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

                                  FORM 10-QSB/A

(Mark One)

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

                 For the quarterly period ended March 31, 2001

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

                         Commission File Number 0-27102

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

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

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

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

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

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

                                Yes ( X ) No ( )

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

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

                                 Yes ( ) No ( )

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 9,989,337 shares of common stock, no
par value per share, as of May 11, 2001.

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


<PAGE>


                                EXPLANATORY NOTE

eGames, Inc. (the "Company") is amending its Form 10-QSB to restate its interim
financial statements for the three and nine month periods ended and as of March
31, 2001, and has revised its interim financial statements for the three and
nine month periods ended March 31, 2000 for comparative purposes, to address
certain revenue recognition issues. The Company has concluded, based upon
receipt of delayed reporting of sell-through results from its food and drug
retailers, that it does not have the ability to make reliable estimates of
product returns for shipments to food and drug retailers in accordance with SFAS
No. 48, "Revenue Recognition When the Right of Return Exists," and the
additional guidance provided in the SEC's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." This Form 10-QSB/A reflects the
sale of the Company's products to its food and drug retailers on a product
sell-through basis to the end consumer. The Company previously recognized
revenue upon shipment of its products to its customers and recorded an allowance
for product returns at the time of shipment. The revenues, product costs and
royalty costs relating to product shipments to food and drug retailers have been
restated in this Form 10-QSB/A to reflect this change in revenue recognition
policy for shipments to food and drug retailers. In addition, net sales
associated with product shipments to customers that traditionally have sold PC
software products are recognized at the time that title passes to the customer.
Such net sales have been restated in this Form 10-QSB/A because the Company
determined in fiscal 2001 that certain of such product sales provided that title
passed to the customer only upon receipt of the Company's product by the
customer, and that, therefore, net sales could only be recognized upon the
customer's receipt of such product shipments.

This Form 10-QSB/A includes changes to the (i) Financial Statements and (ii)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.


                                      INDEX

                                                                         Page
                                                                         ----
Part I.      Financial Information

Item 1.      Financial Statements:

             Consolidated Balance Sheet as of March 31, 2001...........    3

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

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

             Notes to Consolidated Financial Statements................   6-10

Item 2.      Management's Discussion and Analysis of Financial
                 Condition and Results of Operations ..................  11-20

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




<PAGE>


Item 1.  Financial Statements

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

                                                                       As of
                                                                     March 31,
ASSETS                                                                  2001
------                                                              ------------
<S>                                                                 <C>
Current assets:
   Cash and cash equivalents                                        $   115,981
   Accounts receivable, net of allowances totaling $1,601,560         2,554,488
   Inventory                                                          3,741,945
   Prepaid royalties and other expenses                                 525,700
   Net current assets of discontinued operation                         169,021
                                                                    -----------
          Total current assets                                        7,107,135

Furniture and equipment, net                                            180,188
Intangibles and other assets, net                                        44,781
Net long term assets of discontinued operation                          206,296
                                                                    -----------
          Total assets                                              $ 7,538,400
                                                                    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
   Note payable                                                     $    60,616
   Accounts payable                                                   2,367,649
   Customer advance payments                                          1,576,670
   Revolving credit facility                                          1,000,000
   Accrued expenses                                                   1,048,695
   Capital lease obligations                                            206,607
                                                                    -----------
          Total current liabilities                                   6,260,237

Note payable, net of current portion                                     73,564
                                                                    -----------
          Total liabilities                                           6,333,801

Stockholders' equity:
   Common stock, no par value (40,000,000 shares authorized;
         9,981,875 issued and 9,749,975 outstanding)                  9,134,234
   Additional paid-in capital                                         1,155,479
   Accumulated deficit                                               (8,509,708)
   Treasury stock, at cost - 231,900 shares                            (501,417)
   Accumulated other comprehensive loss                                 (73,989)
                                                                    -----------
          Total stockholders' equity                                  1,204,599
                                                                    -----------
          Total liabilities and stockholders' equity                $ 7,538,400
                                                                    ===========
</TABLE>




        See accompanying notes to the consolidated financial statements.


<PAGE>


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

                                                      Three months ended                Nine months ended
                                                           March 31,                        March 31,
                                                  --------------------------       --------------------------
                                                      2001           2000              2001           2000
                                                  -----------    -----------       --------------------------
<S>                                               <C>            <C>               <C>            <C>
Net sales                                         $ 2,691,479    $ 2,326,311       $ 6,426,806    $ 7,979,247

Cost of sales                                       1,721,775        926,776         3,885,967      3,190,551
                                                  -----------    -----------       -----------    -----------

Gross profit                                          969,704      1,399,535         2,540,839      4,788,696

Operating expenses:
    Product development                               194,973        201,479           552,445        665,071
    Selling, general and administrative             1,435,967      1,240,211         4,424,350      4,118,565
                                                  -----------    -----------       -----------    -----------
        Total operating expenses                    1,630,940      1,441,690         4,976,795      4,783,636
                                                  -----------    -----------       -----------    -----------

Operating income (loss)                              (661,236)       (42,155)       (2,435,956)         5,060

Interest expense, net                                  33,376          1,703            64,099         11,610
                                                  -----------    -----------       -----------    -----------

Income (loss) from continuing
operations before income taxes                      (694,612)        (43,858)       (2,500,055)        (6,550)

Provision (benefit) for income taxes                  (27,307)      (149,793)          (39,099)        95,207
                                                  -----------    -----------       -----------    -----------

Loss from continuing operations                    (667,305)         105,935        (2,460,956)      (101,757)

Discontinued operation (Note 4):
Income (loss) from discontinued operation,
net of income tax provision (benefit) for
three months of $312 and ($13,312), and for
nine months of ($19,356) and ($16,911)               (100,822)        67,667           (33,166)       228,374
                                                  -----------    -----------       -----------    -----------

Net Income (loss)                                 ($  768,127)   $   173,602       ($2,494,122)   $   126,617
                                                  ===========    ===========       ===========    ===========

Net Income (loss) per common share:
       - Basic                                    ($     0.08)   $      0.02       ($     0.26)   $      0.01
                                                  ============   ===========       ===========    ===========
       - Diluted                                  ($     0.08)   $      0.02       ($     0.26)   $      0.01
                                                  ===========    ===========       ===========    ===========

