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

                                   FORM 10-QSB

(Mark One)

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

                 For the quarterly period ended December 31,1999
    |_|            TRANSITION REPORT PURSUANT TO SECTION 13 OR
                   15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 0-27102

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

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

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

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

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

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

                                Yes ( X ) No (  )

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

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

                                 Yes ( ) No ( )

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  9,745,775 shares of common stock, no
par value per share, as of February 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 December 31, 1999........    3

               Consolidated Statements of Operations for the three
                   and six months ended December 31, 1999 and 1998 ......    4

               Consolidated Statements of Cash Flows for the six
                   months ended December 31, 1999 and 1998 ..............    5

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

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

               Risk Factors .............................................  15-19

Part II.       Other Information

Item 1.        Legal Proceedings.........................................    19

Item 4.        Submission of Matters to a Vote of Security Holders.......    20

Item 6.        Exhibits and Reports on Form 8-K..........................    20

Signatures     ..........................................................    21

Exhibit Index  ..........................................................    22

Exhibits       ..........................................................    23






<PAGE>


Item 1.  Financial Statements

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

                                                                       As of
                                                                    December 31,
                                     ASSETS                            1999
                                     ------                            ----

<S>                                                                 <C>
Current assets:
   Cash and cash equivalents                                        $   858,656
   Accounts receivable, net of allowances totaling $1,763,373         4,530,277
   Inventory                                                          1,438,631
   Prepaid expenses                                                      73,748
                                                                    -----------
          Total current assets                                        6,901,312

Furniture and equipment, net                                            327,758
Other assets                                                            384,930
                                                                    -----------
          Total assets                                              $ 7,614,000
                                                                    ===========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Note payable                                                     $    52,218
   Accounts payable                                                   1,351,127
   Accrued expenses                                                   1,219,504
   Capital lease obligations                                             21,820
                                                                    -----------
          Total current liabilities                                   2,644,669

Capital lease obligations                                                11,465
Note payable                                                            148,386
Convertible subordinated debt                                           150,000
                                                                    -----------
          Total liabilities                                           2,954,520

Stockholders' equity:

   Common stock, no par value (40,000,000 shares authorized;
          9,977,675 issued and 9,745,775 outstanding)                 9,122,432
   Additional paid in capital                                         1,148,550
   Accumulated deficit                                               (5,090,221)
   Treasury stock, at cost - 231,900 shares                            (501,417)
   Accumulated other comprehensive loss                                 (19,864)
                                                                    -----------
          Total stockholders' equity                                  4,659,480
                                                                    -----------
          Total liabilities and stockholders' equity                $ 7,614,000
                                                                    ===========

</TABLE>




        See accompanying notes to the consolidated financial statements.


<PAGE>


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



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

                                                  1999          1998          1999          1998
                                                  ----          ----          ----          ----
<S>                                           <C>           <C>           <C>           <C>
Net sales                                     $ 4,521,390   $ 3,611,126   $ 8,638,965   $ 6,117,326

Cost of sales                                   1,561,637     1,136,731     3,164,945     2,017,308
                                              -----------   -----------   -----------   -----------

Gross profit                                    2,959,753     2,474,395     5,474,020     4,100,018

Operating expenses:
    Product development                           220,745       236,965       463,592       442,632
    Selling, general and administrative         1,980,596     1,318,861     3,581,002     2,298,503
                                              -----------   -----------   -----------   -----------

        Total operating expenses                2,201,341     1,555,826     4,044,594     2,741,135
                                              -----------   -----------   -----------   -----------

Operating income                                  758,412       918,569     1,429,426     1,358,883

Interest expense, net                               4,977        13,632        10,077        24,281
                                              -----------   -----------   -----------   -----------

Income before income taxes                        753,435       904,937     1,419,349     1,334,602

Provision for income taxes                        152,107        57,967       241,402        84,267
                                              -----------   -----------   -----------   -----------

Net income                                    $   601,328   $   846,970   $ 1,177,947   $ 1,250,335
                                              ===========   ===========   ===========   ===========




Net income per common share:
        - basic                               $      0.06   $      0.09   $      0.12   $      0.13
                                              ===========   ===========   ===========   ===========
        - diluted                             $      0.06   $      0.09   $      0.12   $      0.13
                                              ===========   ===========   ===========   ===========

Weighted average common shares
        outstanding - basic                     9,697,486     9,469,031     9,665,729     9,455,680

Dilutive effect of common stock equivalents       437,493       189,156       439,866       171,234
                                              -----------   -----------   -----------   -----------

 Weighted average common shares
        outstanding - diluted                  10,134,979     9,658,187    10,105,595     9,626,914
                                              ===========   ===========   ===========   ===========


</TABLE>





        See accompanying notes to the consolidated financial statements.


