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

                                   FORM 10-QSB

(Mark One)

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

                For the quarterly period ended September 30, 2000
    |_|            TRANSITION REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 0-27102

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

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

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

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

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

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

                                Yes ( X ) No ( )

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

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

                                 Yes ( ) No ( )

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  9,749,975 shares of common stock, no
par value per share, as of November 10, 2000.

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


<PAGE>


                                  eGames, Inc.

                                      INDEX

                                                                           Page
                                                                           ----
Part I.       Financial Information

Item 1.       Financial Statements:

              Consolidated Balance Sheet as of September 30, 2000.........   3

              Consolidated Statements of Operations for the three months
                  ended September 30, 2000 and 1999 ......................   4

              Consolidated Statements of Cash Flows for the three months
                  ended September 30, 2000 and 1999.......................   5

              Notes to Consolidated Financial Statements..................  6-7

Item 2.       Management's Discussion and Analysis of Financial
                  Condition and Results of Operations ....................  8-12

              Risk Factors ............................................... 13-18

Part II.      Other Information

Item 1.       Legal Proceedings...........................................  18


Item 6.       Exhibits and Reports on Form 8-K............................  19

Signatures    ............................................................  20

Exhibit Index ............................................................  21

Exhibits      ............................................................ 22-23






<PAGE>


Item 1.  Financial Statements

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

                                                                      As of
                                                                   September 30,
ASSETS                                                                 2000
                                                                   ------------

<S>                                                                <C>
Current assets:
   Cash and cash equivalents                                       $   271,863
   Accounts receivable, net of allowances totaling $3,249,847        4,594,646
   Inventory                                                         1,764,776
   Prepaid expenses                                                    187,675
                                                                   ------------
          Total current assets                                       6,818,960

Furniture and equipment, net                                           304,967
Intangibles and other assets, net                                      261,694
                                                                   -----------
          Total assets                                             $ 7,385,621
                                                                   ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Notes payable                                                   $    60,980
   Accounts payable                                                  1,541,335
   Revolving credit facilities                                         500,000
   Accrued expenses                                                  1,339,799
   Convertible subordinated debt                                       150,000
   Capital lease obligations                                            16,095
                                                                   -----------
          Total current liabilities                                  3,608,209

Capital lease obligations, net of current portion                        9,345
Notes payable, net of current portion                                  108,426
                                                                   -----------
          Total liabilities                                          3,725,980

Stockholders' equity:
   Common stock, no par value (40,000,000 shares authorized;
          9,981,875 issued and 9,749,975 outstanding)                9,134,234
   Additional paid-in capital                                        1,148,550
   Accumulated deficit                                              (5,991,408)
   Treasury stock, at cost - 231,900 shares                           (501,417)
   Accumulated other comprehensive loss                               (130,318)
                                                                   -----------
          Total stockholders' equity                                 3,659,641
                                                                   -----------
          Total liabilities and stockholders' equity               $ 7,385,621
                                                                   ===========
</TABLE>




        See accompanying notes to the consolidated financial statements.


<PAGE>


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

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

                                                                    2000          1999
                                                                    ----          ----
<S>                                                              <C>           <C>
Net sales                                                        $ 4,307,666   $ 4,117,575

Cost of sales                                                      1,900,747     1,603,308
                                                                 -----------   -----------

Gross profit                                                       2,406,919     2,514,267

Operating expenses:
    Product development                                              181,147       242,847
    Selling, general and administrative                            2,190,775     1,600,406
                                                                 -----------   -----------

        Total operating expenses                                   2,371,922     1,843,253
                                                                 -----------   -----------

Operating income                                                      34,997       671,014

Interest expense, net                                                  7,995         5,100
                                                                 -----------   -----------

Income before income taxes                                            27,002       665,914

Provision for income taxes                                             2,821        89,295
                                                                 -----------   -----------

Net income                                                       $    24,181   $   576,619
                                                                 ===========   ===========

Net income per common share:
        - Basic                                                  $      0.00   $      0.06
                                                                 ===========   ===========
        - Diluted                                                $      0.00   $      0.06
                                                                 ===========   ===========


Weighted average common shares outstanding - Basic                 9,749,975     9,633,973

Dilutive effect of common stock equivalents                           53,869       503,569
                                                                 -----------   -----------

Weighted average common shares outstanding - Diluted               9,803,844    10,137,542
                                                                 ===========   ===========
</TABLE>






        See accompanying notes to the consolidated financial statements.