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

Dilutive effect of common stock equivalents             - 0 -         50,744             - 0 -        422,848
                                                  -----------    -----------       -----------    -----------
Weighted average common shares
     outstanding - Diluted                          9,749,975      9,796,564         9,749,975     10,115,274
                                                  ===========    ===========       ===========    ===========

</TABLE>
        See accompanying notes to the consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>
                                                                        Nine months ended
                                                                             March 31,
                                                                   --------------------------
                                                                       2001          2000
                                                                   -----------    -----------
<S>                                                                <C>            <C>
Cash flows from operating activities:
    Net Income (loss)                                              ($2,494,122)   $   126,617
    Adjustment to reconcile net income (loss) to net cash
         used in operating activities:
    Depreciation, amortization and other non-cash items                176,912        251,981
    (Income) loss from discontinued operation                           33,166       (228,374)
    Changes in items affecting operations:
             Restricted cash                                             - 0 -         17,560
             Accounts receivable                                      (253,866)      (734,448)
             Prepaid royalties and other expenses                     (318,070)      (172,763)
             Inventory                                              (1,364,180)      (990,885)
             Accounts payable                                          378,863        642,110
             Customer advance payments                               1,576,670          - 0 -
             Accrued expenses                                          339,469         57,314
                                                                   -----------    -----------
Net cash used in operating activities                               (1,925,158)    (1,030,888)
                                                                   -----------    -----------

Cash flows from investing activities:
    Purchase of furniture and equipment                                (37,916)      (172,388)
    Purchase of software rights and other assets                        (4,980)       (16,225)
                                                                   -----------    -----------
Net cash used in investing activities                                  (42,896)      (188,613)
                                                                   -----------    -----------

Cash flows from financing activities:
    Proceeds from exercise of warrants and options                       - 0 -        259,345
    Proceeds from borrowings under revolving credit facility         3,650,000        750,000
    Repayments of borrowings under revolving credit facility        (2,650,000)      (250,000)
    Repayments of convertible subordinated debt                       (150,000)         - 0 -
    Repayments of note payable                                         (40,641)       (37,118)
    Repayments of capital lease obligations                            (82,324)        (4,252)
                                                                   -----------    -----------
Net cash provided by financing activities                              727,035        717,975

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

Net cash provided by (used in) discontinued operation                  229,921       (211,935)
                                                                   -----------    -----------
Net decrease in cash and cash equivalents                           (1,023,197)      (712,562)

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

Supplemental cash flow information:

Cash paid for interest                                             $    76,458    $    20,722
                                                                   ===========    ===========
Cash paid for income taxes                                         $     - 0 -    $   236,000
                                                                   ===========    ===========
Non cash investing and financing activities:

    Acquisition of furniture, equipment and other current assets
         through capital leases                                    $   298,921    $     - 0 -
                                                                   ===========    ===========

</TABLE>
        See accompanying notes to the consolidated financial statements.


<PAGE>


eGames, Inc.

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The Notes to Consolidated Financial Statements included in
the Company's Form 10-KSB for the fiscal year ended June 30, 2000 should be read
in conjunction with the accompanying statements. These statements include all
adjustments the Company believes are necessary for a fair presentation of the
statements. The interim operating results are not necessarily indicative of the
results for a full year.

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

Description of Business

eGames, Inc. (the "Company"), a Pennsylvania corporation incorporated in July
1992, develops, publishes, markets and sells a diversified line of personal
computer software primarily for consumer entertainment. The Company targets the
growing market of home personal computer ("PC") users who value full-featured,
value-priced and easy-to-use entertainment software. The Company's sales are
made through various national distributors on a non-exclusive basis in addition
to direct relationships with 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 previously wholly-owned subsidiary, which due to the sale of this operation
in May 2001, the relevant balances and transactions have been presented as a
discontinued operation. All inter-company balances and transactions have been
eliminated.

Revenue Recognition

Product Sales:
--------------

The Company previously recognized revenue upon shipment of its products to its
customers and recorded an allowance for product returns. The Company has
concluded, based upon receipt of delayed reporting of sell-through results from
its food and drug retailers, which have not historically sold consumer PC
software products, that the Company does not have the ability to make reliable
estimates of product returns for shipments to food and drug retailers in
accordance with SFAS No. 48, "Revenue Recognition When the Right of Return
Exists" and the additional guidance provided in the SEC's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". Accordingly,
the Company's revenues in fiscal 2001 and 2000 associated with product shipments
to food and drug retailers are recognized based on the timing of the actual
sell-through of the Company's products to the end consumer at the retail
location as reported to the Company from the respective food and drug retailer.

Revenues associated with the Company's product shipments to its customers that
traditionally have sold consumer PC software products (i.e., mass merchant
retailers or distributors serving such retailers) are recognized at the time
title to the inventory passes to these customers, less a historically based
provision for anticipated product returns. The Company determined in fiscal 2001
that certain of its product sales to these customers provided that title passed
to the customer only upon receipt of the Company's product by the customer and
that, therefore, net sales could only be recognized upon the customer's receipt
of such product shipments. Title passes to these customers either upon shipment
of the product or receipt of the product by these customers based on the terms
of the sale transaction.


<PAGE>


Notes to Consolidated Financial Statements (continued)


Customers generally have the right to return products purchased from the
Company. The Company recognizes product sales to its customers who traditionally
have sold consumer PC software products, in accordance with the criteria of SFAS
No. 48, at the time of the sale based on the following: the selling price is
fixed at the date of sale, the buyer is obligated to pay the Company, title of
the product transfers to the buyer, the buyer has economic substance apart from
the Company, the Company does not have further obligations to assist the buyer
in the resale of the product and the returns can be reasonably estimated at the
time of sale. While the Company has no other obligations to perform future
services subsequent to shipment, the Company provides telephone customer support
as an accommodation to purchasers of its products and as a means of fostering
customer loyalty. Costs associated with this effort are insignificant and,
accordingly, are expensed as incurred.

