smaller profit margin; and discounted sales of
certain of the Company's software titles in consumer promotional and inventory
close-out programs. Additionally, the Company has experienced increases in the
royalty rates for Company-developed software titles and third-party software
titles and increases in provisions for inventory obsolescence necessitated by
product discontinuances throughout the current fiscal year and in freight costs
related to more complicated store level distribution requirements with certain
direct retail customers. The Company is working towards improving its gross
profit margins, especially, 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 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 Store-In-A-Store program.

Operating Expenses

Product development expenses for the nine months ended March 31, 2001 were
$552,000 compared to $665,000 for the nine months ended March 31, 2000, a
decrease of $113,000 or 17%. This $113,000 decrease was caused primarily by
decreases in salary related costs and travel related costs of $96,000 and
$8,000, respectively. The main reduction in salary related costs came from
headcount reductions within the Company's Internet function, whose remaining
duties have been redistributed amongst remaining personnel.

Selling, general and administrative expenses for the nine months ended March 31,
2001 were $5,366,000 compared to $4,886,000 for the nine months ended March 31,
2000, an increase of $480,000 or 10%. This $480,000 increase in selling, general
and administrative expenses was caused primarily by increases in salary related
costs, litigation costs, marketing promotional costs and operating expenses from
the Company's United Kingdom office of $228,000, $125,000, $277,000 and $175,000
respectively, which increases were partially offset by decreases in public
corporation expenses, consultant expenses and depreciation and amortization
costs of $219,000, $59,000 and $75,000, respectively. The $228,000 increase in
salary related costs was primarily related to the nine months of employment
costs for fiscal 2001 associated with certain personnel that were hired during
the latter portion of fiscal 2000 and the early portion of fiscal 2001.

Interest Expense, Net

Net interest expense for the nine months ended March 31, 2001 was $65,000
compared to $12,000 for the nine months ended March 31, 2000, an increase of
$53,000. The $53,000 increase was primarily due to the increased utilization of
the revolving credit facility during the nine months ended March 31, 2001.

Provision (Benefit) for Income Taxes

The recorded benefit for income taxes for the nine months ended March 31, 2001
was ($58,000) compared to a provision for income taxes of $78,000 for the nine
months ended March 31, 2000, a decrease in the provision for income taxes of
$136,000. This $136,000 decrease in the provision for income taxes was primarily
due to the impact of the Company's estimate of its taxable income for the fiscal
year.

Net Income (Loss)

As a result of the various factors discussed above, the Company recorded a net
loss of ($1,040,000) for the nine months ended March 31, 2001 compared to net
income of $380,000 for the nine months ended March 31, 2000, a decrease in
profitability of $1,420,000.



<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
365,299 for the nine months ended March 31, 2001 to 9,749,975 from 10,115,274
for the nine months ended March 31, 2000. This 365,299 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
nine months ended March 31, 2001. Such common stock equivalents were excluded
from the diluted shares calculation for the current fiscal year's nine month
period, because their inclusion would have had an anti-dilutive effect.

Liquidity and Capital Resources

As of March 31, 2001, the Company's cash and working capital balances were
$116,000 and $2,301,000 respectively, and the Company's total stockholders'
equity balance at March 31, 2001was $2,659,000.

Net cash used in operating activities was approximately $1,683,000 and
$1,139,000 for the nine months ended March 31, 2001 and 2000, respectively. The
$1,683,000 in net cash used in operating activities resulted primarily from
increases of $1,115,000 and $496,000 in accounts receivable and inventory,
respectively, which increases were partially offset by increases of $399,000 and
$319,000 in accounts payable and accrued expenses, respectively. The $1,115,000
increase in accounts receivable resulted primarily from slower cash collections
from the Company's customers caused mainly by slower processing of product
returns through the accounts payable systems by retail customers of the
Company's software titles, especially within the food and drug retail channel.
The $399,000 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 nine months ended March 31, 2001was $1,040,000,
inclusive of depreciation, amortization and other non-cash expenses of $251,000.

Net cash used in investing activities was approximately $30,000 and $197,000 for
the nine months ended March 31, 2001 and 2000, respectively. The $30,000 in net
cash used in investing activities resulted primarily from purchases of $41,000
for furniture and equipment and of $5,000 for software rights and other assets.
These purchases were partially offset by $16,000 in proceeds from the disposal
of furniture and equipment.

Net cash provided by financing activities for the nine months ended March 31,
2001 and 2000 was $702,000 and $623,000, respectively. The $702,000 in net cash
provided by financing activities reflects net proceeds from the Company's
borrowing of $3,650,000 under the revolving credit facilities, which borrowings
were partially offset by repayments of these borrowings under the revolving
credit facilities, notes payable and capital lease obligations of $2,650,000,
$202,000 and $96,000, respectively.

On August 9, 2000, the Company entered into a $2,000,000 revolving 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
credit facility are charged interest at one-half of one percent above the bank's
current prime rate and such interest is due monthly. The credit facility is
collateralized by substantially all of the Company's assets. The credit facility
requires the Company, among other things, to maintain certain financial
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 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 March 31, 2001, 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 March 31,
2001. 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 the bank on a mutually agreeable resolution to the non-compliance issue. As
of May 11, 2001, the Company had a $1,000,000 outstanding balance under this
credit facility and has not been notified that it does not continue 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 March 31 and May 11, 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. Additionally, if the
Company continues to be in non-compliance with the covenants under its revolving
credit facility, there can be no assurance that the bank will continue to grant
waivers to the Company for these deficiencies and could choose to demand payment
on the outstanding balance of this credit facility at anytime, which the Company
may not be able to accomplish due to lack of available funds.