<PAGE>


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

                                                                     Three months ended
                                                                        September 30,

                                                                    2000            1999
                                                                    ----            ----
<S>                                                              <C>            <C>
Cash flows from operating activities:
    Net income                                                   $    24,181    $   576,619
    Adjustment to reconcile net income to net cash
         (used in) provided by operating activities:
    Depreciation, amortization and other non-cash items               79,277        103,383
    Changes in items affecting operations

         Restricted cash                                               - 0 -         17,560
         Accounts receivable                                      (1,869,673)    (2,628,050)
         Prepaid expenses                                             73,710         36,843
         Inventory                                                   373,925         54,649
         Accounts payable                                           (559,797)       651,590
         Gain on disposal of furniture and equipment                  (4,041)         - 0 -
         Accrued expenses                                            544,828        441,906
                                                                 -----------    -----------
Net cash used in operating activities                             (1,337,590)      (745,500)
                                                                 -----------    -----------

Cash flows from investing activities:
    Purchase of furniture and equipment                              (12,105)       (30,212)
    Proceeds from disposal of furniture and equipment                 16,170          - 0 -
    Purchase of software rights and other assets                      (1,730)          (245)
                                                                 -----------    -----------
Net cash provided by (used in) investing activities                    2,335        (30,457)
                                                                 -----------    -----------

Cash flows from financing activities:
    Proceeds from exercise of warrants and options                     - 0 -        110,000
    Proceeds from borrowings under revolving credit facilities       750,000          - 0 -
    Repayments of borrowings under revolving credit facilities      (250,000)         - 0 -
    Repayments of notes payable                                      (13,951)       (94,466)
    Repayments of capital lease obligations                          (10,849)        (6,614)
                                                                 -----------    -----------
Net cash provided by financing activities                            475,200          8,920
                                                                 -----------    -----------

Effect of exchange rate changes on cash and cash equivalents          (7,260)         3,148
                                                                 -----------    -----------

Net decrease in cash and cash equivalents                           (867,315)      (763,889)

Cash and cash equivalents:
    Beginning of period                                            1,139,178      1,313,853
                                                                 -----------    -----------
    End of period                                                $   271,863    $   549,964
                                                                 ===========    ===========

Supplemental cash flow information:

    Cash paid for interest                                       $    14,423    $    11,194
                                                                 ===========    ===========

Non cash investing and financing activities:

    Acquisition of furniture and equipment
         through capital leases                                  $    11,550    $    26,809
                                                                 ===========    ===========

</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.  The interim operating results are not necessarily indicative of the
results for a full year.

Description of Business

eGames, Inc. (the "Company"),  a Pennsylvania  corporation  incorporated in July
1992,  develops,  publishes,  markets and sells a  diversified  line of personal
computer software primarily for consumer entertainment.  The Company targets the
growing market of home personal  computer ("PC") users who value  full-featured,
value-priced  and easy-to-use  entertainment  software.  The Company's sales are
made through various national  distributors on a non-exclusive basis in addition
to direct  relationships  with  certain  national and  regional  retailers.  The
Company's products generally sell at retail for under $15, a price point that is
intended to generate impulse purchases in mass market shopping environments.

Consolidation

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

2.   Comprehensive Income (Loss)

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

                                                       Three Months Ended
                                                          September 30,
                                                     -----------------------
                                                        2000         1999
                                                        ----         ----
Net income                                            $ 24,000    $ 577,000
Other comprehensive income (loss):
   Foreign currency translation adjustment             (61,000)     (12,000)
                                                      --------    ---------
Comprehensive income (loss)                          ($ 37,000)   $ 565,000
                                                      ========    =========

3.   Common Stock

On October 26, 1998, the Company's Board of Directors  authorized the Company to
purchase up to $1,000,000 of its shares of Common Stock in open-market purchases
on the Nasdaq SmallCap  Market.  During the quarter ended September 30, 2000 the
Company did not purchase  any shares of its Common  Stock.  As of September  30,
2000,  the Company had  acquired  231,900  shares of its Common  Stock,  with an
approximate cost of $501,000, pursuant to its stock repurchase program.


<PAGE>


Notes to Consolidated Financial Statements (continued)

4.   Operations by Reportable Segments and Geographic Area

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

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

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

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

Geographic  information  for the quarters  ended  September 30, 2000 and 1999 is
based on the location of the selling entity.  The Company records  international
sales from both the United  States and  United  Kingdom  locations.  Information
about  the  Company's  operations  by  segmented  geographic  locations  for the
quarters ended September 30, 2000 and 1999 is presented below.

Quarters ended
--------------
<TABLE>
<CAPTION>
                            North America     United Kingdom     Eliminations     Consolidated
                            -------------     --------------     ------------     ------------
<S>                           <C>                <C>             <C>              <C>
September 30, 2000:
-------------------
Sales                        $ 3,925,000       $   591,000       ($  208,000)      $ 4,308,000
Operating income (loss)          160,000          (125,000)            - 0 -            35,000
Assets                       $ 7,359,000       $ 1,056,000       ($1,029,000)      $ 7,386,000

September 30, 1999:
-------------------
Sales                        $ 3,707,000       $   576,000       ($  165,000)      $ 4,118,000
Operating income                 598,000            73,000             - 0 -           671,000
Assets                       $ 6,791,000       $   901,000       ($  588,000)      $ 7,104,000