Allowance For Product Returns and Price Markdowns:
--------------------------------------------------

The Company distributes the majority of its products through several third-party
distributors and directly to national and regional retailers. The distribution
of these products is governed by distribution agreements, direct sale agreements
or purchase orders, which generally allow for product returns and price
markdowns. For shipments to its customers that have traditionally sold consumer
PC software products, the Company records an allowance for returns and markdowns
as a reduction of gross sales at the time title of the products pass to the
customer. This allowance, which is reflected as a reduction of accounts
receivable, is estimated based primarily upon historical experience. During the
quarters ended March 31, 2001 and 2000, the Company's provisions for product
returns and price markdowns for customers that have traditionally sold consumer
PC software products were approximately $382,000 and $373,000 or 24% and 16% of
related gross shipments, respectively. During the nine months ended March 31,
2001 and 2000, the Company's provisions for product returns and price markdowns
for customers that have traditionally sold consumer PC software products were
approximately $1,469,000 and $1,414,000 or 30% and 16% of related gross
shipments, respectively.

Customer Advance Payments

Although the Company recognizes revenue from food and drug retailers based on
the timing of the actual sell-through of the Company's products to the end
consumer, the Company may receive payments from these food and drug retailers in
advance of such products being sold to the end consumer. These payments are
recorded as customer advance payments in the Company's Consolidated Balance
Sheet until such time as the products are actually sold through to the end
consumer. After the products are sold through to the end consumer, the customer
advance payment amount is recorded as revenue. In the event that the Company
receives customer advance payments that ultimately exceed the actual product
sell-through of the Company's products to the end consumer at such retailers,
the Company would owe these retailers such excess amounts.

Prepaid Royalties

Prepaid royalties represent advance payments made to licensors of software and
intellectual properties used in the Company's products. Prepaid royalties are
expensed at contractual royalty rates based on net product sales.

Marketing and Sales Incentive Costs

Marketing costs for which the Company pays its resellers, such as slotting and
advertising fees, are charged to expense as incurred and were approximately
$295,000 and $186,000 for the quarters ended March 31, 2001 and 2000,
respectively and were approximately $1,067,000 and $790,000 for the nine months
ended March 31, 2001 and 2000, respectively.

Sales incentive costs, such as rebates and coupons, that the Company offers to
the retail consumer are recorded as reductions to net sales as incurred and were
approximately $172,000 and $149,000 for the quarters ended March 31, 2001 and
2000, respectively and were approximately $485,000 and $511,000 for the nine
months ended March 31, 2001 and 2000, respectively.


<PAGE>


Notes to Consolidated Financial Statements (continued)


Permanent Racking and Fixture Costs

The Company has included the costs of all long-term racking and fixtures already
shipped to retail stores for use in its Store-In-A-Store ("SIAS") program within
the Balance Sheet classification of "Prepaid royalties and other expenses". The
Company expenses these costs over a one-year period from the date the racks are
placed into use at retail locations. As of March 31, 2001, the Company had
$109,000 of these costs reflected in the "Prepaid royalties and other expenses"
section of its Balance Sheet. Any costs relating to permanent racking and
fixtures not yet in use at retail locations are classified in the inventory
section of the Company's Balance Sheet, and as of March 31, 2001 these costs
amounted to $167,000.

New Accounting Pronouncements

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

Additionally, the Company has evaluated its revenue recognition policies based
upon Staff Accounting Bulletin 101 "Revenue Recognition" and related amendments
and interpretations. Accordingly, the Company determined it should recognize
revenues for fiscal 2001 and 2000 associated with product shipments to food and
drug retailers based on the timing of the actual product sell-through activity
to the end consumer of the Company's products at these retail locations and not
at the time the Company ships its products to these food and drug retailers. The
Company made this decision following its determination that it was not able to
adequately estimate, at time of product shipment, the amount of product returns
for product shipments to food and drug retailers. Revenues associated with the
Company's product shipments to its customers that traditionally have sold
consumer PC software products (such as mass-merchant retailers, or distributors
servicing such retailers) are recognized at the time title to these products
passes to these customers, less a historically-based provision for anticipated
product returns.

The Company is currently evaluating the potential impact of Emerging Issues Task
Force ("EITF") 00-10 "Accounting for Shipping and Handling Fees and Costs". This
pronouncement will become effective by the Company's fourth quarter of fiscal
2001. The Company does not expect the adoption of EITF 00-10 to have a
significant impact on its results of operations, financial position or cash
flows.

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:

<TABLE>
<CAPTION>
                                                  Three Months Ended              Nine Months Ended
                                                       March 31,                      March 31,
                                               ------------------------      -------------------------
                                                  2001            2000           2001           2000
                                               ----------    ----------      -----------    ----------
<S>                                             <C>          <C>             <C>            <C>
Net income (loss)                               ($768,127)   $  173,602      ($2,494,122)   $  126,617
Other comprehensive income (loss):
   Foreign currency translation adjustment        (18,856)       (8,649)          (4,791)        1,402
                                               ----------    ----------      ------------   ----------
Comprehensive income (loss)                     ($786,983)   $  164,953      ($2,498,913)   $  128,019
                                               ==========    ==========      ===========    ==========
</TABLE>





<PAGE>


Notes to Consolidated Financial Statements (continued)

3.  Delisting of Common Stock

On November 10, 2000, the Company received notification from Nasdaq that its
common stock had failed to maintain a minimum bid price of $1.00 over a period
of 30 consecutive trading days as required for continued listing on the Nasdaq
SmallCap Market as set forth in Marketplace Rule 4310 (c) (4) (the "Rule"). In
accordance with Marketplace Rule 4310 (c) (8) (B), the Company had 90 calendar
days, or until February 8, 2001, to regain compliance with this Rule. On
February 7, 2001, the Company requested a hearing before a Nasdaq Listing
Qualifications Panel, which stayed the delisting of the Company's common stock
from the Nasdaq SmallCap Market pending the Panel's decision. The Company's
hearing had been scheduled for March 23, 2001. The Company did not attend the
scheduled hearing because management did not believe that it had sufficient
evidence to present to the hearing board, as of March 23rd, that would have
caused them to further stay the Company's de-listing. Accordingly, effective
April 2, 2001, the Company's common stock began trading on the OTC Bulletin
Board under its existing symbol EGAM. The Company's common stock had traded on
the Nasdaq SmallCap Market since October 1995.