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 stayed the delisting of the Company's common stock
from the Nasdaq SmallCap Market pending the Panel's decision. The Company's
hearing had been scheduled for March 23, 2001. The Company did not attend the
scheduled hearing because management did not believe that it had sufficient
evidence to present to the hearing board, as of March 23rd, that would have
caused them to further stay the Company's de-listing. Accordingly, effective
April 2, 2001, the Company's common stock began trading on the OTC Bulletin
Board under its existing symbol EGAM. The Company's common stock had traded on
the Nasdaq SmallCap Market since October 1995.

Subsequent Event

On May 11, 2001, the Company sold its United Kingdom subsidiary, eGames Europe
Limited, to Greenstreet Software Limited, a United Kingdom-based software
publisher and distributor. The Company will receive $300,000 in cash proceeds
from this sale over a twelve month period as follows: $150,000 was received at
closing, $120,000 will be paid in twelve monthly payments of $10,000 over a
one-year period, and $30,000 will be paid in six months but will be subject to
setoff for warranty claims. The $300,000 in cash proceeds approximates the
Company's net book value including the related goodwill attributed to eGames
Europe Limited as of April 30, 2001. Simultaneously with the closing of this
transaction, the Company entered into a comprehensive distribution agreement
with Greenstreet Software Limited to continue to sell the Company's products in
the United Kingdom, Europe and other countries.

New Accounting Pronouncements

The Company is currently evaluating the potential impact of Emerging Issues Task
Force (EITF) Issue 00-10 "Accounting for Shipping and Handling Fees and Costs"
and Staff Accounting Bulletin 101 "Revenue Recognition" and related amendments
and interpretations, which become effective no later than the Company's fourth
quarter of fiscal 2001, and EITF Issue 00-25 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products",
which becomes effective no later than the Company's third quarter of fiscal
2002. 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 10 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 nine months of
fiscal 2001, the Company has sustained a cumulative net loss of $1,040,000.
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


<PAGE>


Risk Factors (continued)

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. 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
subsequent 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.

Delisting of Securities; Risk of Low Priced Stocks. 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
stayed the delisting of the Company's common stock from the Nasdaq SmallCap
Market pending the Panel's decision. The Company's hearing had been scheduled
for March 23, 2001. The Company did not attend the scheduled hearing because
management did not believe that it had sufficient evidence to present to the
hearing board, as of March 23rd, that would have caused them to further stay the
Company's de-listing. Accordingly, effective, April 2, 2001, the



<PAGE>


Risk Factors (continued)

Company's common stock began trading on the OTC Bulletin Board under its
existing symbol EGAM. The Company's common stock had traded on the Nasdaq
SmallCap Market since October 1995.

Potential for Further Trading Restrictions for Low-Priced Stock. Since the
Company's Common Stock has been de-listed from trading on the Nasdaq SmallCap
Market, trading in the Common Stock is now 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 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


<PAGE>


Risk Factors (continued)

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.

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


<PAGE>


Risk Factors (continued)

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 19% and 22% of the
Company's net sales for the nine months ended March 31, 2001 and 2000,
respectively. The Company anticipates that international net sales will be
approximately 10% to 15% of the Company's net sales. 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 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

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

       10.1                 Amended and Restated 1995 Stock Option Plan


(b)  Reports on Form 8-K

None.



<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: May 15, 2001                         /s/  Gerald W. Klein
      ------------                         --------------------
                                           Gerald W. Klein, President, Chief
                                           Executive Officer and Director


Date: May 15, 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
 -----------      -------------------------------------------       -----------

   10.1           Amended and Restated 1995 Stock Option Plan          27-37




<PAGE>



                                                                 Exhibit   10.1

                   AMENDED AND RESTATED 1995 STOCK OPTION PLAN

                 PART I - DEFINITIONS AND ADMINISTRATIVE MATTERS

                        SECTION 1 - PURPOSE; DEFINITIONS
                        --------------------------------

         The purpose of the eGames, Inc. Amended and Restated 1995 Stock Option
Plan (the "Plan") is to enable employees, officers, directors and independent
contractors of eGames, Inc. ("the Company") to: (i) own shares of stock in the
Company, (ii) participate in the stockholder value which has been created, (iii)
have a mutuality of interest with other stockholders and (iv) enable the Company
to attract, retain and motivate employees, officers, directors and independent
contractors of particular merit.

          For the purposes of the Plan, the following terms shall be defined as
set forth below:

(a)      "Board" means the Board of Directors of the Company.

(b)      "Code" means the Internal Revenue Code of 1986, as amended from time to
         time, and any successor thereto.

(c)      "Company" means eGames, Inc., its Subsidiaries or any successor
         organization.

(d)      "Disability" means permanent and total disability within the meaning of
         Section 22(e)(3) of the Code.

(e)      "Disinterested Person" shall have the meaning set forth in the Rules.

(f)      "Eligible Independent Contractor" means an independent contractor hired
         by the Company who is neither an Employee of the Company nor a
         Non-Employee Director.

(g)      "Employee" means any person, including a director, who is employed by
         the Company and is compensated for such employment by a regular salary.

(h)      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(i)      "Fair Market Value" means the per share value of the Stock as of any
         given date, as determined by reference to the price of the last traded
         share of Stock on the over-the-counter market, as reported by the
         National Association of Securities Dealers, Inc. Automated Quotation
         ("NASDAQ") System for such date or the next preceding date that Stock
         was traded on such market, or, in the event the Stock is listed on a
         stock exchange, the closing price per share of Stock as reported on
         such exchange for such date.

(j)      "Incentive Stock Option" means any Stock Option intended to be and
         designated as an "Incentive Stock Option" within the meaning of Section
         422 of the Code.