</TABLE>


5.   Revolving Credit Facilities

On August 9, 2000,  the  Company  entered  into a  $2,000,000  revolving  credit
facility  ("new credit  facility")  with a  commercial  bank,  which  expires on
October 31, 2001.  This new credit  facility  replaced the $1,500,000  revolving
credit  facility that it previously had with another  commercial  bank.  Amounts
outstanding  under this new credit facility are charged  interest at one-half of
one  percent  above the  bank's  current  prime  rate and such  interest  is due
monthly.  The new credit facility is  collateralized by substantially all of the
Company's  assets.  The new credit  facility  requires the Company,  among other
things, to maintain certain financial ratios, such as: a minimum working capital
balance of $1,500,000  and a maximum senior debt to effective net worth ratio of
1.50 to 1.00. Additionally, this new credit facility has a minimum effective net
worth  covenant  starting  at $3.1  million at June 30, 2000 and  increasing  by
$150,000  quarterly  to a $3.7  million  requirement  at June  30,  2001.  As of
September 30, 2000, the Company was in compliance with each of those  covenants.
This new credit  facility  was  established  to  provide,  among  other  things,
additional  working capital to support the Company's  anticipated  growth. As of
November 13, 2000, the Company had a $500,000 outstanding balance under this new
credit facility.

The Company's United Kingdom operation has a $225,000  revolving credit facility
with a  commercial  bank.  Amounts  outstanding  under this credit  facility are
charged  interest at two and one-half percent above the bank's current base rate
and such interest is due monthly.  As of November 13, 2000,  the Company did not
have any  outstanding  balance  under this  credit  facility,  which  expires on
September 30, 2001.


<PAGE>


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

The  accompanying  consolidated  financial  statements  as of September 30, 2000
include the  accounts  of eGames,  Inc.  (the  "Company")  and its  wholly-owned
subsidiary.

Forward-Looking Statements

This Quarterly Report on Form 10-QSB and in particular  Management's  Discussion
and  Analysis  of  Financial   Condition  and  Results  of  Operations  contains
forward-looking  statements  about  circumstances  that  have not yet  occurred,
including,    without   limitation,    statements    regarding   the   Company's
Store-In-A-Store program resulting in the longer-term placement of the Company's
products  in the food and drug  retail  channel,  which is  intended to increase
sales volume within this channel and decrease the rate of product returns due to
longer  product  exposure  on  retailers'  product  shelves;  the  level  of the
Company's  international  net  sales  remaining  at about  17% of the  Company's
consolidated  net sales for the remainder of fiscal 2001; the Company's  efforts
to increase  distribution  of its products via the Internet;  the ability of the
"Store in a Store"  concept  to  attract  consumer  interest  and drive  impulse
purchases of value-priced,  Family-Friendly(TM) software products; the Company's
goal of balancing  promotional sales programs with longer-term,  non-promotional
software  display sections in the food and drug retail channel with the intended
result of reducing the  Company's  exposure to product  returns in this channel;
the payment of certain  promotional  costs  resulting in increased  sell-through
rates for the Company's  products during short-term  promotional  programs;  the
ability  of  the  Company's   Store-in-a-Store  program  to  reduce  promotional
expenses,   as  a  percentage  of  sales,   due  to  more  product  sales  being
non-promotional  in nature;  the  sufficiency  of the Company's cash and working
capital  balances to fund the Company's  operations for the foreseeable  future;
the  expectation  that  certain new  accounting  pronouncements  will not have a
significant impact on the Company's results of operations, financial position or
cash flows; as well as other  statements  including words such as  "anticipate",
"believe" or "expect" and statements in the future tense. These  forward-looking
statements are subject to business and economic risks,  and actual events or the
Company's actual future results could differ  materially from those set forth in
the forward-looking statements due to such risks and uncertainties.  The Company
will not necessarily  update  information if any forward looking statement later
turns out to be inaccurate.

The  following  important  factors,  among  others  discussed  elsewhere in this
report, could cause the Company's actual results to differ materially from those
indicated by the forward-looking statements contained in this report: the market
acceptance of the Company's Store-in-a-Store program in the food and drug retail
channel  and the  sustainability  of the program  over time;  the ability of the
Store-in-a-Store  program to secure  longer-term  shelf space for the  Company's
products;  whether the longer-term placement of the Company's products at retail
will result in better  sell-through  rates and therefore  fewer returns from the
food and drug retail channel; the 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
Company's  ability to continue to implement  its Store within a Store program on
commercially  acceptable  terms;  the  success  of  the  Company's  distribution
strategy,  including its ability to enter into new distribution and direct sales
relationships on commercially acceptable terms; the allocation of adequate shelf
space for the  Company's  products in major retail chain  stores;  the Company's
ability to negotiate lower product  promotional  costs in its  distribution  and
retail  relationships;  the Company's  ability to collect  outstanding  accounts
receivable  and  establish  adequate  reserves for  un-collectible  receivables;
increased selling,  general and administrative costs,  including increased legal
expenses;  the  continued  increase in the number of computers in homes in North
America  and the world;  the  ability to deliver  products in response to orders
within  a  commercially   acceptable  time  frame;  downward  pricing  pressure;
fluctuating costs of developing, producing and marketing the Company's products;
the Company's  ability to license or develop  quality  content for its products;
the  Company's  ability  to access  alternative  distribution  channels  and the
success of the  Company's  efforts to develop  its  Internet  sales;  consumers'
continued  demand  for  value-priced  software;  increased  competition  in  the
value-priced  software  category;  and various other factors,  many of which are
beyond  the  Company's  control.  Risks and  uncertainties  that may  affect the
Company's future results and performance  also include,  but are not limited to,
those  discussed  under the heading "Risk  Factors"  below at pages 13 to 18, as
well as in the Company's  Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2000 as filed with the  Securities  and Exchange  Commission  and other
documents filed with the Commission.