<PAGE>


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


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

                                                                   1999           1998
                                                                   ----           ----
<S>                                                            <C>            <C>
Cash flows from operating activities:
    Net income                                                 $ 1,177,947    $ 1,250,335
    Adjustment to reconcile net income to net cash
        provided by operating activities:
    Depreciation and amortization                                  218,542        187,138
    Changes in items affecting operations net of effect
        from acquired business:
             Restricted  cash                                       17,560            508
             Accounts receivable                                (2,585,142)    (1,946,243)
             Prepaid expenses                                       36,251         35,232
             Inventory                                            (281,966)      (286,555)
             Accounts payable                                      307,199        363,767
             Accrued expenses                                      590,047        283,327
                                                               -----------    -----------
Net cash used in operating activities                             (519,562)      (112,491)
                                                               -----------    -----------

Cash flows from investing activities:
    Acquisition, net of cash acquired                                - 0 -        (12,428)
    Purchase of furniture and equipment                            (65,669)      (122,790)
    Purchase of software rights and other assets                    (1,225)       (54,490)
                                                               -----------    -----------
Net cash used in investing activities                              (66,894)      (189,708)
                                                               -----------    -----------

Cash flows from financing activities:
    Purchase of treasury stock                                       - 0 -       (247,534)
    Proceeds from exercise of warrants and stock options           247,543          - 0 -
    Borrowings under line of credit agreement                      250,000          - 0 -
    Payments under line of credit agreement                       (250,000)         - 0 -
    Repayment of notes payable                                    (105,078)       (85,581)
    Repayment of lease obligations                                 (13,004)       (36,694)
                                                               -----------    -----------
Net cash (used in) provided by financing activities                129,461       (369,809)
                                                               -----------    -----------

Effect of exchange rate changes on cash and cash equivalents         1,798            502
                                                               -----------    -----------
Net decrease in cash and cash equivalents                         (455,197)      (671,506)

Cash and cash equivalents:
    Beginning of period                                          1,313,853        953,648
                                                               -----------    -----------
    End of period                                              $   858,656    $   282,142
                                                               ===========    ===========

Supplemental cash flow information:

Cash paid for interest                                         $    20,722    $    36,835
                                                               ===========    ===========
Cash paid for income taxes                                     $   236,000    $    72,500
                                                               ===========    ===========

Non cash investing and financing activities:

    Capital lease additions                                    $     - 0 -    $    24,915
                                                               ===========    ===========

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


</TABLE>





        See accompanying notes to the consolidated financial statements.


<PAGE>


                                  eGames, Inc.

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

Basis of Presentation

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

Description of Business

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

Consolidation

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

2.  Acquisition

On August 14,  1998,  the  Company  acquired  all of the  outstanding  shares of
Software Partners Publishing and Distribution Limited ("Software Partners"),  in
exchange  for  150,000  shares  of  the  Company's   Common  Stock,   valued  at
approximately  $213,000,  which was the fair value of the Company's Common Stock
on the closing date of the acquisition.  This acquisition was accounted for as a
purchase and the corresponding goodwill in the approximate amount of $308,000 is
being amortized over five years. On March 31, 1999,  Software  Partners  changed
its name to eGames Europe  Limited  ("eGames  Europe").  For the quarters  ended
December 31, 1999 and 1998,  eGames  Europe  contributed  $612,000 and $719,000,
respectively,  in net sales as well as $113,000 and $158,000,  respectively,  in
net income exclusive of inter-company charges. For the six months ended December
31,  1999  and  1998,  eGames  Europe  contributed  $1,189,000  and  $1,020,000,
respectively,  in net sales as well as $191,000 and $264,000,  respectively,  in
net income exclusive of inter-company charges.

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


<PAGE>



Notes to Consolidated Financial Statements (continued)


                 Unaudited Pro-Forma Financial Information

                                                      Six Months Ended
                                                      December 31, 1998
                                                      -----------------
Net sales                                                 $6,175,000
Net income                                                $1,142,000
Net income per diluted share                              $     0.12

3.  Comprehensive Income

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

<TABLE>
<CAPTION>
                                                Three Months Ended           Six Months Ended
                                                   December 31,                December 31,
                                             ------------------------    -----------------------
                                                1999          1998          1999         1998
                                                ----          ----          ----         ----
<S>                                          <C>           <C>           <C>          <C>
Net income                                   $  601,000    $  847,000    $1,178,000   $1,250,000
Other comprehensive income:
   Foreign currency translation adjustment       (9,000)       (5,000)       10,000        1,000
                                             ----------    ----------    ----------   ----------
 Comprehensive income                        $  592,000    $  842,000    $1,188,000   $1,251,000
                                             ==========    ==========    ==========   ==========
</TABLE>

4.  Common Stock

On October 26, 1998, the Company's Board of Directors  authorized the Company to
purchase up to $1,000,000 of its shares of Common Stock in open-market purchases
on the Nasdaq SmallCap Market. During the six months ended December 31, 1999 the
Company did not  purchase  any shares of its Common  Stock.  As of December  31,
1999,  the Company had  acquired  231,900  shares of its Common  Stock,  with an
approximate cost of $501,000, pursuant to its stock repurchase program.