4.  Discontinued Operation

On May 11, 2001, the Company sold eGames Europe Limited, its wholly-owned
subsidiary located in the United Kingdom, to a non-related third-party. The
Company has reflected the relevant activity and account balances for this
operation as a discontinued operation within each of the respective financial
statements included in this report. The Company received $300,000 in net
proceeds, which approximated the discontinued operation's net book value. The
net proceeds consisted of: $150,000 in cash provided at closing, $120,000 in a
note receivable to be payable in twelve monthly payments of $10,000 each, and
$30,000 in cash held in escrow to be released to the Company, pending any
unresolved claims, six months following the closing of the sale. The amounts in
the accompanying consolidated financial statements and footnotes have been
reclassified for all periods presented to give effect to the discontinued
operation.

Net sales for the discontinued operation for the quarters ended March 31, 2001
and 2000 were approximately $373,000 and $568,000, respectively and for the nine
months ended March 31, 2001 and 2000 were $1,732,000 and $1,757,000,
respectively.

Net income (loss) from the discontinued operation was approximately ($101,000)
and $68,000 for the quarters ended March 31, 2001 and 2000, respectively, which
amounts were net of income tax benefits of approximately zero and $13,000,
respectively. Net income (loss) from the discontinued operation was
approximately ($33,000) and $228,000 for the nine months ended March 31, 2001
and 2000, respectively, which amounts were net of income tax benefits of
approximately $19,000 and $17,000, respectively.

Included in the Company's Consolidated Balance Sheet for March 31, 2001, were
net current assets of discontinued operation totaling approximately $169,000,
primarily comprised of accounts receivable, which was partially offset by
accounts payable and accrued expenses. Additionally, in the Company's
Consolidated Balance Sheet for March 31, 2001 were net long term assets of
discontinued operation totaling approximately $206,000, primarily comprised of
un-amortized goodwill related to the prior acquisition of this discontinued
operation during fiscal 1999 and certain furniture and equipment costs.

5.  Operations by Reportable Segments

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

Based on the Company's organizational structure and its presentation of the
discontinued operation, the Company operates in only one reportable segment,
which is publishing interactive entertainment software for personal computers.



<PAGE>



Notes to Consolidated Financial Statements (continued)

6.  Revolving Credit Facility

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

As of March 31, 2001, the Company was not in compliance with these covenants.
The bank has waived the Company's non-compliance with these covenants at March
31, 2001. The Company believes that it will continue to be in non-compliance
with the already identified covenants through June 30, 2001 and is currently
working with its bank on a mutually agreeable resolution to the non-compliance
issue. As of May 11, 2001, the Company had a $1,000,000 outstanding balance
under this credit facility and has not been notified that it does not continue
to have full access to the remaining balance available under this $2,000,000
credit facility.

7.  Liquidity

The Company's ability to achieve and maintain positive cash flow depends upon a
variety of factors, including the timeliness and success of the collection of
outstanding accounts receivable; the timeliness of product returns and the
Company's ability to resell such products after return; the creditworthiness of
the primary distributors and retail customers of the Company's products; the
continuing retail demand for value-priced PC game software; the development and
sell-through of the Company's products, the costs of developing, producing and
marketing such products; and various other factors, many of which are beyond the
Company's control. In the future, the Company expects its cash and working
capital requirements to be affected by each of these factors. However, there can
be no assurances that the Company will be able to achieve and maintain a
positive cash flow or that additional financing will be available if and when
required or, if available, will be on terms satisfactory to the Company.
Additionally, if the Company continues to be in non-compliance with the
covenants under its revolving credit facility, there can be no assurance that
the bank will continue to grant waivers to the Company for these deficiencies
and could choose to demand payment on the outstanding balance of this credit
facility at anytime, which the Company may not be able to satisfy due to lack of
available funds.



<PAGE>


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

The accompanying consolidated financial statements as of March 31, 2001 include
the accounts of eGames, Inc. (the "Company") and its previously wholly-owned
subsidiary that is presented as a discontinued operation. Dollar amounts
discussed within the Company's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" have been rounded to the nearest
thousand ('000).

Forward-Looking Statements

This Quarterly Report on Form 10-QSB/A 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 Company's intent to
continue working towards increasing sales to promotional customers by marketing
its "Branded Browser" concept to retailers, the promotional industry and
national brand manufacturers; the level of the Company's international net sales
remaining at between 5 % and 10% of the Company's consolidated net sales for the
remainder of fiscal 2001; the transition of the Company's international product
distribution to a licensing model, and the ability of this new model to earn a
royalty for the Company; the Company's efforts to increase distribution of its
products via the Internet; the Company's intention to reduce the use of outside
professional service vendors in order to continue to cut future operating
expenses; the Company's efforts to work towards improving gross profit margins
in the Store-in-a-Store program by entering into licensing and replication
arrangements with third-party publishers; the Company's belief that it will
continue to realize lower gross profits margins during the remainder of fiscal
2001 due to the continued purchase of third-party publisher finished goods for
the Store-in-a-Store program; the possibility of customer advance payments
exceeding the actual product sell-through at retail stores, and the resulting
requirement that the Company be required to repay these retailers; 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 to,
or received by, a customer that has traditionally sold PC software; 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 sell its "Branded Browser" concept to retailers, national
brand manufacturers and/or promotional customers on commercially viable terms;
the Company's ability to reduce outside professional vendors costs; the success
of the Company's international product distribution to earn a royalty for the
Company and the ability of licensors to pay the Company such royalties; the
Company's ability to enter into licensing arrangements with third-party software
publishers on commercially viable terms; the likelihood of licensing
arrangements with third-party software publishers resulting in higher gross
profit margins; 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
collect outstanding accounts receivable and establish adequate reserves for
un-collectible receivables; increased selling, general and administrative costs,

<PAGE>


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

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" 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.

Results of Operations

Three Months Ended March 31, 2001 and 2000

Net Sales

Net sales for the quarter ended March 31, 2001 were $2,691,000 compared to
$2,326,000 for the quarter ended March 31, 2000, representing an increase of
$365,000 or 16%. The $365,000 increase in net sales was primarily attributable
to the Company's net sales increase to North American food and drug retailers of
$953,000 and its $225,000 net sales increase to promotional customers. These
increases were partially offset by the decrease in the Company's net sales to
North American traditional software distributors and retailers of $709,000 and
the Company's decrease in net sales to international customers of $104,000.