<PAGE>


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


Results of Operations

Three Months Ended September 30, 2000 and 1999

Net Sales

Net sales for the quarter ended September 30, 2000 were  $4,308,000  compared to
$4,118,000 for the quarter ended September 30, 1999, representing an increase of
$190,000 or 5%. As described in the table  below,  the $190,000  increase in net
sales was primarily  attributable to the Company's expansion of its distribution
into the North  American  food and drug channel,  which was partially  offset by
decreases in net sales into the traditional  North American  software retail and
distribution  channels.  Within the food and drug channel, the Company increased
it   distribution,   among  other   activities,   by   establishing   its  first
"Store-in-a-Store"   entertainment   software  display  sections  in  more  than
approximately  4,000 food and drug retail  stores.  The  establishment  of these
Store-In-A-Store  software display sections within certain national and regional
food and drug retail stores is intended to secure  longer-term  placement of the
Company's  products in this retail  channel,  with the goal of increasing  sales
volume within this channel while  decreasing the rate of product  returns due to
longer product exposure on retailers' product shelves.

The table below  represents the Company's net sales by distribution  channel for
the quarters ended September 30, 2000 and 1999, respectively.

<TABLE>
<CAPTION>
                                                       Quarter Ended   Quarter Ended
                                                       September 30,    September 30,     Increase
Distribution Channel                                       2000            1999          (Decrease)
------------------------------------------------       -------------   --------------   -------------
<S>                                                       <C>             <C>             <C>
North American Food and Drug Retailers                    $2,296,000      $   899,000     $ 1,397,000
North American Traditional Software Retailers                312,000          530,000        (218,000)
North American Traditional Software Distributors             989,000        2,040,000      (1,051,000)
International Markets                                        711,000          649,000          62,000
------------------------------------------------       -------------   --------------   -------------
Totals                                                   $ 4,308,000      $ 4,118,000       $ 190,000
                                                       =============   ==============   =============
</TABLE>

As noted in the  table  above,  the  Company's  net sales to  traditional  North
American software  retailers  decreased by $218,000,  while sales to traditional
North  American  software  distributors  decreased  by  $1,051,000.  These sales
decreases were consistent with industry-wide reductions of PC software inventory
levels held by North American  software  retailers and  distributors,  which has
negatively  impacted the Company's sales to these  customers  during the quarter
ended September 30, 2000.

As discussed  in the above  table,  the  Company's  international  sales for the
quarter ended  September  30, 2000  increased by $62,000 over sales for the same
period  during the prior year.  This minimal  sales  increase is  primarily  the
result of increased  pricing  pressures at retail and increased  competition for
retail shelf space from the Company's competitors in these foreign markets. As a
percentage of net sales, the Company's  international  net sales represented 17%
and 16% of the Company's net sales for the quarters ended September 30, 2000 and
1999,  respectively.  The Company  anticipates that international net sales will
remain at about 17% of the Company's consolidated net sales for the remainder of
fiscal 2001.

Included  in net  sales to the food and drug  retail  channel  are net  sales of
third-party  software  titles  totaling  $364,000  and $165,000 for the quarters
ended  September  30,  2000 and 1999,  respectively.  The  Company  sells  these
software  titles  to food and  drug  retailers  as part of its  Store-In-A-Store
software sections. The Company offers these third-party software titles in order
to provide a one-stop, software category management service for these retailers,
so that the Company can  continue to establish  itself as a leading  supplier of
entertainment software products, of both its own titles and third-party software
titles.


<PAGE>


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

During  fiscal  2000,  the Company  completed  its  transition  from  publishing
shareware-based  PC game  software  titles to  publishing  full-release  PC game
software  titles.  There were no net sales of  shareware-based  software  titles
during the quarter ended  September 30, 2000 compared to $90,000 of net sales of
such titles during the quarter ended September 30, 1999.

The Company has recently  initiated  several  programs  designed to increase the
sale of its products over the Internet,  including:  the roll-out of an improved
and expanded website; improvement of its electronic distribution capabilities by
further  developing and expanding its affiliation  with Digital River, a leading
distributor  of  digital  software  over  the  Internet;  and  incorporation  of
user-friendly  on-line  functionality into its products.  Sales of the Company's
products via the Internet for the  quarters  ended  September  30, 2000 and 1999
were $52,000 and $21,000, respectively, or approximately 1% of the Company's net
sales during both quarters.