5.  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.


<PAGE>


Notes to Consolidated Financial Statements (continued)

Geographic  information  for the quarters and six months ended December 31, 1999
and 1998 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 and six months ended December 31, 1999 and 1998 is presented below.
<TABLE>
<CAPTION>
Quarters ended
--------------
                                     United States   United Kingdom    Eliminations    Consolidated
                                     -------------   --------------    ------------    ------------
December 31, 1999:
------------------
<S>                                   <C>             <C>              <C>                <C>
Sales                                 $ 4,184,000     $   612,000      ($  275,000)     $ 4,521,000
Operating income                          731,000          27,000            - 0 -          758,000
Assets                                $ 7,845,000     $ 1,176,000      ($1,407,000)     $ 7,614,000

December 31, 1998:
------------------
Sales                                 $ 3,079,000     $   719,000      ($  187,000)     $ 3,611,000
Operating income                          793,000         126,000            - 0 -          919,000
Assets                                $ 6,061,000     $ 1,307,000      ($  579,000)     $ 6,789,000


Six months ended
----------------
                                     United States   United Kingdom    Eliminations    Consolidated
                                     -------------   --------------    ------------    ------------
December 31, 1999:
------------------
Sales                                 $ 7,890,000     $ 1,189,000      ($  440,000)     $ 8,639,000
Operating income                        1,384,000          45,000            - 0 -        1,429,000
Assets                                $ 7,845,000     $ 1,176,000      ($1,407,000)     $ 7,614,000

December 31, 1998:
------------------
Sales                                 $ 5,342,000     $ 1,020,000      ($  245,000)     $ 6,117,000
Operating income                        1,148,000         211,000            - 0 -        1,359,000
Assets                                $ 6,061,000     $ 1,307,000      ($  579,000)     $ 6,789,000

</TABLE>


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

The  accompanying  consolidated  financial  statements  as of December  31, 1999
include the accounts of eGames,  Inc.,  (the  "Company"),  and its  wholly-owned
subsidiary.

Results of Operations

Three Months Ended December 31, 1999 and 1998

Net Sales

Net sales for the quarter ended  December 31, 1999 were  $4,521,000  compared to
$3,611,000 for the quarter ended December 31, 1998,  representing an increase of
$910,000 or 25%. For the quarter  ended  December 31, 1999,  the  Company's  net
sales were  comprised  of  full-release  game  products  (87%),  shareware-based
products (0%), personal productivity products (5%) and non-eGames products (8%).
For the quarter ended  December 31, 1998, the Company's net sales were comprised
of full-release game products (51%),  shareware-based  products (34%),  personal
productivity  products  (14%) and  non-eGames  products  (1%).  These changes in
products sold reflect the Company's  transition from publishing and distributing
primarily shareware-based products to full-release,  proprietary products, which
transition began during the first quarter of fiscal 1999.



<PAGE>


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

The Company's  international  sales for the quarter ended December 31, 1999 were
$766,000  or 17% of net sales,  compared to $808,000 or 22% of net sales for the
quarter ended December 31, 1998, representing a decrease of $42,000 or 5% of net
sales.  The  decrease  in  international  sales from  quarter to quarter  can be
attributed,  primarily to pricing  pressures  and increased  competition  in the
United Kingdom.

Until April 1999, the Company primarily  distributed its entertainment  software
products  in  North  America  through  a large  national  distributor,  GT Value
Products, a division of GT Interactive Software  Corporation.  At that time, the
Company terminated its exclusive  distribution  agreement with GT Value Products
and began  entering  into  non-exclusive  distribution  agreements  with various
national distributors, including GT Value Products. The Company has also entered
into  several  direct  sales   relationships   with  certain   retailers.   This
distribution  strategy is  intended  to  diversify  the  Company's  distribution
channels  to  retail,   provide  for  more   effective   inventory   management,
merchandising  and  communications   with  retailers,   diminish  the  Company's
dependence  on any  one  third-party  distributor  for  sales  of the  Company's
products, and increase the potential gross profit margin that may be realized on
the sale of its  products.  The Company  continues  to  distribute  its products
through GT Value  Products to certain mass  merchandise  retailers that purchase
value-priced  software exclusively through GT Value Products.  The Company's net
sales to GT Value  Products  accounted for 8% and 77% of the Company's net sales
for the  quarters  ended  December  31,  1999 and  1998,  respectively.  For the
quarters  ended December 31, 1999 and 1998,  sales of the Company's  products to
other  distributors  accounted for approximately 33% and 8% of the Company's net
sales,  while direct sales to retailers  accounted for approximately 59% and 15%
of the Company's net sales during those same periods, respectively.