The $709,000 decrease in the Company's net sales to North American traditional
software distributors and retailers resulted in large part from industry-wide
reductions of PC software inventory levels held by North American software
retailers and distributors. Market factors that negatively affected net sales to
the North American traditional consumer software retailers included:
distribution partners reducing their inventories by decreasing their
replenishment orders for the Company's products; increased competition in the
value-priced segment of the consumer software marketplace as several major
software publishers continued to offer price discounts on previously
higher-priced products; overall slower sales of PC game software in traditional
retail software channels; and, certain office superstores reducing their
selection of value-priced consumer software products.

The Company's net sales to North American food and drug retailers increased by
$953,000 compared to the same quarter a year ago. During fiscal 2001, the
Company has continued to increase its distribution efforts to North American
food and drug retailers, in an attempt to offset some of the previously
discussed net sales decreases to its North American traditional software retail
and distribution customers. During fiscal 2001, the Company established its
first "Store-in-a-Store" entertainment software display sections in
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 help secure longer-term placement of
the Company's products in this retail channel, with the goal of increasing
product sell through volume at these food and drug retailers while decreasing
the rate of product returns due to longer product exposure on the retailers'
product shelves.

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

The Company's international net revenues, inclusive of both product net sales
and royalty revenues, for the quarter ended March 31, 2001 decreased by $104,000
compared to the same period a year ago. As a percentage of net sales, the
Company's international net revenues represented approximately 3% and 8% of the
Company's net sales for the quarters ended March 31, 2001 and 2000,
respectively. The Company anticipates that international net revenues will range
from 5% to 10% of the Company's consolidated net sales for the remainder of
fiscal 2001.


<PAGE>


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

On May 11, 2001, the Company sold its wholly-owned subsidiary "eGames Europe
Limited", located in the United Kingdom, to a non-related third-party. By
affecting this sale, the Company transitioned the majority of its international
product distribution efforts to a licensing revenue model, whereby the Company
no longer bears the working capital risk of supporting these multi-country
product sales efforts, but will earn a royalty fee based upon net product sales
covered under various licensing arrangements with third-party developers. The
Company has presented the net sales activity for this operation as a
discontinued operation within the Company's Consolidated Statements of
Operations. Net sales for the discontinued operation for the quarters ended
March 31, 2001 and 2000 were $373,000 and $568,000, respectively.

The Company has continued to implement programs designed to increase sales of
its products over the Internet, including: entering into cross-promotional
agreements with larger, high-profile companies to offer coupons for discounts
for the Company's products on websites and in newsletters; continual
improvements and updates to its website and electronic distribution
capabilities; and incorporation of optional, user-friendly on-line functionality
into its products. The Company's net sales of its products via the Internet for
the quarter ended March 31, 2001 decreased by approximately $16,000 compared to
a year ago. As a percentage of net sales, the Company's net sales of its
products via the Internet represented approximately 2% and 3% of the Company's
net sales for the quarters ended March 31, 2001 and 2000, respectively.

Most of the Company's non-exclusive arrangements with its traditional software
distributors and retailers allow for product returns or price markdowns. During
the quarters ended March 31, 2001 and 2000, the Company's provisions for product
returns and price markdowns relating to product shipments to retail customers
where software has traditionally been sold totaled $382,000 and $373,000, or 24%
and 16% of related gross shipments, respectively.

Although the Company has experienced an increase in product shipments to food
and drug retailers, the majority of these product shipments have been
"promotional" in nature, meaning that the Company's products were merchandised
in those retail stores for only six to eight weeks. As a result of this short
promotional period, the Company has experienced a higher and more unpredictable
rate of product returns from food and drug retailers compared to product return
rates from traditional software retailers and distributors where the Company's
products typically have a longer period of time to sell through to end
consumers.

Cost of Sales

Cost of sales for the quarter ended March 31, 2001 were $1,722,000 compared to
$927,000 for the quarter ended March 31, 2000, representing an increase of
$795,000 or 86%. This $795,000 increase in cost of sales was caused primarily by
increases in: product costs related to sales of lower margin third-party
publisher titles of $365,000, product costs for sales of lower margin customized
PC software titles of $165,000, royalty fees of $116,000, reclamation costs of
$57,000 and freight costs of $52,000. The product costs related to sales of
third-party publisher software titles usually have a higher per unit cost to
acquire than software titles published by the Company. In general, the cost for
the Company to acquire software content has continued to rise as the competition
to obtain higher quality entertainment software has driven these costs up.
Product costs consist mainly of replicated compact discs, printed materials,
protective jewel cases and boxes for certain products.

Gross Profit Margin

The Company's gross profit margin for the quarter ended March 31, 2001 decreased
to 36.0% of net sales from 60.0% of net sales for the quarter ended March 31,
2000. This 24.0% decrease in gross profit margin was caused primarily by
increases, as a percentage of net sales, of: 13.5% in product costs related to
sales of lower margin third-party publisher software titles, 6.1% in product
costs for sales of lower margin customized PC software titles, and 5.8% in
distribution, packaging and reclamation costs. These decreases to the Company's
gross profit margin were partially offset by a 2.0% decrease in the product
costs associated with the sales of Company-published software titles.


<PAGE>


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

The increase in distribution, packaging and reclamation costs was largely
associated with increased distribution efforts to support: the Company's sales
to food and drug retailers as part of its Store-In-A-Store distribution strategy
and more complicated store level distribution requirements by certain direct
retail customers. In general, the cost for the Company to acquire software
content has continued to rise as the competition to obtain higher quality
entertainment software has increased these costs.

Operating Expenses

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

Selling, general and administrative expenses for the quarter ended March 31,
2001 were $1,436,000 compared to $1,240,000 for the quarter ended March 31,
2000, an increase of $196,000 or 16%. This $196,000 increase in selling, general
and administrative expenses was caused primarily by increases in salary related
costs, litigation costs and marketing promotional costs of $130,000, $110,000
and $109,000, respectively, which increases were partially offset by decreases
in public corporation expenses, consultant expenses, and depreciation and
amortization expenses of $72,000, $56,000 and $32,000, respectively. The
$130,000 increase in salary related costs was primarily related to a $103,000
bonus expense reversal, which occurred in the prior year's quarter and to a
$27,000 increase in the current year's quarter's commissions paid to independent
sales representatives.