During the quarters ended September 30, 2000 and 1999, the Company's  provisions
for product returns were $1,464,000 and $1,041,000, respectively, or 25% and 20%
of the  Company's  gross  sales,  respectively.  This  $423,000  increase in the
provision  for product  returns has been caused  primarily  by the change in the
Company's  distribution  strategy,   which  involved  expanding  the  number  of
distribution  partners  used to distribute  the  Company's  products and selling
directly  to  retailers.  All of these  non-exclusive  arrangements  between the
Company  and its  distributors  and  retailers  allow  for  product  returns  or
markdowns.   Additionally,   during  the  last  fiscal  year,  the  Company  has
experienced  a  significant  increase in net sales into the food and drug retail
channel. The majority of these sales were "promotional" in nature,  meaning that
the products were sold in those retail stores for only six to eight weeks.  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  fiscal 2001,  the
Company's  strategy is to continue  working  towards a more  profitable  balance
between short-term  promotional sales programs and longer-term,  non-promotional
sales programs in the food and drug retail channel.  This strategy,  among other
things, is intended to reduce the Company's  exposure to product returns in this
channel.  This  Store-In-A-Store  strategy  is an  important  component  of  the
Company's growth strategy for fiscal 2001.

Cost of Sales

Cost of sales for the quarter ended September 30, 2000 were $1,901,000  compared
to $1,603,000 for the quarter ended September 30, 1999, representing an increase
of $298,000 or 19%. Of this $298,000 increase in cost of sales, $182,000 was due
to the  increase in sales of lower  margin  products and $123,000 was due to the
increase in sales of non-eGames  software titles that the Company  acquired at a
higher  product cost than the  Company's  own  software  titles.  Product  costs
consist mainly of replicated compact discs, printed materials,  protective jewel
cases and boxes for certain products.

Gross Profit Margin

The  Company's  gross profit  margin for the quarter  ended  September  30, 2000
decreased  to 55.9% of net sales from 61.1% of net sales for the  quarter  ended
September 30, 1999.  This 5.2% 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 the  Company's:  discounting  sales of certain
software titles with consumer promotions;  sales of newly developed  promotional
titles with lower margins;  and increasing  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.

Operating Expenses

Product  development  expenses  for the quarter  ended  September  30, 2000 were
$181,000  compared to $243,000  for the quarter  ended  September  30,  1999,  a
decrease of $62,000 or 26%.  This  decrease  was caused  primarily  by a $45,000
decrease  in salary and  related  costs due to  headcount  reductions  among the
Company's technology-related staff and no employee bonus accrual for the quarter
ended September 30, 2000.


<PAGE>


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

Selling, general and administrative expenses for the quarter ended September 30,
2000 were $2,191,000  compared to $1,600,000 for the quarter ended September 30,
1999,  an  increase  of  $591,000  or 37%.  This  $591,000  increase  was caused
primarily by the $584,000 increase in marketing  promotional expenses associated
mainly with the increase in sales into the food and drug retail  channel.  These
promotional  costs  are  intended  to  increase  the  sell-through  rate for the
Company's  products  during  the  short-term  promotional  programs  that  these
retailers  offer  periodically  to  their  customers,  as  well  as  expand  the
longer-term  placement  of the  Company's  products in the food and drug channel
through the  Company's  Store-in-a-Store  program.  This  program is intended to
ultimately reduce  promotional  expenses,  as a percentage of sales, due to more
product  sales  being  non-promotional  in  nature.  Additionally,  the  Company
continues to experience  higher  promotional  costs in the traditional  software
retail  channels  due to increased  competition  for shelf space and the related
expenses  charged by retailers and  distributors to promote and support sales of
the Company's products.

Interest Expense, Net

Net  interest  expense  for the  quarter  ended  September  30,  2000 was $8,000
compared to $5,000 for the quarter  ended  September  30,  1999,  an increase of
$3,000.  The $3,000  increase was primarily due to the  utilization  of $500,000
under the revolving credit facility for the quarter ended September 30, 2000.

Provision for Income Taxes

Provision for income taxes for the quarter  ended  September 30, 2000 was $3,000
compared to $89,000 for the quarter  ended  September  30,  1999,  a decrease of
$86,000 or 97%.  This  $86,000  decrease in the  provision  for income taxes was
primarily  due to the $639,000  decrease in the  Company's  income before income
taxes for the quarter ended September 30, 2000.

Net Income

As a result of the factors  discussed above, net income decreased to $24,000 for
the quarter  ended  September  30,  2000 from  $577,000  for the  quarter  ended
September 30, 1999, a decrease of $553,000 or 96%.