The Company has continued to take steps to increase distribution of its products
via the Internet,  including improving and expanding its web site;  establishing
electronic  distribution  capabilities  over  the  Internet;  and  incorporating
on-line  functionality into existing  products.  Sales of the Company's products
via the Internet  represented  less than 1% of the  Company's  net sales for the
quarters ended December 31, 1999 and 1998, respectively.

During the quarters ended  December 31, 1999 and 1998,  the Company's  provision
for product returns was approximately $805,000 and $97,000, respectively, or 15%
and 3% of the Company's gross sales, respectively. The Company has increased its
provision for product returns  primarily as a result of higher returns caused by
the change in the Company's distribution relationship with GT Value Products, as
well as the Company's other recently established  distribution and direct retail
relationships,  all of which  allow for  product  returns.  The Company may also
experience  a higher  return  rate as a result  of  distribution  of more of the
Company's products into  non-traditional  retail stores, such as drug stores and
supermarkets.  The  Company  expects  the return  rates from these  stores to be
higher  than  returns  experienced  historically  from  retail  stores that have
traditionally sold PC software products.

Cost of Sales and Gross Profit Margin

Cost of sales for the quarter ended December 31, 1999 were  $1,562,000  compared
to $1,137,000 for the quarter ended December 31, 1998,  representing an increase
of $425,000 or 37%.  This  increase was caused  primarily by the 25% increase in
product sales along with increases in freight and royalty costs  associated with
the Company's expanded distribution of its full-release software titles into new
and  existing  retail  relationships.  While a year ago  sales of the  Company's
products  had been  achieved  largely by shipping  products to a small number of
distributors and retailers, for the quarter ended December 31, 1999, the Company
shipped approximately 59% of its products directly to retailers compared to only
15% of its products being shipped directly to retailers during the quarter ended
December 31, 1998,  resulting in higher  shipping,  handling and freight  costs.
Product costs consist  mainly of replicated  compact discs,  printed  materials,
protective jewel cases and boxes for certain  products.  Gross profit margin for
the quarter  ended  December  31, 1999  decreased  to 65.5%,  from 68.5% for the
quarter ended December 31, 1998. This decrease in gross profit margin was caused
primarily by increased  freight costs  associated  with the Company's  expansion
into new retail  opportunities,  and increased royalty costs associated with the
Company's  transition  to publishing  and  distributing  primarily  full-release
products. These increased


<PAGE>


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

freight and royalty costs were  partially  offset by a decrease in product costs
resulting from a reduction in per-unit product costs due to volume discounts.

Operating Expenses

Product  development  expenses  for the  quarter  ended  December  31, 1999 were
$221,000  compared to $237,000  for the  quarter  ended  December  31,  1998,  a
decrease of $16,000 or 7%. This  decrease was caused  primarily by a decrease in
outside  labor costs,  which was  partially  offset by an increase in salary and
related costs for employees hired to focus on the Company's product  development
and quality assurance efforts in conjunction with the Company's  transition from
publishing and distributing primarily  shareware-based products to full-release,
proprietary products.

Selling,  general and administrative expenses for the quarter ended December 31,
1999 were  $1,981,000  compared to $1,319,000 for the quarter ended December 31,
1998, an increase of $662,000 or 50%.  This increase was caused  primarily by an
increase in initial  marketing  promotional  costs  incurred to gain  additional
retail shelf space at both new and existing  retail  stores,  and to promote the
Company's  products  in order to achieve  the 25%  increase  in net  sales.  The
Company believes that these promotional costs will continue to be incurred,  but
may decline over time as the Company's  newer retail  relationships  develop and
mature from a promotional  product  launch phase,  into a more  established  and
recurring order phase.  Marketing promotional costs primarily include:  slotting
fees,  in-store ads, mail-in  consumer rebates and display costs.  Additionally,
the  Company  incurred  increases  in salary  and  related  costs and  operating
expenses  incurred by the  Company's  sales and  distribution  operation  in the
United Kingdom.

Interest Expense, net

Net interest expense for the quarter ended December 31, 1999 was $5,000 compared
to $14,000 for the quarter ended December 31, 1998, a decrease of $9,000 or 64%.
The primary  reason for this  decrease was the  reduction  in notes  payable and
capital lease obligations due to scheduled principal payments.

Provision for Income Taxes

Provision for income taxes for the quarter ended  December 31, 1999 was $152,000
compared to $58,000 for the quarter  ended  December  31,  1998,  an increase of
$94,000. The increase in the provision for income taxes was primarily due to the
increase in the quarterly effective income tax rate to 20% for the quarter ended
December 31, 1999 compared to 6% for the quarter ended  December 31, 1998.  This
change reflects the limitation of certain net operating loss  carryforwards  not
available to offset federal and state taxable income.