In January 2001, the Company effected a 25% reduction in its workforce in order
to save an estimated $150,000 in salary and related expenses per quarter. As
part of this reduction, the Company incurred approximately $35,000 in severance
costs, all of which were paid by March 31, 2001. The Company is also reducing
its utilization of outside professional service vendors in order to continue to
cut operating expenses going forward.

Interest Expense, Net

Net interest expense for the quarter ended March 31, 2001 was $33,000 compared
to approximately $2,000 for the quarter ended March 31, 2000, an increase of
$31,000. The $31,000 increase was primarily due to the increased utilization of
the revolving credit facility for the quarter ended March 31, 2001 compared to
the same period a year earlier.

Benefit for Income Taxes

Benefit for income taxes for the quarter ended March 31, 2001 was $27,000
compared to a benefit for income taxes of $150,000 for the quarter ended March
31, 2000, a decrease of $123,000. This $123,000 decrease in the benefit for
income taxes was primarily due to the impact of the Company's estimate of its
taxable income for the fiscal year.

Loss from Continuing Operations

As a result of the various factors discussed above, the Company recognized a
$667,000 loss from continuing operations for the quarter ended March 31, 2001,
compared to $106,000 in income from continuing operations for the quarter ended
March 31, 2000, an increase of $773,000 in losses from continuing operations.

Income (Loss) from Discontinued Operation

(Loss) from discontinued operation for the quarter ended March 31, 2001 was
($101,000), net of a minimal income tax provision, compared to income from
discontinued operation for the quarter ended March 31, 2000 of $68,000, net of a
$13,000 income tax benefit, resulting in a $169,000 decrease in income from
discontinued operation. This $169,000 decrease in income from discontinued
operation was caused primarily by a $128,000 decrease in gross profit in
addition to increases in operating expenses and provision for income taxes of
$25,000 and $13,000, respectively.


<PAGE>


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

Net Income (loss)

As a result of the factors discussed above, net (loss) increased to ($768,000)
for the quarter ended March 31, 2001 from net income of $174,000 for the quarter
ended March 31, 2000, an increase in net loss of $942,000.

Weighted Average Common Shares

The weighted average common shares outstanding on a diluted basis decreased by
46,589 for the quarter ended March 31, 2001 to 9,749,975 from 9,796,564 for the
quarter ended March 31, 2000. This 46,589 decrease in weighted average common
shares outstanding was caused primarily by a decrease in common stock
equivalents resulting from the Company's recording of a net loss for the quarter
ended March 31, 2001. Such common stock equivalents were excluded from the
diluted shares calculation, because their inclusion would have had an
anti-dilutive effect.

Results of Operations

Nine Months Ended March 31, 2001 and 2000

Net Sales

Net sales for the nine months ended March 31, 2001 were approximately $6,427,000
compared to $7,979,000 for the nine months ended March 31, 2000, representing a
decrease of approximately $1,552,000 or 19%. The $1,552,000 decrease in net
sales was primarily attributable to a decrease in net sales to the Company's
North American traditional software distributors and retailers of $3,424,000 and
to international customers of $62,000, which net sales decreases were partially
offset by increases in net sales to North American food and drug retailers of
$1,709,000 and promotional customers of $225,000.

The $3,424,000 decrease in net sales to North American traditional software
distributors and retailers resulted primarily from industry-wide reductions of
PC software inventory levels held by North American software retailers and
distributors. Market factors that negatively affected net sales to the North
American traditional consumer software retailers included: distribution partners
reducing their inventories by decreasing their replenishment orders for the
Company's products; increased competition in the value-priced segment of the
consumer software marketplace as several major software publishers initiated
price cuts on previously higher-priced products and overall slower sales of PC
game software in traditional retail software channels; and, certain office
superstores reducing their selection of value-priced consumer software products.

The Company's net sales to North American food and drug retailers increased by
$1,709,000 compared to the same period a year ago. During fiscal 2001, the
Company has continued to increase its distribution efforts to North American
food and drug retailers, in an attempt to offset some of the previously
discussed net sales decreases to its North American traditional software retail
and distribution customers.

The Company's international net revenues, inclusive of both product net sales
and royalty revenues, for the nine months ended March 31, 2001 decreased by
approximately $62,000 compared to the same period a year ago. As a percentage of
net sales, the Company's international net revenues represented approximately 5%
of the Company's net sales for the nine months ended March 31, 2001 and 2000,
respectively.

On May 11, 2001, the Company sold its wholly-owned subsidiary "eGames Europe
Limited", located in the United Kingdom, to a non-related third-party. By
affecting this sale, the Company transitioned the majority of its international
product distribution efforts to a licensing revenue model, whereby the Company
no longer bears the working capital risk of supporting these multi-country
product sales efforts, but will earn a royalty fee based upon net product sales
covered under various licensing arrangements with third-party developers. The
Company has presented the net sales activity for this operation as a
discontinued operation within the Company's Consolidated Statements of
Operations. Net sales for the discontinued operation for the nine months ended
March 31, 2001 and 2000 were $1,732,000 and $1,757,000, respectively.


<PAGE>


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

The Company's net sales of its products via the Internet for the nine months
ended March 31, 2001 remained at the same level compared to a year earlier. As a
percentage of net sales, the Company's net sales of its products via the
Internet represented approximately 2% and 1% of the Company's net sales for the
nine months ended March 31, 2001 and 2000, respectively.

Most of the Company's non-exclusive arrangements with its traditional software
distributors and retailers allow for product returns or price markdowns. During
the nine months ended March 31, 2001 and 2000, the Company's provisions for
product returns and price markdowns relating to product shipments to its
traditional software customers totaled approximately $1,469,000 and $1,414,000,
or 30% and 16% of related gross shipments, respectively. This $55,000 increase
in the provision for product returns and price markdowns relating to product
shipments to its traditional software customers was primarily associated with
the Company's office superstore customers that returned products in connection
with their transition away from value-priced casual gaming software titles.