(k)      "Insider" means a Participant who is subject to Section 16 of the
         Exchange Act.

(l)      "Non-Employee Director" means any member of the Board who is not an
         Employee of the 2 Company and is not compensated for employment by a
         regular salary.

(m)      "Non-Qualified Stock Option" means any Stock Option that is not an
         Incentive Stock Option.

(n)      "Parent means any corporation which owns stock entitling such
         corporation to fifty percent (50%) or more of the voting power of the
         Company.

(o)      "Participant" means an Employee, officer, Non-Employee Director or
         Eligible Independent Contractor to whom an award is granted pursuant to
         the Plan.


<PAGE>

(p)      "Plan" means the Rom Tech, Inc. Amended and Restated 1995 Stock Option
         Plan, as hereinafter amended from time to time.

(q)      "Rules" means Rule 16(b)(3) and any successor provisions promulgated by
         the Securities and Exchange Commission under Section 16 of the Exchange
         Act.

(r)      "Securities Act" shall mean the Securities Act of 1933, as amended.

(s)      "Securities Broker" means the registered securities broker acceptable
         to the Company who agrees to effect the cashless exercise of an Option
         pursuant to Section 5(d) hereof.

(t)      "Stock" means the Common Stock of the Company, without par value.

(u)      "Stock Option" or "Option" means any option to purchase shares of Stock
         (including Restricted Stock, if the Board so determines) granted
         pursuant to Section 5 below.

(v)      "Subsidiary" means any corporation owned, in whole or in part, by the
         Company.

                           SECTION 2 - ADMINISTRATION
                           --------------------------

         2.1 The portion of the Plan with respect to the grant of Options
pursuant to Part II shall be administered by the Board, provided, however, that
the Board reserves the right to delegate such administration to a committee of
the Board comprised of such directors as the Board may determine, and who shall
serve at the pleasure of the Board.

          The Board shall have the authority to grant pursuant to the terms of
the Plan: Stock Options to Employees (including directors who are Employees) and
officers of the Company, and Eligible Independent Contractors. In particular,
the Board shall, subject to the limitations and terms of the Plan, have the
authority:

                 (i) to select the officers, directors (who are Employees) and
other Employees of the Company, and the Eligible Independent Contractors to whom
Stock Options may from time to time be granted hereunder;

                 (ii) to determine whether and to what extent incentive Stock
ptions are to be granted hereunder;

                 (iii) to determine the number of shares to be covered by each
such award granted hereunder;

                 (iv) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, including the option
or exercise price and any restrictions or limitations, based upon such factors
as the Board shall determine, in its sole discretion;

                 (v) to determine whether and under what circumstances a Stock
Option may be exercised and settled in cash or Stock or without a payment of
cash;

                 (vi) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award under
this Plan shall be deferred either automatically or at the election of the
Participant; and

                 (vii) to amend the terms of any outstanding award (with the
consent of the Participant) to reflect terms not otherwise inconsistent with the
Plan, including amendments concerning exercise price changes, vesting
acceleration or forfeiture waiver regarding any award or the extension of a
Participant's right with respect to awards granted under the Plan, as a result
of termination of employment or service or otherwise, based on such factors as
the Board shall determine, in its sole discretion.


<PAGE>


             The Board shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan, provided that the
Board may delegate to the Chief Executive Officer of the Company, or such other
officer as may be designated by the Board, the authority, subject to guidelines
prescribed by the Board, to grant Options to Employees and Eligible Independent
Contractors who are not then subject to the provisions of Section 16 of the
Exchange Act, and to determine the number of shares to be covered by any such
Option, and the Board may authorize any one or more of such persons to execute
and deliver documents on behalf of the Board, provided that no such delegation
may be made that would cause grants of Options to persons subject to Section 16
of the Exchange Act to fail to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act. Determinations, interpretations
or other actions made or taken by the Board pursuant to the provisions of the
Plan shall be final and binding and conclusive for all purposes and upon all
persons.

         No member of the Board or any committee designated by the Board to
administer the Plan shall be liable for any action or determination made in good
faith with respect to the Plan or any Stock Option granted under it. Nothing
herein shall be deemed to expand the personal liability of a member of the Board
or any such committee beyond that which may arise under any applicable standards
set forth in the Company's by-laws and Pennsylvania law, nor shall anything
herein limit any rights to indemnification or advancement of expenses to which
any member of the Board or such committee may be entitled under any by-law,
agreement, vote of the stockholders or directors, or otherwise.

         2.2 The portion of the Plan with respect to the grant of Options to
Non-Employee Directors pursuant to Part II shall be administered by the Board.
The Board shall have the same authority with respect to the grant of Options to
Non-Employee Directors under Part II as is provided to the Board pursuant to
Section 2.1

         2.3 (a) The portion of the Plan with respect to the grant of Options
pursuant to Part III shall be administered by the Board. Grants of Stock Options
under Part III of the Plan and the amount, price and timing of the awards to be
granted will be automatic, as described in Part III hereof. All questions of
interpretation of the Plan with respect to the Grant of Options pursuant to Part
III will be determined by the Board, and such determination shall, unless
otherwise determined by the Board, be final and conclusive on all persons having
any interest hereunder.

             (b) The Board reserves the right to amend the terms of any
outstanding award (with the consent of the Participant) to reflect terms not
otherwise inconsistent with the Plan, including amendments concerning exercise
price changes, vesting acceleration or forfeiture waiver regarding any award or
the extension of a Participant's right with respect to awards granted under the
Plan, as a result of termination of service or otherwise, based on such factors
as the Board shall determine, in its sole discretion.