Weighted Average Common Shares

The weighted  average common shares  outstanding on a diluted basis decreased by
333,698 for the quarter ended  September 30, 2000 to 9,803,844  from  10,137,542
for the quarter  ended  September  30, 1999.  This 333,698  decrease in weighted
average common shares  outstanding was caused  primarily by a decrease in common
stock equivalents  resulting primarily from the Company's  decreasing  quarterly
average common share price in the Nasdaq SmallCap market.

Liquidity and Capital Resources

As of September 30, 2000, the Company's cash and working  capital  balances were
$272,000 and $3,211,000,  respectively,  and the Company's  total  stockholders'
equity balance at September 30, 2000 was $3,660,000.

Net cash used in operating activities was approximately  $1,338,000 and $746,000
for the quarters ended September 30, 2000 and 1999, respectively. The $1,338,000
in net cash used in operating  activities  resulted  primarily from a $1,870,000
increase in accounts  receivable  and a $560,000  decrease in accounts  payable,
which were  partially  offset by a $545,000  increase in accrued  expenses and a
$374,000 decrease in inventory.  Additionally,  the Company's net income for the
quarter  ended  September  30,  2000 was  $24,000,  inclusive  of  depreciation,
amortization and other non-cash expenses of $79,000.

Net cash provided by investing  activities  for the quarter ended  September 30,
2000 was $2,000 compared to net cash used in investing activities of $30,000 for
the  quarter  ended  September  30,  1999.  The $2,000 in net cash  provided  by
investing  activities  resulted  from  $16,000 in proceeds  from the disposal of
furniture and  equipment,  which was offset by purchases of $12,000 in furniture
and equipment and $2,000 in other assets.


<PAGE>


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

Net cash provided by financing  activities for the quarters ended  September 30,
2000 and 1999 were $475,000 and $9,000,  respectively.  The $475,000 in net cash
provided by  financing  activities  reflects  net  proceeds  from the  Company's
borrowing of $750,000 under the revolving credit facilities, which was offset by
repayments  of this  borrowing  under the  revolving  credit  facilities,  notes
payable  and  capital  lease  obligations  of  $250,000,  $14,000  and  $11,000,
respectively.

On August 9, 2000,  the  Company  entered  into a  $2,000,000  revolving  credit
facility  ("new credit  facility")  with a  commercial  bank,  which  expires on
October 31, 2001.  This new credit  facility  replaced the $1,500,000  revolving
credit  facility that it previously had with another  commercial  bank.  Amounts
outstanding  under this new credit facility are charged  interest at one-half of
one  percent  above the  bank's  current  prime  rate and such  interest  is due
monthly.  The new credit facility is  collateralized by substantially all of the
Company's  assets.  The new credit  facility  requires the Company,  among other
things, to maintain certain financial ratios, such as: a minimum working capital
balance of $1,500,000  and a maximum senior debt to effective net worth ratio of
1.50 to 1.00. Additionally, this new credit facility has a minimum effective net
worth  covenant  starting  at $3.1  million at June 30, 2000 and  increasing  by
$150,000  quarterly  to a $3.7  million  requirement  at June  30,  2001.  As of
September 30, 2000, the Company was in compliance with each of those  covenants.
This new credit  facility  was  established  to  provide,  among  other  things,
additional  working capital to support the Company's  anticipated  growth. As of
November 13, 2000, the Company had a $500,000 outstanding balance under this new
credit facility.

The Company's United Kingdom operation has a $225,000  revolving credit facility
with a  commercial  bank.  Amounts  outstanding  under this credit  facility are
charged  interest at two and one-half percent above the bank's current base rate
and such interest is due monthly.  As of November 13, 2000,  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   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, some of which are beyond the
Company's  control.  In the  future,  the  Company  expects its cash and working
capital  requirements  to be  affected  by each of these  factors.  The  Company
believes  cash and  working  capital  balances,  in  addition  to the  Company's
revolving  credit  facilities  mentioned  above,  will be sufficient to fund the
Company's  operations  for the next  twelve  months.  However,  there  can be no
assurances that the Company will be able to achieve and maintain a positive cash
flow or that additional  financing will be available if and when required or, if
available, will be on terms satisfactory to the Company.

On November 10, 2000,  the Company  received  notification  from Nasdaq that its
common  stock had failed to  maintain a minimum bid price of $1.00 over a period
of 30 consecutive  trading days as required for continued  listing on the Nasdaq
SmallCap Market as set forth in Marketplace  Rule 4310 (c) (4) (the "Rule").  In
accordance with  Marketplace  Rule 4310 (c) (8) (B), the Company has 90 calendar
days,  or until  February  8, 2001,  to regain  compliance  with this Rule.  The
Company may appeal Nasdaq's  determination  pursuant to the procedures set forth
in the Nasdaq  Marketplace  Rule 4800  Series.  A hearing  request will stay the
de-listing  of the  Company's  securities  pending the Panel's  decision.  As of
November 10,  2000,  the Company  continued to satisfy all other  aspects of its
listing agreement for the Nasdaq SmallCap Market.