Net Income

Net income for the quarter  ended  December  31, 1999 was  $601,000  compared to
$847,000 for the quarter ended December 31, 1998, a decrease of $246,000 or 29%.
This decrease in profitability  resulted primarily from an increase in operating
expenses necessary to support the Company's  increased sales and the increase in
the Company's  effective income tax rate, which costs were partially  reduced by
the increase in gross profit derived from the 25% increase in net sales.


<PAGE>


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

Results of Operations

Six Months Ended December 31, 1999 and 1998

Net Sales

Net sales for the six months ended December 31, 1999 were $8,639,000 compared to
$6,117,000 for the six months ended December 31, 1998,  representing an increase
of $2,522,000 or 41%. For the six months ended  December 31, 1999, the Company's
net sales were comprised of full-release  game products  (79%),  shareware-based
products (0%),  personal  productivity  products  (10%) and non-eGames  products
(11%).  For the six months ended December 31, 1998, the Company's net sales were
comprised of full-release game products (46%),  shareware-based  products (37%),
personal productivity products (14%) and non-eGames products (3%). These changes
in  products  sold  reflect  the  Company's   transition   from  publishing  and
distributing  primarily  shareware-based  products to full-release,  proprietary
products, which transition began during the first six months of fiscal 1999.

The  Company's  international  sales for the six months ended  December 31, 1999
were $1,415,000 or 16% of net sales,  compared to $1,259,000 or 21% of net sales
for the six months ended December 31, 1998, representing an increase of $156,000
or 12%. The increase in  international  sales can be primarily  attributed to an
increase in  non-recurring  special  order  sales  under an  original  equipment
manufacture  ("OEM")  agreement,  which was partially reduced by the decrease in
traditional  sales in the  United  Kingdom  experienced  as a result of  pricing
pressures and increased competition.

The  Company's net sales to GT Value  Products  accounted for 15% and 74% of the
Company's  net  sales  for the six  months  ended  December  31,  1999 and 1998,
respectively.  For the six months ended December 31, 1999 and 1998, sales of the
Company's products to other distributors accounted for approximately 33% and 13%
of the  Company's  net sales,  while  direct sales to  retailers  accounted  for
approximately 52% and 13% of the Company's net sales, respectively. Sales of the
Company's  products via the Internet  represented  less than 1% of the Company's
net sales for the six months ended December 31, 1999 and 1998, respectively.

During the six months ended December 31, 1999 and 1998, the Company's  provision
for product returns was approximately $1,846,000 and $112,000,  respectively, or
18% and 2% of the Company's gross sales, respectively. The Company has increased
its provision for product returns primarily as a result of higher returns caused
by the change in the Company's distribution relationship with GT Value Products,
as well as the Company's  other  recently  established  distribution  and direct
retail  relationships,  all of which allow for product returns.  The Company may
also  experience a higher return rate as a result of distribution of more of the
Company's products into  non-traditional  retail stores, such as drug stores and
supermarkets.  The  Company  expects  the return  rates from these  stores to be
higher  than  returns  experienced  historically  from  retail  stores that have
traditionally sold PC software products.

Cost of Sales and Gross Profit Margin

Cost of sales  for the six  months  ended  December  31,  1999  were  $3,165,000
compared to $2,017,000 for the six months ended December 31, 1998,  representing
an increase of $1,148,000 or 57%. This increase was caused  primarily by the 41%
increase in product  sales  along with  increases  in freight and royalty  costs
associated with the Company's expanded distribution of its full-release software
titles into new and existing retail relationships. While a year ago sales of the
Company's  products had been  achieved  largely by shipping  products to a small
number of  distributors  and  retailers,  for the six months ended  December 31,
1999,  the  Company  shipped  approximately  52% of  its  products  directly  to
retailers  compared  to only 13% of its  products  during the six  months  ended
December 31, 1998,  resulting in higher  shipping,  handling and freight  costs.
Product costs consist  mainly of replicated  compact discs,  printed  materials,
protective jewel cases and boxes for certain  products.  Gross profit margin for
the six months ended  December 31, 1999  decreased to 63.4%,  from 67.0% for the
six months ended December 31, 1998. This decrease in gross profit margin was


<PAGE>


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

caused  primarily by  increased  freight  costs  associated  with the  Company's
expansion into new retail opportunities,  and increased royalty costs associated
with  the  Company's   transition  to  publishing  and  distributing   primarily
full-release products.  These cost increases were partially offset by a decrease
in product  costs  resulting  from a reduction in per-unit  product costs due to
volume discounts.