                     SECTION 3 - STOCK SUBJECT TO THE PLAN
                     -------------------------------------

         3.1 The aggregate number of shares of Stock that may be issued or
transferred under the Plan is 2,950,000, subject to adjustment pursuant to
Section 3.2 below. Such shares may be authorized but un-issued shares or
reacquired shares. If the number of shares of Stock issued under the Plan and
the number of shares of Stock subject to outstanding awards (taking into account
the share counting requirements established under the Rules) equals the maximum
number of shares of Stock authorized under the Plan, no further awards shall be
made unless the Plan is amended in accordance with the Rules or additional
shares of Stock become available for further awards under the Plan. If and to
the extent that Options granted under the Plan terminate, expire or are canceled
without having been exercised, such shares shall again be available for
subsequent awards under the Plan.

         3.2 If any change is made to the Stock (whether by reason of merger,
consolidation, reorganization, re-capitalization, stock dividend, stock split,
combination of shares, or exchange of shares or any other change in capital
structure made without receipt of consideration), then unless such event or
change results in the termination of all outstanding awards under the Plan, the
Board shall preserve the value of the outstanding awards by adjusting the
maximum number and class of shares issuable under the Plan to reflect the effect
of such event or change in the Company's capital structure, and by making
appropriate adjustments to the number and class of shares subject to an
outstanding award and/or the option price of each outstanding Option, except
that any fractional shares resulting from such adjustments shall be eliminated
by rounding any portion of a share equal to .500 or greater up, and any portion
of a share equal to less than .500 down, in each case to the nearest whole
number.


<PAGE>

         3.3 In any fiscal year of the Company, the maximum number of shares of
Common Stock with respect to which Options may be granted to any optionee shall
not exceed 5% of the Common Stock outstanding, as adjusted for stock splits,
stock dividends or other similar changes affecting the Common Stock.

                      SECTION 4 - DESIGNATION OF OPTIONEES
                      ------------------------------------

         4.1 Optionees under Part II of the Plan shall be selected, from time to
time, by the Board from among those Employees and Eligible Independent
Contractors who, in the opinion of the Board, occupy responsible positions and
who have the capacity to contribute materially to the continued growth,
development and long-term success of the Company and its Subsidiaries. Optionees
under Part II may also be selected from among those Non-Employee Directors who,
in the opinion of the Board, have the capacity to devote themselves to the
Company's success.

         4.2 All Non-Employee Directors on the date of grant shall be eligible
to receive Options under Part III of the Plan.

       PART II - GRANTS TO EMPLOYEES, ELIGIBLE INDEPENDENT CONTRACTORS AND
                             NON-EMPLOYEE DIRECTORS

                           SECTION 5 - STOCK OPTIONS
                           -------------------------

         Any Stock Option granted under Part II of the Plan shall be in such
form as the Board may from time to time approve. Stock Options granted under
Part II of the Plan may be of two types: (i) Incentive Stock Options and (ii)
Non-Qualified Stock Options. The Board shall have the authority to grant
Incentive Stock Options, Non-Qualified Stock Options or both types of Stock
Options. To the extent that any Stock Option does not qualify as an Incentive
Stock Option, it shall constitute a Non-Qualified Stock Option. The Board shall
have the authority to grant Non-Qualified Stock Options to Non-Employee
Directors under Part II. Anything in the Plan to the contrary notwithstanding,
no term of this Plan relating to Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be so exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the optionee(s) affected, to disqualify any Incentive
Stock Option under Section 422. Options granted hereunder shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Board shall deem
appropriate:

         5.1 OPTION PRICE. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Board at the time of grant; provided,
however, that the option price per share for any Stock Option shall be not less
than 100% of the Fair Market Value of the Stock on the date of grant. Any
Incentive Stock Option granted to any optionee who, at the time the Option is
granted, owns more than 10% of the voting power of all classes of stock of the
Company or of a Parent or Subsidiary corporation (within the meaning of Section
424 of the Code), shall have an exercise price no less than 110% of Fair Market
Value per share on the date of the grant.

         5.2 OPTION TERM. The term of each Stock Option shall be fixed by the
Board, but no Stock Option shall be exercisable more than ten years after the
date the Stock Option is granted. However, any Incentive Stock Option granted to
any optionee who, at the time the Option is granted, owns more than 10% of the
voting power of all classes of stock of the Company or of a Parent or Subsidiary
corporation may not have a term of more than five years. No Option may be
exercised by any person after expiration of the term of the Option.

         5.3 EXERCISABILITY. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Board at or after grant. If the Board provides, in its discretion, that any
Stock Option is exercisable only in installments, the Board may waive such
installment exercise provisions at any time at or after grant in whole or in
part, based on such factors as the Board shall determine, in its sole
discretion.