New Accounting Pronouncements

The Company is currently evaluating the potential impact of Emerging Issues Task
Force ("EITF")  00-14,  "Accounting  for Certain Sales  Incentives",  EITF 00-10
"Accounting  for  Shipping  and  Handling  Fees and Costs" and Staff  Accounting
Bulletin 101 "Revenue  Recognition" and related amendments and  interpretations.
All of these pronouncements  become effective no later than the Company's fourth
quarter of fiscal 2001. The Company does not expect the adoption of these or any
other recently issued accounting  pronouncements to have a significant impact on
its results of operations, financial position or cash flows.


<PAGE>


Risk Factors

Factors Affecting Future Performance

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 8 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.

The  Company's  business is subject to many risks and  uncertainties,  which may
affect  its  future  financial  performance.  Some of the  important  risks  and
uncertainties  which may cause the Company's  operating results to vary or which
may  materially  and  adversely  affect the Company's  operating  results are as
follows:

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 income from operations.  The Company's operations today are still
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 overcome
problems  and delays in product  development,  market  acceptance  of  products,
successful implementation of its sales, distribution and marketing strategy, and
the  implications of the settlement of litigation  discussed under Part II, Item
1, "Legal Proceedings." 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.


<PAGE>


Risk Factors (continued)

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.  The insolvency or business  failure of
any significant  retailer or distributor of the Company's  products could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  Sales are typically made on credit,  with terms that vary
depending upon the customer and the nature of the product.  The Company does not
hold collateral to secure payment.

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

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

The Consumer  Entertainment  Software  Market is Highly  Competitive and Changes
Rapidly. The market for consumer  entertainment  software is highly competitive,
particularly at the retail shelf level where a constantly  increasing  number of
software titles are competing for the same amount of shelf space. Retailers have
a  limited  amount of shelf  space on which to  display  consumer  entertainment
software  products.  Therefore,  there is  intense  competition  among  consumer
entertainment  software  publishers  for  adequate  levels  of shelf  space  and
promotional  support from retailers.  As the number of software titles continues
to increase,  the competition for shelf space continues to intensify,  resulting
in greater leverage for retailers and distributors in negotiating terms of sale,
including price discounts and product return  policies.  The Company's  products
represent a relatively  small  percentage of any  retailer's  sales volume,  and
there can be no assurance that retailers will continue to purchase the Company's
products or promote the Company's  products with adequate  levels of shelf space
and promotional  support.  Most of the Company's  competitors have substantially
greater sales,  marketing,  development and financial resources.  Moreover,  the
Company's present or future  competitors may be able to develop products,  which
are  comparable or superior to those offered by the Company,  offer lower priced
products or adapt more quickly than the Company to new  technologies or evolving
customer  requirements.  The Company's  competitors  may 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 respond
to technological change, customer requirements and competitors' current products
and  innovations.  There can be no  assurance  that the Company  will be able to
continue 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 recently  established  $2,000,000 revolving
credit  facility with a commercial bank that expires on October 31, 2001. If the
Company is not able to maintain cash flow from operations at a level  sufficient
to support continued growth of 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.


<PAGE>


Risk Factors (continued)

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") (See Part II, Item 1, "Legal Proceedings").  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 has 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 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 if 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.

<PAGE>

Risk Factors (continued)

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  operates  with  little or no  backlog.  Therefore,  net
revenues in any quarter are 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 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.


<PAGE>


Risk Factors (continued)

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  17% and 16% of the
Company's  net  sales  for the  quarters  ended  September  30,  2000 and  1999,
respectively.  The Company  anticipates that international net sales will remain
at or about 17% of the Company's net sales for the remainder of fiscal 2001. The
Company's international business is subject to certain risks including:  varying
regulatory  requirements;  tariffs and trade  barriers;  political  and economic
instability;  reduced  protection for  intellectual  property  rights in certain
countries;   difficulties  in  supporting  foreign  customers;  difficulties  in
managing foreign distributors;  potentially adverse tax consequences; the burden
of complying with a wide variety of complex operations;  customs,  foreign laws,
regulations and treaties;  fluctuating currency valuations;  and the possibility
of difficulties in collecting accounts receivable.

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

Listing of Securities;  Risk of Low Priced Stocks. The Company's common stock is
listed on the Nasdaq SmallCap Market under the symbol EGAM. A listed company may
be de-listed if it fails to maintain minimum levels of Stockholders' equity, bid
price,  shares publicly held,  number of Stockholders or aggregate market value,
or if it violates other aspects of its listing agreement. At September 30, 2000,
the Company satisfied the minimum level of Stockholders' equity that is required
to be listed  ($2,000,000),  as well as all other  requirements  of its  listing
agreement for inclusion on the Nasdaq SmallCap Market. 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 has 90 calendar  days,  or until
February 8, 2001, to regain  compliance  with this Rule.  The Company may appeal
Nasdaq's  determination  pursuant  to the  procedures  set  forth in the  Nasdaq
Marketplace  Rule 4800 Series. A hearing request will stay the de-listing of the
Company's  securities  pending the  Panel's  decision.  If the Company  fails to
regain compliance with this rule or any other criteria for trading on the Nasdaq
SmallCap  Market,  its Common Stock may be de-listed.  Public  trading,  if any,
would  thereafter be conducted in the  over-the-counter  market in the so-called
"pink sheets," or on the NASD's "Electronic Bulletin Board." If the common stock
were  de-listed,  it may be more  difficult  to  dispose  of,  or even to obtain
quotations  as to the price of, the common  stock and the price  offered for the
common stock may be substantially reduced.