Cost of Sales

Cost of sales for the nine months ended March 31, 2001 were approximately
$3,886,000 compared to approximately $3,191,000 for the nine months ended March
31, 2000, representing an increase of approximately $695,000 or 22%. This
$695,000 increase in cost of sales was caused primarily by increases in product
costs associated with increased sales of lower margin third-party publisher
software titles of $576,000 and sales of lower margin customized PC software
titles of $165,000. Additionally, other cost of sales increase included:
provision for inventory obsolescence of $146,000, reclamation costs of $107,000
and freight costs of $104,000. These cost of sales increases were partially
offset by a $438,000 decrease in product costs associated with decreased sales
of Company-published software titles.

Gross Profit Margin

The Company's gross profit margin for the nine months ended March 31, 2001
decreased to 39.5% of net sales from 60.0% of net sales for the nine months
ended March 31, 2000. This 20.5% decrease in gross profit margin was caused
primarily by increases in product costs associated with the sales of third-party
publisher software titles and sales of customized PC software titles, as a
percentage of net sales, of 9.0% and 2.6%, respectively. The Company earns
smaller profit margins on third-party publisher software titles and customized
PC software titles than on PC software titles that the Company has traditionally
published. Additionally, other decreases to the Company's gross profit margin
were costs increases, as a percentage of net sales, of: 5.7% in distribution,
packaging and reclamation costs, 2.5% in provision for inventory obsolescence,
and 1.4% in royalty fees. These decreases to the Company's gross profit margin
were partially offset by a 0.7% decrease in the product cost associated with the
sales of Company published software titles.

The increase in distribution, packaging and reclamation costs was largely
associated with increased distribution efforts to support: the Company's sales
to food and drug retailers as part of its Store-In-A-Store distribution strategy
and more complicated store level distribution requirements by certain direct
retail customers. The increase in provision for inventory obsolescence was
largely associated with product discontinuances throughout the current fiscal
year for end-of-life-cycle products. The cost for the Company to acquire
software content has continued to rise as the competition to obtain higher
quality entertainment software has driven these costs up, which has contributed
to the Company's increased royalty rates for Company-developed software titles
and third-party publisher software titles.

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


<PAGE>


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

Operating Expenses

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

Selling, general and administrative expenses for the nine months ended March 31,
2001 were $4,424,000 compared to $4,119,000 for the nine months ended March 31,
2000, an increase of $305,000 or 7%. This $305,000 increase in selling, general
and administrative expenses was caused primarily by increases in salary related
costs, litigation costs and marketing promotional costs of $228,000, $125,000
and $277,000, respectively, which increases were partially offset by decreases
in public corporation expenses, consultant expenses and depreciation and
amortization costs of $219,000, $59,000 and $75,000, respectively. The $228,000
increase in salary related costs was primarily related to the nine months of
employment costs for fiscal 2001 associated with certain personnel that were
hired during the latter portion of fiscal 2000 and the early portion of fiscal
2001.

Interest Expense, Net

Net interest expense for the nine months ended March 31, 2001 was $64,000
compared to $12,000 for the nine months ended March 31, 2000, an increase of
$52,000. The $52,000 increase was primarily due to the increased utilization of
the revolving credit facility during the nine months ended March 31, 2001.

Provision (Benefit) for Income Taxes

The recorded (benefit) for income taxes for the nine months ended March 31, 2001
was ($39,000) compared to a provision for income taxes of $95,000 for the nine
months ended March 31, 2000, a decrease in the provision for income taxes of
$134,000. This $134,000 decrease in the provision for income taxes was primarily
due to the impact of the Company's estimate of its taxable income for the fiscal
year.

Loss from Continuing Operations

As a result of the various factors discussed above, the Company recognized a
$2,461,000 loss from continuing operations for the nine months ended March 31,
2001, compared to a $102,000 loss from continuing operations for the nine months
ended March 31, 2000, an increase of $2,359,000 in losses from continuing
operations.

Income (Loss) from Discontinued Operation

(Loss) from discontinued operation for the nine months ended March 31, 2001 was
approximately ($33,000), net of a $19,000 income tax benefit, compared to income
from discontinued operation for the nine months ended March 31, 2000 of
$228,000, net of a $17,000 income tax benefit, resulting in a $261,000 decrease
in income from discontinued operation. This $261,000 decrease in income from
discontinued operation was caused primarily by an increase in operating expenses
of $175,000 largely associated with increased marketing promotion costs to
support product sales and an $88,000 decrease in gross profit, which were
partially offset by a $2,000 increase in income tax benefit.

Net Income (Loss)

As a result of the various factors discussed above, the Company recorded a net
(loss) of ($2,494,000) for the nine months ended March 31, 2001 compared to net
income of $127,000 for the nine months ended March 31, 2000, a decrease in
profitability of $2,621,000.


<PAGE>


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

Weighted Average Common Shares

The weighted average common shares outstanding on a diluted basis decreased by
365,299 for the nine months ended March 31, 2001 to 9,749,975 from 10,115,274
for the nine months ended March 31, 2000. This 365,299 decrease in weighted
average common shares outstanding was caused primarily by a decrease in common
stock equivalents resulting from the Company's recording of a net loss for the
nine months ended March 31, 2001. Such common stock equivalents were excluded
from the diluted shares calculation for the current fiscal year's nine month
period, because their inclusion would have had an anti-dilutive effect.

Liquidity and Capital Resources

As of March 31, 2001, the Company's cash and working capital balances were
$116,000 and $847,000 respectively, and the Company's total stockholders' equity
balance at March 31, 2001 was $1,205,000.

Net cash used in operating activities was approximately $1,925,000 and
$1,031,000 for the nine months ended March 31, 2001 and 2000, respectively. The
$1,925,000 in net cash used in operating activities resulted primarily from the
Company's net loss of $2,494,000, in addition to other cash uses from increases
in inventory, prepaid expenses and accounts receivable of $1,364,000, $318,000
and $254,000, respectively. These cash uses were partially offset by cash
sources from increases in: customer advance payments, accounts payable and
accrued expenses of $1,577,000, $379,000 and $339,000, respectively.
Additionally, for the nine months ended March 31, 2001, depreciation,
amortization and other non-cash items totaled $177,000.