Operating Expenses

Product  development  expenses for the six months  ended  December 31, 1999 were
$464,000  compared to $443,000  for the six months ended  December 31, 1998,  an
increase of $21,000 or 5%. This increase was caused  primarily by an increase in
salary and related costs for employees  hired to focus on the Company's  product
development and quality  assurance  efforts caused by the Company's  significant
increase in the development of full-release products during the six months ended
December 31, 1999 as compared to the six months ended  December 31, 1998,  which
costs were partially offset by a decrease in outside service expenses related to
various external development projects.

Selling,  general and administrative  expenses for the six months ended December
31,  1999 were  $3,581,000  compared  to  $2,299,000  for the six  months  ended
December 31, 1998,  an increase of  $1,282,000  or 56%. This increase was caused
primarily by an increase in initial marketing promotional costs incurred to gain
additional  retail shelf space at both new and existing  retail  stores,  and to
promote  the  Company's  products  in order to achieve  the 41%  increase in net
sales.  The Company  believes that these  promotional  costs will continue to be
incurred,  but may decline over time as the Company's newer retail relationships
develop  and  mature  from  a  promotional  product  launch  phase,  into a more
established and recurring  order phase.  Marketing  promotional  costs primarily
include:  slotting  fees,  in-store  ads,  mail in consumer  rebates and display
costs. Additionally,  the Company incurred increases in salary and related costs
and  operating  expenses  incurred  by  the  Company's  sales  and  distribution
operation in the United Kingdom.

Interest Expense, net

Net  interest  expense for the six months  ended  December  31, 1999 was $10,000
compared to $24,000 for the six months  ended  December  31, 1998, a decrease of
$14,000 or 58%. The primary  reason for this decrease was the reduction in notes
payable and capital lease obligations due to scheduled principal payments.

Provision for Income Taxes

Provision  for  income  taxes for the six months  ended  December  31,  1999 was
$241,000  compared to $84,000 for the six months ended  December  31,  1998,  an
increase  of  $157,000.  The  increase  in the  provision  for income  taxes was
primarily due to the increase in the year to date  effective  income tax rate to
17% for the six months ended December 31, 1999 compared to 6% for the six months
ended  December 31, 1998.  This change  reflects the  limitation  of certain net
operating loss  carryforwards  not available to offset federal and state taxable
income.

Net Income

Net income for the six months ended December 31, 1999 was $1,178,000 compared to
$1,250,000  for the six months ended December 31, 1998, a decrease of $72,000 or
6%.  This  decrease  in  profitability  resulted  primarily  from an increase in
operating  expenses  necessary to support the Company's  increased sales and the
increase in the Company's  effective income tax rate, which costs were partially
reduced by the  increase in gross  profit  derived  from the 41% increase in net
sales.


<PAGE>


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

Liquidity and Capital Resources

As of December 31, 1999,  the Company's cash and working  capital  balances were
$859,000 and $4,257,000,  respectively,  and the Company's  total  stockholders'
equity balance at December 31, 1999 was  $4,659,000.  The Company's cash balance
has decreased by $455,000 since June 30, 1999,  primarily as a result of reduced
cash  collections  from the  Company's  customers and  additional  cash payments
relating  to  promotional  activities  incurred to support the 41% growth in net
sales for the six months ended  December 31, 1999 compared to the same six month
period last fiscal year. Additionally, the Company experienced a gradual slowing
in receivable collections from one of its existing distributors during the first
six months of fiscal 2000.  Subsequent to December 31, 1999, the Company has had
discussions  with this  distributor  regarding  improvements in cash collections
from this  distributor over the remaining six months of fiscal 2000. At December
31,  1999,  this  distributor  represented  approximately  29% of the  Company's
accounts receivable.  Since December 31, 1999, the Company has received payments
from this distributor totaling approximately $685,000,  which represented 72% of
the past due  balance as of December  31,  1999 and 38% of the total  receivable
balance with this distributor as of December 31, 1999.

Net cash used in operating activities for the six months ended December 31, 1999
and 1998 were $520,000 and $112,000, respectively. The $520,000 net cash used in
operating  activities  for the six  months  ended  December  31,  1999  resulted
primarily  from  increases  in accounts  receivable  and  inventory,  which were
partially  offset by increases in the Company's net income adjusted for non-cash
depreciation and amortization expense, accounts payable and accrued expenses. As
indicated in the accompanying financial statements, the Company's net income for
the six months ended  December 31, 1999 was  $1,178,000  and the  Company's  net
income for the six months ended December 31, 1998 was $1,250,000.

Net cash used in investing activities for the six months ended December 31, 1999
and 1998 were $67,000 and $190,000,  respectively.  The $67,000 in net cash used
in investing activities for the six months ended December 31, 1999 resulted from
the  purchase  of  additional  furniture  and  equipment  needed to support  the
increase in  personnel  necessary  to  facilitate  the  continued  growth in the
Company's sales.