<PAGE>



         5.4 METHOD OF EXERCISE. Subject to whatever installment exercise
provisions apply under Section 5.3, Stock Options may be exercised in whole or
in part at any time and from time to time during the Option period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by cash, check, or such other instrument as the Board may accept.
As determined by the Board, in its sole discretion, at or after grant, payment
in full or in part may also be made in the form of unrestricted Stock already
owned by the optionee (based upon the Fair Market Value of a share of Stock on
the business date preceding tender if received prior to the close of the stock
market and at the Fair Market Value on the date of tender if received after the
stock market closes); provided, however, that, (i) in the case of an Incentive
Stock Option, the right to make a payment in the form of unrestricted Stock
already owned by the optionee may be authorized only at the time the Option is
granted and (ii) the Company may require that the Stock has been owned by the
Participant for a minimum period of time specified by the Board. In addition, if
such unrestricted Stock was acquired through exercise of an Incentive Stock
Option, such Stock shall have been held by the optionee for a period of not less
than the holding period described in Section 422(a)(1) of the Code on the date
of exercise, or if such Stock was acquired through exercise of a Non-Qualified
Stock Option or of an option under a similar plan of the Company, such Stock
shall have been held by the optionee for a period of more than one year on the
date of exercise, and further provided that the optionee shall not have tendered
Stock in payment of the exercise price of any other Option under the Plan or any
other stock option plan of the Company within six calendar months of the date of
exercise. To the extent permitted under the applicable laws and regulations, at
the request of the Participant, and with the consent of the Board, the Company
shall permit payment to be made by means of a "cashless exercise" of an Option.
Payment by means of a cashless exercise shall be effected by the Participant
delivering to the Securities Broker irrevocable instructions to sell a
sufficient number of shares of Stock to cover the cost and expenses associated
therewith and to deliver such amount to the Company. No shares of Stock shall be
issued until full payment therefor has been made. An optionee shall not have any
right to dividends or other rights of a stockholder with respect to shares
subject to the Option until such time as Stock is issued in the name of the
optionee following exercise of the Option in accordance with the Plan.

         5.5 STOCK OPTION AGREEMENT. Each Option granted under this Plan shall
be evidenced by an appropriate Stock Option agreement, which agreement shall
expressly specify whether such Option is an Incentive Stock Option or a
Non-Qualified Stock Option and shall be executed by the Company and the
optionee. The agreement shall contain such terms and provisions, not
inconsistent with the Plan, as shall be determined by the Board. Such terms and
provisions may vary between optionees or as to the same optionee to whom more
than one Option may be granted.

         5.6 REPLACEMENT OPTIONS. If an Option granted pursuant to the Plan may
be exercised by an optionee by means of a stock-for-stock swap method of
exercise as provided in 5.4 above, then the Board may, in its sole discretion
and at the time of the original Option grant, authorize the Participant to
automatically receive a replacement Option pursuant to this part of the Plan.
This replacement Option shall cover a number of shares determined by the Board,
but in no event more than the number of shares equal to the difference between
the number of shares of the original Option exercised and the net shares
received by the Participant from such exercise. The per share exercise price of
the replacement Option shall equal the then current Fair Market Value of a share
of Stock, and shall have a term extending to the expiration date of the original
Option. The Board shall have the right, in its sole discretion and at any time,
to discontinue the automatic grant of replacement Options if it determines the
continuance of such grants to no longer be in the best interests of the Company.

         5.7 NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be
transferable by the optionee other than by will, by the laws of descent and
distribution, pursuant to a qualified domestic relations order, or as permitted
under the Rules, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the
Board may grant non-qualified Options that are transferable, without payment of
consideration, to immediate family members (i.e., spouses, children and
grandchildren) of the Optionee or to trusts for, or partnerships whose only
partners are, such family members. The Board may also amend outstanding
non-qualified Options to provide for such transferability.


<PAGE>



         5.8 TERMINATION OF EMPLOYMENT BY REASON OF DEATH. Unless otherwise
determined by the Board at or after grant, if any optionee dies during the
optionee's period of employment by the Company, or during the periods referred
to in Sections 5.9, 5.10 or 5.11, any Stock Option held by such optionee may
thereafter be exercised, to the extent then exercisable or on such accelerated
basis as the Board may determine at or after grant, by the legal representative
of the estate or by the legatee of the optionee under the will of the optionee,
for a period of one year (or such shorter period as the Board may specify at
grant) from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is shorter.

         5.9 TERMINATION OF EMPLOYMENT BY REASON OF DISABILITY. Unless otherwise
determined by the Board at or after grant, if an optionee's employment by the
Company terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination, or on such accelerated basis as the
Board may determine at or after grant, for a period of one year (or such shorter
period as the Board may specify at grant) from the date of such termination of
employment or until the expiration of the stated term of such Stock Option,
whichever period is shorter. In the event of termination of employment by reason
of Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, such
Stock Option will thereafter be treated as a Non-Qualified Stock Option.

         5.10 TERMINATION OF EMPLOYMENT UPON RETIREMENT. Unless otherwise
determined by the Board at or after grant, if an optionee's employment
terminates due to retirement (as hereinafter defined), any Stock Option held by
such optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the date of retirement, or on such accelerated basis as the Board
may specify at grant, for a period of one-year (or such shorter period as the
Board may specify at grant) from the date of such retirement or until the
expiration of the stated term of such Stock Option, whichever period is shorter.
For purposes of this Section 5.10, "Retirement" shall mean any Employee
retirement under the Company's retirement policy.

         5.11 OTHER TERMINATION OF EMPLOYMENT. Unless otherwise determined by
the Board at or after grant, in the event of termination of employment
(voluntary or involuntary) for any reason other than death, disability or
retirement, or if an Employee is terminated for cause, any Stock Option held by
such optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such termination or on such accelerated basis as the
Board may determine at or after grant, for a period of three months (or such
shorter period as the Board may specify at grant) from the date of such
termination of employment or the expiration of the stated term of such Stock
Option, whichever period is shorter. If an Employee is terminated for cause, any
Stock Option held by such Optionee shall terminate immediately.

         5.12 INCENTIVE STOCK OPTION LIMITATION. The aggregate Fair Market Value
(determined as of the time of grant) of the Stock with respect to which
Incentive Stock Options are exercisable for the first time by the optionee
during any calendar year under the Plan and/or any other stock option plan of
the Company shall not exceed $100,000.

         5.13     TERMINATION OF ELIGIBLE INDEPENDENT CONTRACTORS OPTIONS.  The
termination provisions of Options granted to Eligible Independent Contractors
shall be determined by the Board in its sole discretion.