The $1,364,000 increase in inventory is primarily associated with the Company's
product shipments to food and drug retailers that have not been reported to the
Company by the retailer as being sold through to the end consumer. The $318,000
increase in prepaid expenses primarily resulted from royalty payments made to
the Company's software developers for product shipments to food and drug
retailers that have not yet sold through to the end consumer and so the Company
has not yet recognized revenue on these shipments. The $254,000 increase in
accounts receivable resulted primarily from slower cash collections from the
Company's customers.

The $1,577,000 in customer advance payments approximates the amount of customer
payments from food and drug retailers that have exceeded the amount of revenue
recognized by the Company relating to the actual product sell- through of the
Company's products to the end consumer reported by food and drug retailers. The
$379,000 increase in accounts payable resulted primarily from the increased cost
of purchasing third-party publisher software titles for distribution in the
Company's Store-In-A-Store program to food and drug retailers.

Net cash used in investing activities was approximately $43,000 and $189,000 for
the nine months ended March 31, 2001 and 2000, respectively. The $43,000 in net
cash used in investing activities resulted primarily from $38,000 in purchases
of furniture and equipment and from $5,000 in purchases of software rights and
other assets.

Net cash provided by financing activities for the nine months ended March 31,
2001 and 2000 was $727,000 and $718,000, respectively. The $727,000 in net cash
provided by financing activities reflects net proceeds from the Company's
borrowing of $3,650,000 under the revolving credit facility, which borrowing was
partially offset by repayments of the borrowing under the revolving credit
facility, convertible subordinated debt, note payable and capital lease
obligations of $2,650,000, $150,000, $41,000 and $82,000, respectively.

Net cash provided by (used in) the Company's discontinued operation for the nine
months ended March 31, 2001 and 2000 were approximately $230,000 and ($212,000),
respectively. The $230,000 in net cash provided by the Company's discontinued
operation resulted primarily from $242,000 in net cash provided by operating
activities and $13,000 in net cash provided by investing activities, which cash
sources were partially offset by approximately $25,000 in net cash used in
financing activities.


<PAGE>


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

As of March 31, 2001, the Company had received approximately $1,577,000 in
customer payments from certain food and drug retailers for products shipped to
such retailers prior to the sale of such products to the end consumer being
reported to the Company from these retailers. These payments are recorded as
customer advance payments in the Company's Consolidated Balance Sheet until such
time that these retailers report to the Company that the products are actually
sold to the end consumer. After the products are sold through to the end
consumer, the customer advance payment amount is recorded as product revenue. In
the event that the Company receives customer advance payments that ultimately
exceed the actual product sell-through of the Company's products to the end
consumer at such retailers, the Company would owe these retailers such excess
amounts. The Company's management believes that it is highly likely that the
ultimate product sell-through of the Company's products will be substantially
less than the customer advance payment balances for these food and drug
retailers. If these retailers request that the Company repay this liability, it
would likely result in a serious liquidity issue for the Company.

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 March 31, 2001, the Company was not in compliance with these covenants.
The bank has waived the Company's non-compliance with the covenants of this
credit facility at March 31, 2001. The Company believes that it will continue to
be in non-compliance with the already identified covenants through June 30, 2001
and is working with its bank on a mutually agreeable resolution to the
non-compliance issue. As of May 11, 2001, the Company had a $1,000,000
outstanding balance under this credit facility and had not been notified that it
did not continue to have full access to the remaining balance available under
this $2,000,000 credit facility.

The Company's ability to achieve and maintain positive cash flow depends upon a
variety of factors, including the timeliness and success of the collection of
outstanding accounts receivable, the creditworthiness of the 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. There can be no
assurances that the Company will be able to achieve and maintain a positive cash
flow or that additional financing will be available if and when required or, if
available, will be on terms satisfactory to the Company.

On November 10, 2000, the Company received notification from Nasdaq that its
common stock had failed to maintain a minimum bid price of $1.00 over a period
of 30 consecutive trading days as required for continued listing on the Nasdaq
SmallCap Market as set forth in Marketplace Rule 4310 (c) (4) (the "Rule"). In
accordance with Marketplace Rule 4310 (c) (8) (B), the Company had 90 calendar
days, or until February 8, 2001, to regain compliance with this Rule. On
February 7, 2001, the Company requested a hearing before a Nasdaq Listing
Qualifications Panel, which stayed the delisting of the Company's common stock
from the Nasdaq SmallCap Market pending the Panel's decision. The Company's
hearing had been scheduled for March 23, 2001. The Company did not attend the
scheduled hearing because management did not believe that it had sufficient
evidence to present to the hearing board, as of March 23rd, that would have
caused them to further stay the Company's de-listing. Accordingly, effective
April 2, 2001, the Company's common stock began trading on the OTC Bulletin
Board under its existing symbol EGAM. The Company's common stock had traded on
the Nasdaq SmallCap Market since October 1995.


<PAGE>


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

New Accounting Pronouncements

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

Additionally, the Company has evaluated its revenue recognition policies based
upon Staff Accounting Bulletin 101 "Revenue Recognition" and related amendments
and interpretations. Accordingly, the Company determined it should recognize
revenues for fiscal 2001 and 2000 associated with product shipments to food and
drug retailers based on the timing of the actual product sell-through activity
to the end consumer of the Company's products at these retail locations and not
at the time the Company ships its products to these food and drug retailers. The
Company made this decision following its determination that it was not able to
adequately estimate, at time of product shipment, the amount of product returns
for product shipments to food and drug retailers. Revenues associated with the
Company's product shipments to its customers that traditionally have sold
consumer PC software products (such as mass-merchant retailers, or distributors
servicing such retailers) are recognized at the time title to these products
passes to these customers, less a historically-based provision for anticipated
product returns.

The Company is currently evaluating the potential impact of Emerging Issues Task
Force ("EITF") 00-10 "Accounting for Shipping and Handling Fees and Costs". This
pronouncement will become effective by the Company's fourth quarter of fiscal
2001. The Company does not expect the adoption of EITF 00-10 to have a
significant impact on its results of operations, financial position or cash
flows.


<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: March 26, 2002                    /s/  Gerald W. Klein
      --------------                    --------------------
                                        Gerald W. Klein, President, Chief
                                        Executive Officer and Director


Date: March 26, 2002                    /s/ Thomas W. Murphy
      --------------                    --------------------
                                        Thomas W. Murphy, Chief Financial
                                        Officer and Chief Accounting Officer