Net cash provided by financing  activities for the six months ended December 31,
1999 was $130,000 and net cash used in financing  activities  for the six months
ended  December 31, 1998 was $370,000.  During the six months ended December 31,
1999,  the Company  received  net  proceeds  from the  exercise of Common  Stock
options  totaling  $248,000,  and made  repayments  of notes payable and capital
lease obligations of $105,000 and $13,000,  respectively.  Additionally,  during
the six months ended December 31, 1999, the Company borrowed and repaid $250,000
under its current revolving credit facility.

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

On October 26, 1998, the Company's Board of Directors  authorized the Company to
purchase up to $1,000,000  of its shares of Common Stock in the Nasdaq  SmallCap
Market.  During the six months  ended  December  31,  1999 the  Company  did not
purchase any shares of its Common  Stock.  As of December 31, 1999,  the Company
had acquired  231,900  shares of its Common  Stock,  at an  approximate  cost of
$501,000, pursuant to its stock repurchase program.


<PAGE>


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

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

Forward-Looking Statements

This  report  contains  statements  that are  forward-looking,  as that  term is
defined  by the  Private  Securities  Litigation  Reform  Act of 1995 and by the
Securities and Exchange  Commission in rules,  regulations  and releases.  These
statements include, but are not limited to, statements regarding:  the Company's
efforts to diversify the  distribution  channels used to distribute its products
in order to diminish the Company's dependence on any one third-party distributor
or retailer and provide for more effective inventory  management,  merchandising
and  communications  with  retailers;   the  Company's   expectations  regarding
increased  product  returns  caused by the change in the Company's  distribution
relationships   as  well  as  increased   distribution   of  its  products  into
non-traditional  retail stores;  the Company's  belief that product  promotional
costs will  continue to be incurred,  but may decline over time;  the ability of
the Company's  localized  products to further  penetrate  foreign  markets;  the
sufficiency  of the  Company's  cash and  working  capital  balances to fund the
Company's  operations  in the future;  and the increase in the  Company's  gross
profit margin. All forward-looking  statements are based on current expectations
regarding  significant risk factors,  and such statements should not be regarded
as a  representation  by the  Company  or any  other  person  that  the  results
expressed in this report will be achieved.

The  following  important  factors,  among  others  discussed  elsewhere in this
report, could cause the Company's actual results to differ materially from those
indicated  by the  forward-looking  statements  contained  in this  report:  the
success of the Company's  new  distribution  strategy,  including its ability to
enter into new  distribution  and direct  sales  relationships  on  commercially
acceptable  terms;  the market  acceptance  and successful  sell-through  of the
Company's  existing  and new  products  in the United  States and  international
markets;  the allocation of adequate  shelf space for the Company's  products in
major retail chain  stores;  the  Company's  ability to 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 uncollectible  receivables;  the amount of returns of the Company's
products from  distributors and retailers and the Company's ability to establish
adequate reserves for product returns;  the continued  increase in the number of
computers  in homes in North  America  and the  world;  the  ability  to deliver
products in  response to orders  within a  commercially  acceptable  time frame;
downward  pricing  pressure;  fluctuating  costs of  developing,  producing  and
marketing the Company's  products;  the 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.  The Company does not undertake
to update any forward-looking  statement made in this report or that may be made
from time to time by or on behalf of the Company.


<PAGE>


Risk Factors

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.

Early Stage  Company;  Consumer  Entertainment  Software  Business;  Maintaining
Profitability.  The  Company  commenced  operations  in July 1992.  The  Company
experienced  significant  losses from inception  through the end of fiscal 1997.
Fiscal 1998 was the first year that the Company  earned a profit.  After earning
$463,000 and $1,253,000 in fiscal 1999 and 1998,  respectively,  the accumulated
deficit for the Company at June 30, 1999 was approximately  $6,268,000.  For the
six months ended December 31, 1999, the Company earned  $1,178,000 in net income
and the accumulated deficit was approximately $5,090,000.  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 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  from the
development,  marketing  and  distribution  of its current  and future  software
products.  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.   Other  factors  affecting  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 and successful  implementation of its 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;  Risk Of Customer  Business  Failure;
Product  Returns.  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 or 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  effect  the  Company's  business,  operating  results  and  financial
condition.

Distributors  and  retailers  in the  computer  industry  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 has a non-exclusive distribution relationship with GT Value Products
which is  terminable  by either party at any time for any reason,  and therefore
there can be no assurance that GT Value Products will continue to distribute the
Company's  products.  The  loss of GT  Value  Products  as a  distributor  or an
inability to collect  receivables  from GT Value  Products or any other  adverse
change  in the  Company's  relationship  with GT  Value  Products  would  have a
material adverse effect on the Company's business,  operating results, liquidity
and financial condition.