         5.14 WITHHOLDING AND USE OF SHARES TO SATISFY TAX OBLIGATIONS. The
obligation of the Company to deliver Stock upon the exercise of any Option shall
be subject to applicable federal, state and local tax withholding requirements.
If the exercise of any Option is subject to the withholding requirements of
applicable federal tax laws, the Board, in its discretion (and subject to such
withholding rules ("Withholding Rules") as shall be adopted by the Board), may
permit the optionee to satisfy the federal withholding tax, in whole or in part,
by electing to have the Company withhold (or by delivering to the Company)
shares of Stock, which Stock shall be valued, for this purpose, at their Fair
Market Value on the date the amount of tax required to be withheld is determined
(the "Determination Date"). Such election must be made in compliance with and
subject to the Withholding Rules, and the Board may not withhold shares of Stock
in excess of the number necessary to satisfy the minimum federal income tax
withholding requirements. If Stock acquired upon the exercise of an Incentive
Stock Option is used to satisfy such withholding requirement, such Stock must
have been held by the optionee for a period of not less than the holding period
described in Section 422(a)(1) of the Code on the Determination Date. If Stock

<PAGE>

acquired through the exercise of a Non-Qualified Stock Option or of an option
under a similar plan is delivered by the optionee to the Company to satisfy such
withholding requirement, such Stock must have been held by the optionee for a
period of more than one year on the Determination Date. For Optionees subject to
Section 16 of the Exchange Act, to the extent required by Section 16, the
election to have Stock withheld by the Company hereunder must be either (a) an
irrevocable election made six months before the Determination Date; or (b) an
irrevocable election where both the election and the Determination Date occur
during one of the ten-day periods beginning on the third business day following
the date of release of the Company's quarterly or annual summary financial data
and ending on the twelfth business day following such release.

         5.15 ISSUANCE OF SHARES AND COMPLIANCE WITH SECURITIES ACTS. Within a
reasonable time after exercise of an Option, the Company shall cause to be
delivered to the optionee a certificate for the Stock purchased pursuant to the
exercise of the Option. At the time of any exercise of any Option, the Company
may, if it shall deem it necessary and desirable for any reason connected with
any law or regulation of any governmental authority relative to the regulation
of securities, require the optionee to represent in writing to the Company that
it is his or her then intention to acquire the Stock for investment and not with
a view to distribution thereof and that such optionee will not dispose of such
Stock in any manner that would involve a violation of applicable securities
laws. In such event, no Stock shall be issued to such holder unless and until
the Company is satisfied with such representation. Certificates for shares of
Stock issued pursuant to the exercise of Options may bear an appropriate
securities law legend.

         5.16     TERMINATION OF NON-EMPLOYEE DIRECTORS OPTIONS. Section 11 of
the Plan shall apply to the termination of Options granted to Non-Employee
Directors under Part II.

                   PART III - GRANTS TO NON-EMPLOYEE DIRECTORS

                          SECTION 6 - GRANT OF OPTIONS
                          ----------------------------

         Options to purchase 10,000 shares of Common Stock, subject to
adjustment as provided in Section 3.2 (the "Initial Options") and options to
purchase 5,000 shares, subject to adjustments as provided in Section 3.2 (the
"Annual Options"), shall be granted to Non-Employee Directors as follows:

         (a) Each Non-Employee Director on the 30th day after the stockholders
of the Company have approved the Plan shall be granted an Initial Option.

         (b) Each Non-Employee Director who is not granted an Initial Option
pursuant to Section 6(a), shall be granted an Initial Option on the first
business day immediately following the date that such person is first elected or
appointed to serve as a Non-Employee Director.

         (c) Each year on January 1, each Non-Employee Director on such date
shall be granted an Annual Option.

                          SECTION 7 - TYPES OF OPTIONS
                          ----------------------------

         All options granted under Part III of the Plan shall be non-qualified
Stock Options for purposes of the Code.

                            SECTION 8 - OPTION PRICE
                            ------------------------

         The purchase price of each share of Stock issuable upon exercise of an
Option will be equal to the Fair Market Value of the Stock on the date of grant.


<PAGE>



                 SECTION 9 - OPTION TERM AND RIGHTS TO EXERCISE
                 ----------------------------------------------

         9.1 PERIOD OF OPTION AND RIGHTS TO EXERCISE. Except as set forth
herein, each Non-Employee Director who receives options under this Plan must
continue to hold office as a Non-Employee Director of the Company for six months
from the date that the Initial Option is granted and six months from the date
each Annual Option is granted before he can exercise any part thereof.
Thereafter, subject to the provisions of the Plan, options will vest and be
exercisable as follows:

(a)      Initial Options.

     (i) Each  Initial  Option will vest and be  exercisable  in full six months
from the date of grant.

     (ii) The right to  exercise  an  Initial  Option  will  expire on the fifth
anniversary of the date on which the option was granted.

     (iii) Once an Initial  Option has become  exercisable,  such  option may be
exercised in whole at any time or in part from time to time until the expiration
of the option,  whether or not any option  granted  previously  to the  optionee
remains outstanding at the time of such exercise.

(b)      Annual Options.

     (i) Each Annual Option will vest and be exercisable  on a cumulative  basis
as to 2,500  shares  beginning  six  months  from the  date of grant  and  2,500
additional  shares beginning on the first anniversary of the date of grant.

     (ii)The  right to  exercise  an  Annual  Option  will  expire  on the fifth
anniversary of the date on which the option was granted.

     (iii) Once each installment of an Annual Option has become exercisable,  it
may be  exercised  in whole at any time or in part from  time to time  until the
expiration  of the option,  whether or not an option  granted  previously to the
optionee remains outstanding at the time of such exercise.