<PAGE>


Risk Factors (continued)

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

Part II. Other Information

Item 1.  Legal Proceedings

In August,  2000, the Company  settled the lawsuit filed by Hasbro  Interactive,
Inc.,  Atari   Interactive,   Inc.,  and  Zao  Elorg  d/b/a  Elorg   Corporation
(collectively,  the  "Plaintiffs")  against the  Company,  Xtreme  Games LLC, GT
Interactive Software Corporation, MVP Software, Inc., Webfoot Technologies, Inc.
and Varcon  Systems,  Inc. on February 9, 2000,  in the United  States  District
Court for the  District of  Massachusetts.  The suit had alleged that certain of
the  Company's  products  infringed  copyrights  and  trademarks  owned  by  the
Plaintiffs, and that the Company had engaged in unfair competition. The suit had
sought to have the Company enjoined from manufacturing,  marketing, distributing
and  selling  the  Company's  allegedly  infringing  games  and from  using  the
allegedly  infringing  trademarks;  to have the  Company  recall  the  allegedly
infringing  products and related  materials from the  distributors and retailers
currently  selling these products;  to require the Company to pay the Plaintiffs
the  profits  derived  from  the  allegedly  infringing  products;  and  to  pay
Plaintiffs'  legal fees and costs. The settlement  agreement with the Plaintiffs
caused the Company to incur a non-recurring  expense of $205,000 charged against
the Company's  fiscal 2000 fourth  quarter,  ended June 30, 2000.  This $205,000
charge consisted of a $160,000 cash payment to the plaintiffs,  a $15,000 fee to
a third party  consultant  and $30,000 in an increased  provision  for inventory
obsolescence.  In total,  including  outside legal costs,  during the year ended
June  30,  2000,  the  Company  incurred  $390,568  in  costs  relating  to this
litigation,  including the $205,000  charge noted above.  The settlement did not
require the recall of any of the  Company's  products  and also did not admit to
any infringement by the Company of the titles named in the suit. Under the terms
of the  settlement,  the Company was  permitted to sell certain games alleged to
infringe on Hasbro's copyrights through September 30, 2000, at which point these
products  were  discontinued.  The  settlement  involved the  following  Company
titles:  Intergalactic  Exterminator,  3D Astro Blaster, Missile Launch, Missile
Launch 2000,  TetriMania,  TetriMania  Master,  3D  TetriMania,  3D Maze Man, 3D
Chomper,  3D Frogman,  3D Ms. Maze and Tunnel Blaster.  The discontinued  titles
generated  net sales of  $2,100,000  and  $2,000,000  for fiscal  2000 and 1999,
respectively, or 15% and 20% of net sales during those same fiscal years.



<PAGE>


Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

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

        10.1        Description of eGames, Inc. 2001 Employee Incentive
                    Compensation Plan
        27.1        Financial Data Schedule


(b)  Reports on Form 8-K

On July 27,  2000,  the  Company  filed a report on Form 8-K  regarding  a press
release  announcing the Company's  unaudited  results for the fourth quarter and
year ended June 30, 2000.

On August 17, 2000, the Company filed a report on Form 8-K  announcing  that the
Company  had  entered  into an  agreement  with  Summit  Bank  for a $2  million
revolving  credit  facility  that  replaced an existing  $1.5 million  revolving
credit facility with another commercial bank.

On September 13, 2000,  the Company filed a report on Form 8-K regarding a press
release  announcing the  settlement of the trademark and copyright  infringement
suit filed by Hasbro  Interactive,  Inc., Atari Interactive,  Inc. and ZAO Elorg
d/b/a  Elorg  Corporation  against  the  Company in the U.S.  District  Court in
Boston, Massachusetts.

On October 27, 2000,  the Company  filed a report on Form 8-K  regarding a press
release  announcing  the  Company's  unaudited  results for the first quarter of
fiscal 2001 ended September 30, 2000.




<PAGE>


                                   SIGNATURES



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



                                  eGames, Inc.
                                  (Registrant)




Date: November 14, 2000                   /s/  Gerald W. Klein
      -----------------                   --------------------
                                          Gerald W. Klein, President, Chief
                                          Executive Officer and Director


Date: November 14, 2000                   /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        Description of eGames, Inc. 2001 Employee Incentive
                 Compensation Plan                                        22
     27.1        Financial Data Schedule                                  23