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


<PAGE>


Risk Factors (continued)


customer or  distributor  could have a material  adverse effect on the Company's
business,  operating results and financial  condition.  Although the Company has
established  allowances for returns that it believes are adequate,  there can be
no assurance  that actual returns will not exceed such  allowances.  The Company
may  also  accept   substantial   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 GT Value Products,  and its new  non-exclusive  distribution  relationships
with  other  distributors,  including  GT Value  Products,  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.

Highly  Competitive  Market;   Pricing  Concerns;   Rapidly  Changing  Marketing
Environment;  Competition  for Retail  Shelf  Space.  The  market  for  consumer
entertainment  software is highly competitive,  particularly at the retail shelf
level where a rapidly increasing number of software titles are competing for the
same  amount of shelf  space.  Retailers  have a limited  amount of shelf  space
relative to the number of consumer entertainment software products competing for
that space. 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.  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.

Possible Inadequacy of Protection of Trade Names; Software Technology; and Other
Proprietary  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


<PAGE>


Risk Factors (continued)

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.

The Company may from time to time be notified  that it is  infringing on certain
patent or  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.  The Company has recently  been sued for  trademark and
copyright  infringement by Hasbro  Interactive,  Inc. (the "Hasbro Action") (See
Part II, Item 1, "Legal Proceedings"). The Company intends to defend this action
vigorously.  There can be no assurance  that  additional  third parties will not
initiate  infringement  actions  against the  Company in the future.  The Hasbro
Action, as well as any other 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 advent of  litigation  arising out of any such claims,
could have a material adverse effect on the Company's operating results.

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;  the level of product and price competition;  the length of
the Company's sales cycle;  seasonality of individual  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;  the  ability of the  Company to develop and
market new  products  and control  costs;  general  domestic  and  international
economic and political conditions;  and personnel changes.  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


<PAGE>


Risk Factors (continued)

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 can be 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. For the six months ended December 31, 1999,  international
sales  represented  16% of net sales as compared to 21% of net sales for the six
months ended  December  31, 1998.  The Company  expects  international  sales to
continue  to comprise a  significant  percentage  of the  Company's  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


<PAGE>


Risk Factors (continued)

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,
shares publicly held, number of Stockholders or aggregate market value, or if it
violates  other  aspects of its listing  agreement.  At December 31,  1999,  the
Company  satisfied  the minimum  level of  Stockholders'  equity  required to be
listed ($2,000,000) and all other aspects of its listing agreement.

If the Company fails to maintain the 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.

In  addition,  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 $5.00
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

On February 9, 2000, Hasbro Interactive,  Inc., Atari Interactive, Inc., and Zao
Elorg d/b/a Elorg Corporation (collectively, the "Plaintiffs") filed suit in the
United  States  District  Court for the  District of  Massachusetts  against the
Company and Xtreme Games LLC, GT Interactive Software Corporation, MVP Software,
Inc., Webfoot Technologies,  Inc. and Varcon Systems, Inc. The suit alleges that
certain of the Company's  products  infringe  copyrights and trademarks owned by
the  Plaintiffs,  and also  alleges  that the  Company  has  engaged  in  unfair
competition.  The suit seeks 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 that
the award of costs and attorneys fees. The Company intends to defend this action
vigorously.


<PAGE>


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

The Company held its Annual Meeting of Shareholders on December 7, 1999. At that
the meeting,  the following matters were acted upon, together with the number of
votes cast for, against or withheld as to each such matter:

                                                            Votes Cast

                                                     For     Against   Abstain
                                                  -----------------------------
(i)      The election of the following directors:

         Robert M. Aiken, Jr.                     8,555,992   - 0 -     60,473
         Gerald W. Klein                          8,411,964   - 0 -    204,501
         Thomas D. Parente                        8,411,614   - 0 -    204,851
         Lambert C. Thom                          8,412,164   - 0 -    204,301


(ii)     Ratification of the appointment of KPMG LLP as the Company's auditors
         for the 2000 fiscal year:
                                                            Votes Cast

                                                     For     Against   Abstain
                                                  -----------------------------
                                                  8,527,255   60,250    28,960

         No broker non-votes were recorded for any of the matters acted upon.


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

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

         27.1                           Financial Data Schedule


(b) Reports on Form 8-K

On January 21, 2000,  the Company  filed a report on Form 8-K  regarding a press
release  announcing the Company's  unaudited  results for the second quarter and
six months ended December 31, 1999.

On February 10, 2000,  the Company  filed a report on Form 8-K regarding a press
release  announcing  that Hasbro  Interactive,  Inc.  has filed suit against the
Company and  several  other  defendants  in the U.S.  District  Court in Boston,
Massachusetts alleging that the Company, among other parties, infringed Hasbro's
copyrights and trademarks in the production of certain games




<PAGE>


                                   SIGNATURES



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



                                  eGames, Inc.
                                  (Registrant)




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


Date: February 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
    -----------              ----------------------              -----------

       27.1                  Financial Data Schedule                 23