                      SECTION 10 - PAYMENT OF OPTION PRICE
                      ------------------------------------

         Payment or provision for payment of the purchase price shall be made as
follows: (i) in cash or check; (ii) by exchange of Stock valued at its Fair
Market Value on the date of exercise; (iii) by means of a cashless exercise
procedure by the delivery to the Company of an exercise notice and irrevocable
instructions to the Securities Broker to sell a sufficient number of shares of
Stock to pay the purchase price of the shares of Common Stock as to which such
exercise relates and to deliver promptly such amount to the Company; or (iv) by
any combination of the foregoing. Where payment of the purchase price is to be
made with shares of Stock acquired through exercise of a non-qualified Stock
Option or of an option under a similar plan of the Company, such Stock shall
have been held by the optionee for a period of more than one year on the date of
exercise, and further provided that the optionee shall not have tendered Stock
in payment of the exercise price of any other Option under the Plan or any other
stock option plan of the Company within six calendar months of the date of
exercise.

                      SECTION 11 - TERMINATION OF SERVICE
                      -----------------------------------

         Upon cessation of service as a Non-Employee Director (for reasons other
than retirement or death), including cessation of service due to physical or
mental disability that prevents such person from rendering further services as a
Non-Employee Director, only those options exercisable at the date of cessation
of service shall be exercisable by the Non-Employee Director, or on such
accelerated basis as the Board may determine at or after grant, for a period of
three months, or such other period as the Board may specify from time to time.
Upon the retirement or death of a Non-Employee Director, options shall be
exercisable as follows:

         (a) Retirement. Upon retirement as a Non-Employee Director after the
Non-Employee Director has served for at least six consecutive years as a
director, all Options shall continue to be exercisable during their terms as if
such person had remained a Non-Employee Director.


<PAGE>

         (b) Death. In the event of the death of a Non-Employee Director while a
member of the Board, or within the period after termination of service referred
to in the first paragraph of Section 11, the Options granted to him shall be
exercisable, to the extent then exercisable, for a period of one year from the
date of the Non-Employee Director's death, or until the expiration of the
Option, whichever period is shorter.

                   SECTION 12 - NO GUARANTEED TERM OF OFFICE
                   -----------------------------------------

         Nothing in this Plan or any modification thereof, and no grant of an
option, or any term thereof, shall be deemed an agreement or condition
guaranteeing to any Non-Employee Director any particular term of office or
limiting the right of the Company, the Board or the stockholders to terminate
the term of office of any Non-Employee Director under the circumstances set
forth in the Company's Certificate of Incorporation or Bylaws, or as otherwise
provided by law.

                        SECTION 13 - OTHER RESTRICTIONS
                        -------------------------------

         Sections 5.5, 5.7 and 5.15 of the Plan shall apply to options granted
pursuant to Part III of the Plan.

                             PART IV - MISCELLANEOUS

                         SECTION 14 - CHANGE IN CONTROL
                         ------------------------------

         A "Change in Control" for purposes of this Plan shall mean any one of
the events described below:

         14.1 at any time during a period of two (2) consecutive years, at least
a majority of the Board shall not consist of Continuing Directors. "Continuing
Directors" shall mean directors of the Company at the beginning of such two-year
period and directors who subsequently became such and whose selection or
nomination for election by the Company's shareholders was approved by a majority
of the then Continuing Directors; or

         14.2 any person or "group" (as determined for purposes of Regulation
13D-G promulgated by the Commission under the Exchange Act or under any
successor regulation), but excluding any majority-owned subsidiary or any
employee benefit plan sponsored by the Company or any subsidiary or any trust or
investment manager for the account of such a plan, shall have acquired
"beneficial ownership" (as determined for purposes of such regulation) of the
Company's securities representing fifty percent (50%) or more of the combined
voting power of the Company's then outstanding securities unless such
acquisition is approved in advance by a majority of the directors of the Company
who were in office immediately preceding such acquisition and any individual
selected to fill any vacancy created by reason of the death or disability of any
such director; or

         14.3 the Company becomes a party to a merger, consolidation or share
exchange in which either (i) the Company will not be the surviving corporation
or (ii) the Company will be the surviving corporation and any outstanding shares
of Common Stock will be converted into shares of any other company (other than a
re-incorporation or the establishment of a holding company involving no change
in ownership of the Company or other securities or cash or other property
(excluding payments made solely for fractional shares); or

         14.4 the Company's shareholders (i) approve any plan or proposal for
the disposition or other transfer of all, or substantially all, of the assets of
the Company, whether by means of a merger, reorganization, liquidation or
dissolution or otherwise or (ii) dispose of, or become obligated to dispose of,
50% or more of the outstanding capital stock of the Company by tender offer or
otherwise. If a Change in Control has occurred, all outstanding options granted
under the Plan shall be immediately exercisable by the holders of the options
for the total remaining number of Shares covered by the options and shall
survive any such event.


<PAGE>


                    SECTION 15 - AMENDMENTS AND TERMINATION
                    ---------------------------------------

         The Board may amend, alter or discontinue the Plan at any time and from
time to time, but no amendment, alteration or discontinuation shall be made
which would impair the rights of an optionee or Participant under a Stock Option
award theretofore granted, without the optionee's or Participant's consent, or
which, without the approval of the Company's stockholders, would require
stockholder approval under the Rules. The Board may amend the terms of any stock
option theretofore granted, prospectively or retroactively, but no such
amendment shall impair the rights of any holder without the holder's consent.
The Board may also substitute new stock options for previously granted stock
options, including previously granted stock options having higher option prices.
Subject to the above provisions, the Board shall have broad authority to amend
the Plan, to take into account changes and applicable tax laws, securities laws,
and accounting rules, as well as other developments.

                      SECTION 16 - UNFUNDED STATUS OF PLAN
                      ------------------------------------

         The Plan is intended to constitute an "un-funded" plan of incentive and
deferred compensation. With respect to any payments not yet made to a
Participant or optionee by the Company, nothing contained herein shall give any
such Participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Board may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that, unless the Board otherwise determines with
the consent of the affected Participant, the existence of such trusts or other
arrangements is consistent with the "un-funded" status of the Plan.

                        SECTION 17 - GENERAL PROVISIONS
                        -------------------------------

         17.1 All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to such stop-transfer orders and other
restrictions as the Board may deem advisable under the rules, regulations and
other requirements of the Securities Act, the Exchange Act, any stock exchange
or over-the-counter market upon which the Stock is then listed, and any
applicable federal or state securities law, and the Board may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.

         17.2 Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required, and such arrangements may be either
generally applicable or applicable only in specific cases.

         17.3 The adoption of the Plan shall not confer upon any Participant any
right to continued employment with the Company nor shall it interfere in any way
with the right of the Company to terminate its relationship with any of its
Employees, directors or Independent Contractors at any time.

         17.4 No later than the date as of which an amount first becomes
includable in the gross income of the Participant for federal income tax
purposes with respect to any award under the Plan, the Participant who is an
Employee of the Company shall pay to the Company, or make arrangements
satisfactory to the Board regarding the payment of, any federal, state, or local
taxes of any kind required by law to be withheld with respect to such amount. To
the extent permitted by the Board, in its sole discretion, the minimum required
withholding obligations may be settled with Stock, including Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements
and the Company shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment of any kind otherwise due to the Participant.

         17.5 The Board shall establish such procedures as it deems appropriate
for a Participant to designate a beneficiary to whom any amounts payable in the
event of the Participant's death are to be paid. The Plan shall be governed by
and subject to all applicable laws and to such approvals by any governmental or
regulatory agency as may be required.


<PAGE>


                  SECTION 18 - EFFECTIVE DATE AND TERM OF PLAN
                  --------------------------------------------

         The Plan shall be effective as of the effective date the Plan is
adopted by the Board of Directors and Shareholders of the Company, (the
"Effective Date"), subject to the consent or approval of the Company's
stockholders as provided below. No Stock Option award shall be granted pursuant
to the Plan on or after ten years from the Effective Date, but Stock Options
granted prior to such tenth anniversary may be exercised after such date. If the
Plan is not approved by a majority of the votes cast at a duly held meeting at
which a quorum representing a majority of all outstanding voting stock of the
Company is, either in person or by proxy, present and voting on the Plan, within
12 months after such effective date, any Incentive Stock Options that have been
granted shall automatically become Non-Qualified Stock Options.

                          SECTION 19 - INTERPRETATION
                          ---------------------------

         A determination of the Board as to any question which may arise with
respect to the interpretation of the provisions of this Plan or any Options
shall be final and conclusive, and nothing in this Plan, or in any regulation
hereunder, shall be deemed to give any Participant, his legal representatives,
assigns or any other person any right to participate herein except to such
extent, if any, as the Board may have determined or approved pursuant to this
Plan. The Board may consult with legal counsel who may be counsel to the Company
and shall not incur any liability for any action taken in good faith in reliance
upon the advice of such counsel.

                           SECTION 20 - GOVERNING LAW
                           --------------------------

         With respect to any Incentive Stock Options granted pursuant to the
Plan and the agreements thereunder, the Plan, such agreements and any Incentive
Stock Options granted pursuant thereto shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the
Commonwealth of Pennsylvania shall govern the operation of, and the rights of
Participants under, the Plan, the agreements and any Options granted thereunder.

                     SECTION 21 - COMPLIANCE WITH THE RULES
                     --------------------------------------

         21.1 Unless an Insider could otherwise transfer shares of Stock issued
hereunder without incurring liability under Section 16(b) of the Exchange Act,
at least six months must elapse from the date of grant of an Option to the date
of disposition of the Stock issued upon exercise of such Option.

         21.2 It is the intent of the Company that this Plan comply in all
respects with the Rules in connection with any grant of Options to, or other
transaction by, an Insider. Accordingly, if any provision of this Plan or any
agreement relating to an Option does not comply with the Rules as then
applicable to any such Insider, such provision will be construed or deemed
amended to the extent necessary to conform to such requirements with respect to
such person. In addition, the Board shall have no authority to make any
amendment, alteration, suspension, discontinuation, or termination of the Plan
or any agreement hereunder, or take other action if such authority would cause
an Insider's transactions under the Plan not to be exempt under the Rules.

         21.3 Certain restrictive provisions of the Plan have been implemented
to facilitate the Company's and Insiders' compliance with the Rules. The Board,
in its discretion, may waive certain of these 13 14 restrictions, provided the
waiver does not relate in any way to an Insider and, provided further, such
waiver or amendment is carried out in accordance with Section 15 hereof.

        SECTION 22 - SUBSTITUTION OF OPTIONS IN A MERGER, CONSOLIDATION
                               OR SHARE EXCHANGE
                               -----------------

         In the event that the Company becomes a party to a merger,
consolidation or share exchange (a "Business Combination") and in connection
therewith substitutes options under the Plan for options of another party to
such Business Combination, notwithstanding the provisions of the Plan, the terms
of such substituted options may have the same terms and conditions (provided
that the number of shares issuable and the exercise prices are adjusted in
accordance with the terms of the Business Combination) as the former options of
such other party to the Business Combination, provided, however, that the
exercise price of the Options to be granted under the Plan shall be lawful
consideration as determined by the Board.